Thursday, May 06, 2010

Why Economic Freedom Matters

Economic freedom is one of my favorite topics and the one that is discussed the least by politicians in this country. Everyone on every news channel discusses all types of "freedoms" -- many without Constitutional legs, but the one that is clearly seen in our governing document (by the Tenth Amendment and the limited powers in Article I, Section 8) is largely ignored. Politicians do not discuss economic freedom and those in the media have no idea why such even matters.

The National Center for Policy Analysis (NCPA) brought some excellent information on this topic from several different resources to my attention. The Federal Reserve Bank of St. Louis has released a new study called "Economic Freedom and Economic Growth in the US States." That report notes that there is a definite link between such freedoms and employment growth. Other studies have come to similar conclusions, but Michael D. LaFaive (Director of the Mackinac Center's Morey Fiscal Policy Initiative) notes that the thing that makes the Federal Reserve's study significant is its findings on labor markets. The authors write: "In addition, we find that less restrictive state and national government labor market policies have the greatest impact on employment growth in U.S. states."

Having had come from Michigan originally, I am always saddened by stories of that state's continuous decline. LaFaive states that the findings of the study only translates into more bad news for the Great Lakes State. Michigan has one of the worse labor environments in the country. It is not only a closed union shop state, but the epitome of big labor out of control. It is simply much easier for a business to move capital (and jobs) than to subject itself to the highest wages, biggest employee benefits, and toughest "pro-labor" regulations of any state in the Union. These type of policies have forced businesses to leave the state, which has created a revenue shortage, and has led Michigan to answer that problem by raising taxes even higher. Its $1.4 billion tax increase has made Michigan and even less friendly place for doing business, according to LaFaive.

These factors are among the reasons Michigan has consistently suffered from the highest unemployment in the country. The Fraser Institute and Pacific Research Institute have also chimed in on the decline of economic freedom in Michigan. In 2004, Fraser ranked Michigan 32nd among states in economic freedom. By 2009, it had dropped to 39th. Meanwhile, the Pacific Research Institute pointed out that the state fell from 27th in 1999 to 34th in 2004, and most recent, to 43rd (in its 2008 report). This rapid decline of freedom in Michigan has translated into economic ruin for the once great manufacturing giant.

LaFaive suggests several steps in reversing Michigan's economic slide, including:

  • Put a halt on the state's new tax increases. Michigan has to develop ways of being more competitive in some areas than other states. Currently, Ontario, Canada does commercials boasting a lower tax rate than Michigan. That has to change if that state is going to attract job creators.
  • The state should end entirely its repressive business tax and replace that with real spending cuts and other reforms. Again, the state has to develop ways to attract new businesses. Ending such a tax would certainly help.
  • Forbes Magazine notes that all but one of the ten most prosperous states are right-to-work states. Michigan has to make it easier to fire and control employee expenditures, if that state is interested in businesses hiring more and increasing payrolls.
  • Finally, Michigan has environmental laws that are among the most aggressive in the country. Michigan has to get its regulations in line with other states, if it is interested in job growth.

Michigan is in a state of crisis. Many other states are following a similar path (as is the nation, seen in businesses taking capital and move to other countries). It is imperative for policy makers on every level of government to recognize the relationship between economic freedom and jobs.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is also host of the Price of Business (M-F at 11 AM on CNN radio). Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

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