ALEC-Laffer State Competitiveness Index (13th Edition) Is Out!

The webpage announces:

The empirical evidence and analysis in this edition of Rich States, Poor States illustrate which policies encourage greater economic opportunity and which are obstacles to growth. The evidence is clear that competitive tax rates, thoughtful regulations, and responsible spending lead to more opportunities for all Americans. State economies grow and flourish when lawmakers trust people, not government, to create long-term prosperity.

I’m unsure where in the actual report the empirical analysis is. All I see is this assertion on the page after page vi:

The Economic Outlook Ranking is a forecast based on a state’s current standing in 15 state policy variables. Each of these factors is influenced directly by state lawmakers through the legislative process. Generally speaking, states that spend less — especially on income transfer programs — and states that tax less — particularly on productive activities such as working or investing — experience higher growth rates than states that tax and spend more.

And yet there are no empirics reported to support these assertions. Maybe that’s because there is no robust evidence that the Economic Outlook Ranking — with Utah and Wyoming at the top and Vermont and New York last —  means anything.

In my own analysis (discussed in this post), using data through the 12th edition of Rich States, Poor States, I found the ranking has essentially no predictive power for subsequent growth, as measured by employment (dlempl) or real GDP (dlrgdp). This is shown in the table. The variable rsps is the ranking provided by Rich States, Poor States, with lower values indicating a purportedly better business environment.

ldensity Log population density
wet Precipitation (less precipitation = higher values)
mild Temperature extremes (less extreme = higher values)
distance Proximity to water (closer = higher values)

These variables are from Kolko et al. (2013), as provided by Professor Neumark.

Notice that the RSPS rank is not significant, regardless of specification.

One might argue that the impact should be assessed over a longer horizon; however, using a 3 year horizon, neither employment and GDP growth exhibit a robust relationship with the Rich States, Poor States ranking.

You can conduct your own analysis with the data here (Stata .dta file), although I have not included 2019 data on employment and GDP, nor have I included the latest rankings from Rich States, Poor States. However, I am quite confident that you will fail to find a robust relationship between the ALEC-Laffer index and growth.



46 thoughts on “ALEC-Laffer State Competitiveness Index (13th Edition) Is Out!

  1. Barkley Rosser

    Not finding tax rates which I have thought was their main bugaboo, especially Laffer’s, or some measure of regulations, another of their things there. Certainly Laffer has had some embarrassing failures in recent years with some of his advising, most notably in Kansas where they sharple cut taxes in anticipation of a supply-side miracle that did not come to pass, with the electorate throwing out the bums who followed his advice after it led to massive cuts in support for schools and some other untoward outcomes.

    1. Menzie Chinn Post author

      Barkley Rosser: If you look at the components, marginal personal tax rate, corporate rate, tax progressivity, property tax burden, sales tax burden are at the top.

      1. Barkley Rosser

        I’m sure they are there somewhere, Menzie. I just do not see them in what you have here, which has three dlempl and thrree dlgdp across the top, with thinks like wet and dist on the side.

        BTW, anybody at UW talking about when Don Harris, Kamala’s dad, was there? One I know who was is your LaFollette colleague, Tim Smeeding, although I thin he showed up the year before Don took off for Stanford.

        1. Menzie Chinn Post author

          Barkley Rosser: Sorry, what I meant is that the ALEC index has tax rates as components, so tax rates are implicitly (albeit ad hoc) included.

          Haven’t talked to anybody here *in person* about Harris – but maybe soon somebody will.

        2. 2slugbaits

          Barkley Rosser When trying to understand the ranking you need to quit thinking like an actual economist and start thinking like a middle schooler instead. Yes, the ranking methodology is that stupid. The fifteen variables are on the right side of the page for each state. There are two columns. The column on the left shows something that looks like a statistic; e.g., growth rate, debt service as a share of tax revenue, average worker compensation costs, etc. Resist the temptation to do any kind of analysis with that data. It’s just there for show. What you want to focus on is the far right column that shows the state’s ranking in each of those categories. Also, keep in mind that with dichotomous variables such as whether or not the state has an inheritance tax or if it’s a right to work state then the variable will be either a “1” if “No” or “50” if “Yes”. Then take a simple average of the fifteen variables and you’ll get what’s supposed to be some kind of index value. Do that for each state and then rank the index values from lowest (i.e., the “best” state) to highest. Don’t overthink it. There’s no regression or ANOVA or anything that you might think came from the usual econometrics toolbox. This is just a braindead ranking. It’s not intended to provide any useful analytics. The intended audience is state legislators who have about as much econometrics training as CoRev or Bruce Hall.

          1. pgl

            “start thinking like a middle schooler instead”.

            When I listen to Kudlow or read Laffer-Moore I have to wonder if nay of these three stooges got past 3rd grade.

          2. Barkley Rosser

            Yes, 2slug, I know how to do this sort of thing. The problem, as Menzie admitted, was that what he showed did not exhibit those variables mentioned.

  2. 2slugbaits

    Let me see if I’ve got this straight. They took three categories and assigned a relative rank to each category for each state. Then they took a simple unweighted average of the three categorical rankings, and the state with the lowest average value is ranked as the best and the state with the highest average value is ranked the worst. And from that we get their State Economic Performance Ranking 2008-2018. And then they did a similar “analysis” with the fifteen variables giving us the State Economic Outlook Rankings 2020. And some of their fifteen independent variables don’t appear to have a lot of much to do with economic growth. I’m not aware of any empirical evidence that says having an estate or inheritance tax hurts economic growth. In fact, quite the opposite. Most studies find that people retire earlier than otherwise planned after receiving an unexpected inheritance. And just taking a casual look at those fifteen independent variables, it appears that many (most?) are strongly correlated with each other. Fifteen variables and fifty dependent observations. Hmmmm. Maybe they should have tried to find some principle components. What a joke.

  3. Moses Herzog

    I’m glad Menzie calls these red herrings to reality out. And that’s all these “books” and “reports” from ALEC are. An attempt to fool the general public that policies that are bad for the nation are “good” for the nation.

    However….. when I think Of Arthur Laffer, I think of the Laffer curve, and when I think of the Laffer curve (which truly is a laugher) I think of Ronald Reagan and all the lies and fabrications and mis-notions Reagan got this country to buy into. The name Laffer makes me feel almost immediate nausea.

    In short, if you want to know how to ruin my mood at any particular moment, just speak out the name “Arthur Laffer” and you will have achieved your goal.

    1. Dr. Dysmalist

      I quit paying attention to Arthur Laffer about 1985 or so. I wasn’t even a declared econ major yet and I could recognize that, even if there was a kernel of truth underlying his curve, it had no empirical basis at the level of U.S. tax rates.

      The one who really gets my blood boiling is Steven Moore. If I hear or read of something he’s published I usually just laugh. However, if I hear that he will be interviewed on a news program I start seething before he even starts lying, i.e., speaking. He has been so thoroughly discredited, especially by Menzie but also by others, that I’m infuriated that anyone calling themselves a journalist would present him as anything other than a bullshit artist, and a poor one at that. His fraudulence is transparent.

      1. pgl

        I just to have Google search for Stephen Moore publications. I got a couple of links – one all those stupid editions of Rich States, Poor States. The other was an archive of some short rants collected by the Heritage Foundation:

        Yea – Moore also wrote worthless opeds for the WSJ and the National Review.

        American Economic Review? Zero. Journal of Political Economy? Zero. Any other credible refereed journal? I do not think so. But Menzie can correct my count if he knows of anything.

      2. macroduck

        Second-hand story about Laffer, heard from a Georgtown econ prof who was in the room when it happened…

        Laffer was presenting to a roomful of otential private sector clients. He showed them a chart of his own GDP forecasts over time compared with reported actuals, then another chart showing median estimates vs actuals. His forecasts appeared to be overwhelmingly superior. What other members of the audience were unlikely to notice, but what the econ prof did notice, was that Laffer was comparing his non-seasonally-adjusted GDP growth forecasts to NSA actuals, while comparing the median estimate for seasonally-adjusted GDP to SA actuals. Those who have worked with NSA => SA data know how the trick works.

        1. Menzie Chinn Post author

          macroduck: Hadn’t heard that story; but there is a story about him using NSA data for money demand, and seemingly having a very high R-squared…

      3. macroduck

        Moore is among the most notorious of what Krugman, in one of his early books, called “policy entrepreneurs”. They pass hemselves of as experts, but are really in the business of convincing the public that partisan policy ideas are really the received wisdom of unbiased economics.

        the remarkable thing is that, after decades of evidence about who is and is not reliable, the unmasking of the junk science cospiracy, the Laffers and Moores of the world are still readily given camera time, ink and space by supposedly neutral news outlets.

      1. Moses Herzog

        I couldn’t find a direct reference to it in your link, but there were (surprisingly to me) other references.,%20Comaniciu%20Liliana.pdf

        You can find Gardner’s book “Knotted Donuts and…… ” in pdf form and can be downloaded relatively easily. In my opinion to Romanian economiists had a pretty strong takedown (pro-wrestling bodyslam??) of the Laffer curve. How ironic is it that two economists from a East European nation would have better economic analysis than a 1980s White House “economist”??

    1. Moses Herzog

      @ Not Trampis
      I’ve got an idea for a TV pilot starring you. It’s about an Australian chemistry teacher. Very likable guy, obsessed with seasonally adjusted learning rates for his students (whether or not they regress during the summer holiday). He sells meth in Adelaide for extra income. We’ll call it “Joking Bad”.

      1. Not Trampis

        but but but I am a very funny guy ( need to see Good morning vietnam to understand the theme).

  4. Moses Herzog

    Republicans control Congress right now. This is what they offer us in the way of “free markets”???

    Where do Republicans think Marxists and pro-union people come out of?? Out of what context exactly do they imagine people grasping onto those ideas?? Whether you view it as heretical or a biblical precept, which context do they imagine that arising from?? Show me a homeless person or a homeless family who believes in free markets. Is that an easy “sell” you think??

    Is trump going to grab a Bible from his empty-headed daughter, have some ICE goons beat the crap out of DC blacks and mumble like “Rambo” in front of some church?? Is that going to have people believing in “free markets”??

    1. The Rage

      Since the French started Communism, maybe they need to look before Marx. Socialism(British) and Communism(French) were basically started by white men, for white men of indentured servitude. They didn’t like the Aristocrats or their slaves they used to steal jobs from them in agriculture.

      The modern world is ignorant of history.

      1. not_really

        maybe they need to look before Marx.

        Maybe you need to read Marx instead of using it as a catchall for whatever you don’t like.

  5. pgl
    “After months of butting heads with his medical experts, including the government’s top infectious disease official, Dr. Anthony Fauci, President Trump introduced a new adviser to the administration during his coronavirus briefing on Monday, Dr. Scott Atlas, whose views on Covid-19 and school reopenings more closely match the president’s.”
    If one was holding out any hope Trump would put the nation ahead of his shallow ego – this pathetic appointment should dash all hope.

      1. Moses Herzog

        @ macroduck
        Alan Greenspan says that Ayn Rand says people will “self-regulate” with their masks. I don’t know about you but that sure puts my mind at ease.

        This also means Americans will all self-regulate with double layer cotton and double layer chiffon (of proper quality). They’ll make certain the mask is snug over their nose. They won’t work at standing 6 inches in front of you at the grocers as they grab 3 bags of potato chips like you are some invisible phantom. Greenspan argues “Why would they want to kill themselves or their grandma or kill their neighbor’s grandma?? It’s not rational”. As David Letterman might have said back in the day “I mean, he’s like…….. a genius, and stuff”.

          1. Moses Herzog

            @ macroduck
            It won’t surprise you at all to find out a guy (me) who only has his 4-year Bachelor’s in Finance from a small state university who is not as well read as he often likes to imagine himself had to Google that reference. Pretty funny when I did though. : )

    1. Willie

      I looked up Atlas. What could possibly go awry when you put an ideologue who happens to be a radiologist in charge of a response that’s all about epidemiology and solving difficult problems?

      1. pgl

        When I Googled Charles Atlas, the early hits were to the fittest guru. Of course that is a very different person. Although Trump really needs a personal trainer.

  6. pgl

    Did I hear this right? 1500 COVID-19 deaths yesterday alone. That is more than 1 per minute.

    And we were told by Trump and his sycophants that the death count was going down.

  7. Julian Silk

    Dear Folks,

    Even if the RSPS rankings do have some validity, you want to watch out for whether they mean levels or percentages. For Utah and Wyoming to be leading, it sounds an awful lot like percentages is their metric.

    Consider two possible states: A and B. A starts out with a GSP of 1000. B starts out with a GSP of 5000. A grows by 1000, B grows by 2000. So A has experienced a 100% growth rate, while B’s is only 40%. But which state is actually doing better?


  8. ltr

    While I have no interest in the nutty economics of conservatives, I am reminded of a severe economic mistake that was made in New York not that long ago.  New York City had the chance of having an Amazon headquarters, which several self-styled liberal legislators successfully fought against.  Paul Krugman who wrote extensively on location theory considered the loss of Amazon of no account, while I thought of an indefinitely growing advanced technology company that would in turn attract other such companies.

    What I am finding right now in my community, is that shopping has been dramatically changed in the wake of the coronavirus.  Markets and the like are remarkably uncrowded, while everywhere in the neighborhood there are Amazon deliveries being made.  All I hear is how pleasing shopping by Amazon is, which is my experience, and I would guess shopping has been changed for a long time to come.

    Yes, I know all about assorted complaints about Amazon, but to have a computer, to Kashi cereal by the carton to, yes, Parmalat milk by the case for the cereal, always at the door, is a revelation. Amazon can easily be fixed if actually necessary.

    1. dilbert dogbert

      Amazon had the sites picked. Just a PR stunt to see which cities would offer the largest tax break. Sort of “Tax Farming”.

      1. Moses Herzog

        I think you mean tax “fishing”. Amazon being the trans stripper who doesn’t “pass” fishing and the city officials being Peter Griffin excited by the trans’s fake Tinder photos.

    2. Dr. Dysmalist

      Wait, are you comparing only the gross product ex ante with the hypothetical ex post gross product plus future hypothesized agglomeration effects?

      IIRC, Amazon alone would have required absolutely HUGE upfront investments in infrastructure, not just the usual ‘roads’ that everyone thinks of, but the boring stuff like schools, water, sewage, electrical and data grids, etc., etc. And of course Amazon was extorting extremely large tax breaks (property, corporate and individual) from the suckerscontestants in the HQ2 derby.

      IOW, astronomical costs almost completely socialized, astronomical profits and incomes almost completely privatized. At the time, it seemed to me like a good decision by NY, both city and state. I’ve seen no data since then, including from the present circumstances, that would (or should) cause me to change my mind.

    3. Willie

      As a person from Seattle, all I can say is be careful what you wish for. Amazon is a mixed blessing at times.

  9. ltr

    Me, I say let Amazon farm since they already do along with the rest of corporate America. Then too, I really like farmers, especially the sort that grow shopping carts.

    [ Got to be less assertive. ]

  10. Richard

    The “ideal” ALEC state would have zero tax and thus zero public schools and colleges, zero roads and streets, and zero publicly funded police, firefighters, or courts. I believe Somalia might be their dream state.

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