By Jon Cassidy | Ohio Watchdog
Ohio has the most oversized state and local governments in the country, according to a study published this week.
The Fraser Institute report, “Economic Freedom of North America 2012,” also shows a direct relationship between oversized government and poor economic performance.
The Fraser Institute ranks American states and Canadian provinces on their economic freedom, combining multiple factors into a score on a scale of 1 to 10. With a score of 5.5 for its state and local governments, Ohio tied with New York and Rhode Island for second worst, beating only Vermont’s 5.3.
In the subcategory of government size relative to economy, Ohio was dead last.
Tennessee, South Dakota, and Delaware tied for first in economic freedom with a score of 7.7.
While the number is abstract, it’s closely tied to real earnings, as “a one-point improvement in economic freedom increases per-capita GDP by US$7,641 for U.S. states,” according to the study.
On a companion list that includes the effects of the federal government, researchers found a stark difference in economic performance between the freest states and the least free. Per capita income in the top 10 averaged $51,737, while per capita income in the bottom 10 was just $38,017.
“The link between economic freedom and prosperity is clear: states that support low taxation, limited government, and flexible labor markets benefit from greater economic growth,” wrote Fred McMahon, the report’s co-author.
For the uninitiated, the authors explain why free transactions are inherently superior to coercive (i.e. government) transactions:
“Any transaction freely entered into must benefit both parties; any transaction that does not benefit both parties would be rejected by the party that would come up short. This has consequences throughout the economy. Consumers who are free to choose will only be attracted by superior quality and price. Producers must constantly improve the price and quality of their products to meet customers’ demands or customers will not freely enter into transactions with them. Many billions of mutually beneficial transactions occur every day, powering the dynamic that spurs increased productivity and wealth throughout the economy.”
The Fraser Institute study uses 10 categories for its state-level rankings: top marginal income tax rates, labor market freedom, regulation of credit markets, and business regulations, as well as six other categories measured as a percentage of GDP. These are size of government, transfers and subsidies, social security payments (including unemployment insurance, workers compensation, and public pensions), total tax revenue, indirect tax revenue (which includes property taxes, as well as taxes for unemployment, workers comp, etc.), and sales tax revenue.
The authors offer an explanation for the layman who might wonder why government services would be considered a restriction on economic freedom.
Government “is marked by coercion in collecting taxes and lack of choice in accepting services: instead of gains for both parties arising from each transaction, citizens must pay whatever bill is demanded in taxes and accept whatever service is offered in return. Moreover, while the incentives of producers in a competitive market revolve around providing superior goods and services in order to attract consumers, the public sector faces no such incentives. Instead, as public-choice theory reveals, incentives in the public sector often focus on rewarding interest groups, seeking political advantage, or even penalizing unpopular groups.”
The 10 categories are organized into three larger areas: size of government, takings and discriminatory taxation, and regulation.
In the first area, size of government, Ohio comes in dead last, with the biggest overall state and local government.
It got that ranking thanks to its performance in three subcatgories: government expenditures as a percentage of GDP (33rd place), transfers and subsidies as a percentage of GDP (45th place), and social security payments as a percentage of GDP (50th place).
Social security, in this use, means unemployment insurance, workers compensation, government pensions, and other socially funded programs that replace private options such as insurance and retirement accounts.
In less technical language, government cheese is a huge part of Ohio’s economy.
The state’s overall economic freedom ranking was held down by dismal performance in several other areas.
Ohioans are overtaxed, coming in 45th place in the measurement of tax revenue as a percentage of GDP
They were also 41st in a category called indirect taxation, which covers property tax, as well as social insurance taxes.
On a companion ranking that factored in the effects of the federal government at the state level, Ohio did a little better, coming in 37th place.
Both Ohio and the U.S. have been slipping in recent years.
“Earlier this year, the United States saw its global economic freedom ranking drop to 16th out of 144 nations and territories, its lowest-ever showing and a sharp drop from the second overall position in held in 2000,” the authors wrote. “…Canada is now well ahead of the United States.”
Between 1981 and 2006 Ohio’s economic freedom actually increased, albeit slightly, but the state went into steady decline between 2006 and 2010, the year used for this study’s data.
A 1 percent improvement in economic freedom correlates to a 0.74 – 0.97 percent increase in a state’s GDP growth rate, which holds true from year to year, the authors write. “The similarity of results regardless of the structure of the index or year of the tests is quite remarkable.”
The authors are only surprised that the correlation between wealth and freedom holds true at such incremental levels, because the general tendency is well-established, they write.
“The results of the experiments of the twentieth century should now be clear: free economies produce the greatest prosperity in human history for their citizens. Even poverty in these economically free nations would have been considered luxury in unfree economies. This lesson was reinforced by the collapse of centrally planned states and, following this, the consistent refusal of their citizens to return to central planning, regardless of the hardships on the road to freedom. Among developing nations, those that adopted the centrally planned model have only produced lives of misery for their citizens. Those that adopted the economics of competitive markets have begun to share with their citizens the prosperity of advanced market economies….
“In some ways it is surprising the debate still rages because the evidence and theory favoring economic freedom match intuition: it makes sense that the drive and ingenuity of individuals will produce better outcomes through the mechanism of mutually beneficial exchange than the designs of a small coterie of government planners, who can hardly have knowledge of everyone’s values and who, being human, are likely to consider first their own well-being and that of the constituencies they must please when making decisions for all of us.”
Contact Jon Cassidy at [email protected]