By Lawrence J. McQuillan
As Americans buckle down for what could be a severe recession, many state governments are scrambling to find ways to keep their economies afloat. Unfortunately, when it comes to economic freedom—a major component of a state’s business climate—New Jersey is falling far behind.
According to the U.S. Economic Freedom Index, a recent study published by the Pacific Research Institute in association with Forbes, New Jersey is among the least economically free states in the country. Although it often goes overlooked, the amount of economic freedom enjoyed by New Jerseyans will play a significant role in determining how much damage the ongoing recession will do.
So what is economic freedom? It’s the ability to voluntarily exchange property under the rule of law. It can be as simple as buying a pack of gum from the corner store or as complex as merging two multinational corporations.
States with high levels of economic freedom avoid excessive regulations, high taxes, unfair licensing requirements, and wasteful welfare spending. Such policies get in the way of productive economic activity and retard a state’s economic growth and prosperity.
The data bear this out. In 2005, per-capita income grew 31-percent faster in the 15 most economically free states than it did in the 15 least-free states. That translates into more money in the pockets of average workers. Employment growth was a staggering 216-percent higher in the most-free states.
These figures should be of interest to policymakers contemplating economic stimulus packages. The facts show that the most effective way to create jobs and raise take-home pay is to expand economic freedom.
Economically unfree states, like California, New Jersey, Rhode Island, and New York, will have a harder time recovering from the downturn. California faces crushing budget deficits and might not be able to issue tax refunds this year. And New York is reeling from the implosion of the financial industry.
In times of great economic growth, these states could get away with high taxes and tort laws that fleece businesses. But in the wake of the financial crisis, their wrongheaded policies will have disastrous, magnified consequences.
For one, less-free states could see an exodus of talent and capital. Census data showed an astounding 245-percent difference in migration rates between the freest states and least-free states in 2005. In other words, even in good economic times, people choose to leave economically restrictive states for freer ones.
Fortunately, some states have caught on to these realities and have taken steps to become more economically free. Chief among them is South Dakota, a state that has risen in the rankings 14 places since 2004. It is now the nation’s economically freest state. The Mount Rushmore State imposes no corporate-income tax, no personal-income tax, no personal-property tax, no business-inventory tax, and no inheritance tax.
If New Jersey hopes to emerge from our nation’s economic rough patch, its leaders would be wise to rethink its overbearing economic policies. If they don’t, New Jersey could be in for hard times for a long time.
Lawrence J. McQuillan, PhD, is director of Business and Economic Studies at the Pacific Research Institute. He is coauthor of the 2008 U.S. Economic Freedom Index. Contact him at LMcQuillan@pacificresearch.org.