A Story of Decline

Fellow Pileus blogger Jason Sorens (along with his collaborator William Ruger) have gained some attention with their “Freedom in the 50 States,” a project that ranks the states based on a number of indicators (see Jason’s blog entry here). Although my state of residence, Connecticut, is number 40 in the rankings, there are some long-term trends that makes one confident that it will soon be in the bottom five.   These trends are presented in Jim Powell’s article on the nutmeg state (in  Forbes) entitled  “How Did Rich Connecticut Morph Into One of America’s Worst Performing Economies.”

Readers might be surprised to learn that Connecticut has been hemorrhaging population and businesses and is currently ranked number 50 in annual economic growth. This should be no great surprise given a few facts. There have been:  dramatic increases in taxation (including a $1.8 billion increase in 2011 alone, a year when 77 tax hikes were pushed through), rapidly expanding government payrolls (between 1970 and 2000, the state payrolls grew 6 times faster than the population), growing debt ($27,540 per capita), combined debt and pension liabilities amounting to 17.1 percent of GDP (the highest of any state), a flow of new regulations, a failed probate court system, and a record of cronyism and political corruption that even shocked the New York Times.

When I moved from Wisconsin to Connecticut in 1989, there was no state income tax. I felt as if I had entered the land of the free. In 1990, however, Lowell Weicker was elected governor and the income tax was enacted as a means of addressing the state’s fiscal imbalances. As Powell explains:

The income tax failed to achieve the wonders Weicker claimed.  By siphoning more money out of the private sector, the Connecticut income tax reduced the amount of money available for private sector hiring and reduced the amount of money available for consumer spending. … Ironically, while Connecticut’s income tax generated more revenue than the state had before, it undermined efforts to control spending.  The last Connecticut annual budget before the income tax was about $7.5 billion, and state spending since then has nearly tripled – not counting all of the state’s spending on Medicaid.

As elected officials discovered that the new revenues only increased their capacity to spend and secure the support of various constituents and transfer seekers, more taxes simply led to more spending, which led to more taxes and more spending. Connecticut entered the long decline that many residents have witnessed.

Jim Powell’s piece provides some useful lessons of how a long series of bad policy decisions can carry significant ramifications for a state’s economy. Given that these same policies have been embraced in Washington DC, there is little evidence that the lessons have been learned.

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