Building an Economy that Works for Everyone

“Rich States, Poor States”: A 110 page guide to crashing your state’s economy | Part 2

Arthur Laffer’s economic predictions don’t hold up – even using his own numbers

Arthur Laffer

Yesterday I examined the numerous flaws in the American Legislative Exchange Council’s publication “Rich States, Poor States” (RSPS), written by Arthur Laffer. But let’s set all that aside for now, and see how RSPS does when measured by its own standards – starting with our very own Washington state.

Washington’s best-in-the-nation minimum wage means we’ve gotten a low “economic outlook” ranking of 33 the past two years from Laffer. But despite the gloomy forecast, Laffer’s own measure of our state’s economic performance has consistently ranked us in the top 15 overall.

This isn’t the only place where Laffer has repeatedly misfired. For example, on average Indiana’s performance has been ranked 31 places lower than its economic outlook would predict, and Vermont 30 places higher. Take a look at Laffer’s average “outlook” and “performance” rankings over the past five years and a pattern becomes clear:

  • The average state economic outlook differs from performance by nearly 12 places.
  • Just one-quarter of states perform within even 5 places of its average outlook.
  • 60% of the time, actual performance goes in the opposite direction of Laffer’s outlook ranking.

In other words, you’d make a better prediction of future economic performance by flipping a coin than using Laffer’s flawed rankings and methodology.

Why are Laffer’s rankings so far off, even using his own narrow set of data? Because – contrary to what he and ALEC would have you believe – a state’s economic health depends on more than tax rates. When the Iowa Policy Project examined a broad set of economic performance measures, including manufacturing, transportation, health, and education, as well as Laffer’s tax cut variables, the results were conclusive:

Neither variable — total taxes or “right-to-work” — had a statistically significant effect on growth in state GDP, growth in non-farm employment, or growth in per capita income. The composition of the state economy, on the other hand, had a great deal to do with how fast a state grew, particularly in explaining growth in employment and per capita income. The share of the economy consisting of extractive industries (mining, oil) was a very significant determinant in all equations.

It turns out that the rankings in Laffer’s report have zero positive correlation to actual economic indicators, such as state GDP growth. In fact, the only real correlation is negative: the higher a state’s economic outlook ranking (according to Laffer), the lower the state’s actual per capita income and median family income, and the higher the poverty rate.

For the past five years, ALEC has basically reprinted Wall Street Journal editorials in “Rich States, Poor States”, and passed it off to legislators as a foolproof blueprint for economic success. The evidence shows just the opposite: undermining the minimum wage, cutting taxes on the wealthy, and gutting services for the middle class and poor is a recipe for inequality, low wages, and stagnant incomes – not prosperity.

By EOI intern Ashwin Warrior

Editor’s Note: Previous editions of the ALEC/Laffer studies can be hard to find, so if you’re interested in doing your own analysis of Laffer’s findings, here you go:

Rich States, Poor States: 1st Edition (2007)

Rich States, Poor States: 2nd Edition (2009)

Rich States, Poor States: 3rd Edition (2010)

Rich States, Poor States: 4th Edition (2011)

Rich States, Poor States: 5th Edition (2012)

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