Gov. Perry and the 'Race to the Bottom' Myth

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Gov. Rick Perry's entrance into the Republican presidential field has sparked intense debate on Texas' economic performance, including provocative claims that Perry and the state are engaging in a ‘race to the bottom' to attract jobs and people by keeping taxes and regulations low.

Delaware Gov. Jack Markell, former chairman of the Democratic Governors Association in 2010, even suggested in a Politico op-ed that the Perry agenda represents "a lousy model for the middle class" compared to Markell's notion of extensive government investment in infrastructure and human capital to boost an economy.

This argument among states and governors is not new, though perhaps the phrase ‘race to the bottom' is of more recent vintage. Politicians in states that have lost their economic preeminence have been making variations of the same case dating back to New York's decline from economic domination in the 1950s and 1960s. Back then the state's Republican Governor, Nelson Rockefeller, and the mayor of its biggest city, Gotham's John Lindsay, dismissed an increase in high-profile business relocations out of the Empire State as insignificant because, they argued, the majority of firms would eschew places with low taxes and meager services in favor of the New York model of high services paid for with above-average taxes. Rockefeller invested the revenues from the higher taxes in a vast building program in Albany and around the state, while Lindsay placed Gotham's tax revenues into an expensive social welfare model that he predicted would make New York City among the most progressive and desirable places to live.

It didn't exactly turn out that way. Wall Street firms decamped for New Jersey and beyond, until by the end of the 20th century there were nearly as many securities and commodities jobs in Northern New Jersey as in Manhattan. Commercial banks and insurers also left, taking valuable middle class back-office jobs to locations around the country. Manufacturers from many regions of the state left for other places U.S. locations, sparking a decline in New York's manufacturing sector long before globalization was a hot issue. By 2006, gubernatorial candidate Eliot Spitzer could colorfully compare the economy of whole parts of New York to the economy of Appalachia.

One reason that the ‘high-taxes-equals-high-services' model didn't appeal to businesses is because it has not actually delivered quality services or effective government. New York, with perhaps the highest combined state and local taxes in the country, puts a big chunk of those revenues into education, spending 70 percent more per pupil than the national average, but the performance of its students is mediocre, and Texas has actually proven better with its curriculum reforms at closing the black/white achievement gap than New York.

And as government grew in New York the political class somehow found ways to underinvest in essential functions like infrastructure, spending just $2.8 billion a year of state money out of $93 billion in revenues on roads and bridges last year, according to the Manhattan Institute's Nicole Gelinas. Two years ago the state had to close a bridge spanning Lake Champlain, disrupting the economy of the area, because the poorly-maintained span was about to collapse, and now the New York City metro area faces a possible economic cataclysm because the state can't find the funds or the will to replace the Tappan Zee Bridge over the Hudson River. Businesses that have remained in the area are appalled, with good reason.

Since fewer businesses have bought into the high tax/high services model, advocates of it like Gov. Markell now suggest through the evocative phrase ‘race to the bottom' that firms are conspiring with state politicians like Perry in what may be a winning strategy for them, but is a loser for workers. But to make his case Markell engages in a few "stretchers," as Mark Twain would have said. For instance, Markell defines Perry's approach to business development as, "based on less regulation, less taxation and less litigation," but then adds that this is a failure because, "there are lots of countries with no regulation, little taxation, and no real threat of litigation - usually also where wages are low." In other words, says Markell: Taxes and regulations are less in Texas than some other states; countries with no regulations, low taxes and virtually no litigation are bad for workers, and therefore Texas is bad for workers. That's quite a leap in logic.

I'm not even sure that Markell's second proposition, that low regulation and taxes are bad for workers, is true. According to a recent study by the Political and Economic Risk Consultancy, for instance, Hong Kong has the world's least regulated business environment, which helps it attract capital from around the world. The United Nations ranks Hong Kong as one of the places in the world with the highest levels of human development based on life expectancy, literacy, education and high standards of living. That doesn't sound all that bad for workers.

The real dynamic drawing jobs to states like Texas isn't the attraction of no regulations, I would argue, but the repelling force of places where businesses see the level of regulation as unreasonable and impractical, and where high taxes haven't actually brought better government. It's useful, for instance, to compare the business environment in Texas and California, because surveys now show that the Lone Star State has become the number one destination for firms leaving California. That's not surprising because in polls, business executives and owners consistently rank California as one of the least desirable places to locate or expand a business, and those executives typically rate the state's regulatory environment as their biggest disincentive.

Recently, for instance, the chief executive of a California restaurant firm, CKE Restaurants, said his firm would stop expanding in its home state and expand in Texas instead. In California regulations delayed the opening of a new restaurant for up to18 months on average, while it took six weeks for CKE to get a unit opened in Texas. This is not a company that is trying to build nuclear power plants or turn brownfields into manufacturing facilities, but to open chain restaurants. The bottom line: $200,000 to $250,000 in additional opening costs in California for a restaurant because of a regulatory regime that is protecting consumers from too many food choices?

Of course, this debate is not just about restaurant jobs. In his piece, Gov. Markell says states must cultivate an environment of investment that provides innovators with what they need to create good middle class jobs. Like most critics, Markell simply suggests that the Texas model doesn't do that. Yet Texas has over the last several decades attracted some $12 billion in investments in high-tech jobs and industries related to computer chip research and manufacturing, making the state a worldwide center of that industry. And Texas ranked fifth among the states last year in the volume of medical research dollars its institutions attracted, according to a study by Research!America, a nonprofit focusing on healthcare investments. Several years ago, in fact, Dr. David Grazter, a Canadian physician, observed in City Journal that the University of Texas' MD Anderson Cancer Center alone spent more money on medical research in one year than the entire country of Canada.

By the way, Markell's state, Delaware, ranks forty-third in U.S. in the amount of medical research dollars it attracts, according to Research!America. But no rational person would use that fact to claim that Markell has been engaged in a race to the bottom, now would they.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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