What does “Pro-Growth” mean, anyway?

The correlation between “pro-growth” policies and economic growth in US states is roughly zero.  Pro-growth policies are, basically, the conservative economic package – low taxes, low services, aggressive anti-union policies.  Menzie Chinn has actually run the study, rough as it might be, and found complete statistical noise.  The image below is of growth vs. the ranking of pro-growth policies from ALEC, a business interest group, with a trend line and the top 5 oil-producing states removed (though it doesn’t make any real difference to include them).

The most obvious takeaway from this shouldn’t be that conservative policies don’t work, it’s that economic growth is hard and an aggressive anti-union low-tax agenda at the state level is pretty marginal in the short run.  As he mentions, even the state fixed effects aren’t that large – unemployment and growth tend to be roughly parallel trends across the United States, even if there are gaps in the levels.  As Andrew Gelman writes in Red State Blue State, this is to be expected.  If you took a stack-ranking of America’s states by wealth in 1914 and compared it to 2014, the overall order is quite similar.  You have high-human-capital states like Massachusetts and Connecticut at the top, and low-human-capital states like Mississippi and Alabama at the bottom.

We don’t understand what drives economic growth very well at all, but we know that it’s very difficult to change.  National policy – including monetary policy – is far more important than the relatively small discretion states have over their own policies.  This is probably not true over the long term, where clearly large returns have accrued to the states that have invested the most in education.  But even a cursory understanding of the long-term trends suggests that there just isn’t much a state government can do to unleash a burst of growth at in the period T+1.

Decisions about tax policy shouldn’t be couched in terms of “growth”, because it won’t matter; they should be framed in terms of a state’s revenue needs.  State fiscal crises seem to be a much more common phenomenon than states strangling growth with high taxes, which is hypothetically possible but seems vanishingly unlikely in practice.  Variance in state-level growth rates are driven by so much more than these policy decisions that it would take unrealistically huge tax increases or union impositions to even make a hypothetically measurable impact, and the data measurement process is so noisy that an actually detectable effect is likely impossible.

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