October 23, 2015 at 5:00 am ET
As the U.S. presidential election draws closer, politicians and voters are considering different ways to reignite a depressed labor market. At the heart of this is a debate between liberal institutions that forcefully redistribute resources and free market institutions that allow individuals to satisfy their own desires through voluntary transactions.
Though the liberal approach of expanding the federal government fails to achieve desired results, there is a free market solution that provides a beacon of hope: the Texas model.
The U.S. was once the envy of the world as it held the bronze prize in economic freedom in 2000, according to the Fraser Institute. After years of government intervention in the economy and our daily lives, this ranking recently slipped to 16th behind Taiwan, leaving lackluster economic growth and job creation as the new norm. This decline precipitated from policies attempting to stabilize the economy through unprecedented fiscal and monetary actions. In fact, the current recovery looks to be one of the weakest on record with no relief in sight. The direction of public policy must radically change.
Federal spending has increased by 27 percent since the fourth quarter of 2008, when the financial crisis took its greatest toll. This spending included bailing out banks and an almost trillion-dollar stimulus package contributing to a 70 percent increase in the national debt to $18.2 trillion. This debt now exceeds all of the country’s economic output. Though the sequester recently restrained spending, it doesn’t correct the massive increase beforehand.
In December 2008, the Federal Reserve took historic action by lowering the federal funds rate to the current range of zero to 0.25 percent and conducted three rounds of bond-buying programs called quantitative easing. These actions were primarily intended to keep interest rates low to stimulate the economy.
A common benchmark for the direction of the federal funds rate is the Taylor rule, named after the economist John Taylor, that calculates the rate based on economic measures. The rule indicates that the Fed left the rate too low for too long during the mid-2000s, contributing to the housing market boom and bust, and has now left it lower than it should have been since 2010—with the current calculated rate of two percent. After the previous lessons of failed policies, the Fed would be wise to return to a more rules-based approach that misallocates fewer resources.
Supporters of this monetary policy argue, including former Chairman Ben Bernanke, that inflation remains low and the labor market is near full employment. It’s helpful to examine the period from December 2008 to August 2014 when the last round of quantitative easing essentially ended. During this period, the Fed’s assets, called the monetary base, increased by a massive 155 percent leading to a 75 percent increase in the money supply.
Indeed, if you just consider the increase in the consumer price index, price inflation increased by 12 percent over six years for an annual average of only 2 percent—in line with the Fed’s implicit target. However, other asset prices did inflate to the tune of 135 percent in oil prices, 58 percent in gold prices, and 124 percent in the S&P 500. There was certainly asset price inflation.
Supporters also cheer the drop in the unemployment rate from 10 percent in October 2009 down to 5.1 percent in September 2015. But this misses the large number of people who have dropped out of the labor force and those working part time but would like a full-time job, which when added to the total unemployed brings the current underutilization rate to a whopping 10 percent.
Collectively, these policies have misdiagnosed the U.S. economy. There is less economic activity with fewer dollars in the private sector due to higher taxes, more government debt, and more dollars flowing to unsustainable projects from excessive monetary easing. It’s no wonder that the U.S. has dropped so far in its ranking of economic freedom and Americans have been left to suffer.
Fortunately, the system of federalism provides an opportunity for a laboratory of state competition within an umbrella of federal policies. In search of a more free market model that would reward risk-taking and entrepreneurial activity, the Texas Public Policy Foundation recently released a paper comparing economic freedom and labor market measures among the largest states—California, Texas, Florida, and New York—and U.S. averages during the last 15 years.
With the highest ranking of economic freedom and the best labor market results compared with the largest states, Texas acts as a model. This top ranking isn’t an accident as Texas has kept taxes low, never enacted a personal income tax, and passed sensible regulations. These factors combined define the Texas model.
This model helped support the creation of 73 percent of all new nonfarm jobs in the U.S. from January 2000 to December 2014. Though critics often shrug these off as low-paying jobs, the inflation-adjusted private pay has been 67 percent higher than the U.S. average since 2000.
Despite the rhetoric about income inequality, data show that Texas has had more equal income distribution since 2000 with fewer redistributionary policies than other large states. Further, the supplemental poverty measure, which considers cost of living differences among states and government transfer programs, shows that Texas’ rate matches the U.S. average and is the lowest among these states.
No matter how you slice it, the Texas model is one that supports prosperity. But even with this success, Texas could advance it’s lead even further by eliminating the state’s onerous business margins tax and effectively limiting state spending.
If they are really serious about renewing the American dream, the presidential candidates should trash their current policies and consider similar free market measures associated with the Texas model.
Vance Ginn, Ph.D., is an Economist in the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at firstname.lastname@example.org.