Spurring the Ohio Miracle with Sound Policy

Orphe Divounguy, Ph.D. and Quinn Beeson Jun 19, 2017

Every year, The Buckeye Institute and the Fraser Institute release Economic Freedom of North America (EFNA), an index ranking economic freedom in the states. The rankings look at the ability of individuals to act in the economic sphere free of undue restrictions, such as a high tax burden or labor market regulations.

Academics, economists, and policy experts gather each year at the EFNA Network Conference to discuss the rankings and how states can improve. At this year’s conference – happening today and Tuesday – The Buckeye Institute’s lead economist, Orphe Pierre Divounguy, Ph.D., will present research titled Decomposing Economic Prosperity and the ‘Texas Miracle’: Rethinking Measures of Economic Freedom and the Role of Taxation. A mouthful, right? Luckily for you, we have summarized the presentation, which looks at the differences between Ohio and Texas in the rankings.

Historically, Ohio has ranked rather poor compared to the rest of the United States – in 2016 we ranked 38th. While Texas, on the other hand, has experienced what many have termed the “Texas miracle,” referring to the state’s seemingly miraculous economic performance, which has as much to do with its free-market policies as it does with its abundance of natural resources. Since there isn’t much that we can do about Ohio’s natural resources we ask: How else can Ohio’s economy be transformed to mirror the successes Texas is having?

In 2014, Texas’s per capita real gross domestic product (GDP) was $54,026 – almost $5,700 more than Ohio’s at $48,339. Now, Ohio may not be blessed with the same amount of natural resources as the Lone Star state, but there are certainly ways to improve our economic prospects, particularly if the “Texas miracle” has as much to do with its free-market policies.

The EFNA index first examines how government spending affects economic freedom – a favorite of free-market advocates. Government spending, however, is not the main attribute that differentiates Texas and Ohio. Despite the fact that Ohio’s budget needs to be trimmed, and we have offered many recommendations on ways to do that, spending alone may not be the magic potion Ohio is looking for.

The second factor the EFNA index ranks is tax policy across United States. Not surprisingly, a low tax burden has a positive effect on GDP. When tax rates are low, people have an increased incentive to work because they are able to keep more of their paycheck – thus, leading to higher investment and higher incomes. However, not all taxes have the same effect on behavior.

Taxes that penalize investment and labor such as income and business taxes have a more harmful effect than taxes on consumer goods. According to the Tax Foundation’s Facts & Figures 2017 report, Texas has a higher effective tax on consumer goods (sales tax) and no individual income tax compared to Ohio’s highly progressive individual income tax and relatively average sales tax.

Texas also scores consistently higher than Ohio on labor market freedom, the final category examined by the EFNA index. Could the regulatory framework be to blame for why Ohioans are less productive than Texans? Evidence in economics literature shows that labor regulations cause employers to not hire new workers and keep the less productive ones, thus decreasing the overall productivity of the firm.

Over burdensome labor regulations can slow down hiring and reduces productivity, which harms economic growth. Unions are partly to blame for a more rigid labor market in Ohio. Economists argue that unions result in business profit loss, decrease the availability of jobs, and slow economic growth. Union membership also significantly decreases average labor productivity “by reducing managerial flexibility, introducing restrictive work rules, and limiting the use of merit-based compensation.” In Ohio, 12.4 percent of the working population are members of a union, while in Texas, only four percent of workers are unionized.

There isn’t much that Ohioans can do about our state’s natural resources. However, there is plenty we can do to help our economic outcomes by adopting pro-growth policies. If Ohio wants to experience its own economic miracle, we must ask our legislators to eliminate policies that slow growth, such as burdensome tax rates and labor regulations that ultimately hurt the workers they were meant to protect. Only then will we begin to close the gap between our state and freer, wealthier states like Texas.

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