This started out to be a fact-check of something Newt Gingrich said (which turns out to be something between an untruth and a colossal oversimplification), but I’m afraid it’s morphed into a more philosophical inquiry into that strange, twisted relationship between politics, facts and truthiness.
First, the Gingrich piece. When the former speaker was in town last week to star in a Tom Emmer fund-raiser, he was asked about Tim Pawlenty’s record as governor. As reported by MinnPost teammate Doug Grow, Gingrich replied:
“Your unemployment rate is lower than the national average because [Pawlenty] cut taxes, cut regulations and encouraged business,” Gingrich said. “The states with the lowest unemployment rates have the lowest taxes.”
The whole statement is highly suspect at best. Minnesota has had a lower than national average unemployment rate consistently, with only a few brief exceptions, since before Tim Pawlenty was born. Attributing this to Pawlenty’s no-new-taxism is just kinda silly, but we won’t take it too seriously or too literally. Presumably, since Gingrich and Pawlenty are both exploring presidential runs, Gingrich was viewing the topic of Pawlentyism through that prism and went for the speak-no-ill-of-a-fellow-Republican formula.
The last sentence, the one in bold face above wherein Gingrich suggests a high correlation between state tax levels and unemployment levels, is where Gingrich makes an assertion that is (a) easily checkable; (b) untrue or (c) at best, a colossal oversimplification.
The federal Bureau of Labor Statistics compiles state-by-state unemployment rates. There are various ways to calculate tax burdens but the best is to lump together all state and local taxes and express them as a percentage of per capita income within each state. Below are the 10 states with the best (that is, lowest) unemployment rates (in ascending order by unemployment rate. The number in parentheses after each state is that state’s ranking according to state and local tax burden (with 1 being the highest taxing state and 51 being the lowest – p.s. there are 51 because the District of Columbia is treated as a state). The unemployment data, from BLS, are seasonally adjusted as of August. The tax burden comparisons are 2008 data from a July 2010 publication of the Minnesota Taxpayers Association (if you click through, go to page 15):
(Minnesota, with an unemployment rate of 7.0 percent, is actually tied for 10th best with Oklahoma and Virginia.)
You can see at a glance that the list of the 10 most employed states actually draws almost equally and almost randomly from the ranks of the highest tax states, lowest tax states and middling tax states.
The same is true at the other end, by the way. The list of the 10 states with the highest unemployment rates is topped by Nevada (14.4 percent unemployment!!!), which has the 40th highest state and local taxes as a percentage of average income (and therefore, according to Gingrich’s rule, should have low unemployment), followed by Michigan (smack dab in the middle of the states by tax burden) and California, which ranks 11th in tax burden and fits the Gingrich theory nicely if you choose to believe that what’s happening in the California economy is fundamentally about taxes.
An economist’s view
I asked economist Tim Taylor of Macalester College (and editor of the Journal of Economic Perspectives) about whether he saw any problems or possibilities in Gingrich’s statement about taxes and unemployment. Taylor laughed at the idea that someone would “come here and tell an audience of Minnesotans that ‘wow,’ it’s obvious you’ve benefitted from being a low tax state.” The joke, to Taylor, is that Minnesotans would know that ours is both a relatively high tax state (but only the 21st highest), and has long enjoyed a well-above-national-average economy.
In fact, although I wasn’t present, I would bet that the Gingrich remark was well-received because he was at an Emmer event. Many contemporary Republicans are so comfortable with the good-things-flow-from-tax-cuts religion that they would likely have nodded along. This is how selective perception and confirmation bias work. Liberals have political beliefs that likewise border on articles of faith and are fairly impervious to critical examination.
That’s the philosophical part I alluded to at the top. Most of us are not by nature inclined to be skeptical of something we hear that is consistent with what we already believe. And, in the context of a vital gubernatorial race, we want to believe what our party and our candidate believe.
Rather than reflecting tax policy, Taylor said the list of best and worst states by unemployment is much more likely influenced by factors that should be fairly obvious given the causes and consequences of the Great Recession. States that were hardest hit by the collapse in the housing market (California), the housing construction business (Nevada), tourism (Nevada again) and those that were most involved in the financial industry (New York was actually middle of the pack) would be suffering the most.
When I told Taylor that Michigan is the second highest state by unemployment, he said that may have less to do with tax policy than with the collapse of the auto industry.
As for Minnesota, Taylor said, “we didn’t participate as much in the boom on the upside and we’re not getting socked as hard on the downside.”
State economies are complex things, he added, and “it’s a fools’ game when a [state] does well or does badly to credit it or blame it on any one thing,” Taylor said. He doesn’t doubt that tax climates play a role but “if low taxes were everything, Minnesota would have lost all its business to the Dakotas and Arkansas a long, long time ago.”
By the way, if you’re wondering how North Dakota shows up on the ranking as a high-tax state, I suspect it is mostly about the money our neighbor is reaping from the oil boom. Energy producing states in general turn up in the high-tax, low-unhemployment end of the rankings.
Response from Gingrich’s camp
I did ask Gingrich’s spokester, Joe DeSantis, if he had any backup for Gingrich’s assertion of a high correlation between tax climate and employment. He encouraged me to take a broader look at the total package of small government impulses:
“The tax rate is one of several factors that contribute to the health of a state’s economy,” DeSantis wrote me. “There’s also regulation, right to work, spending, the tort system, clean government, land use laws, the education system and more.”
He urged me to look at Gingrich’s full record, not just one off-the-cuff, out-of-context quote, and to recognize that low taxes are part of a broader set of what he calls “economic freedom policies” that lead to the good stuff.
He referred me to a ranking by the Pacific Research Institute of what it calls an “economic freedom” index, (pdf) which takes several of those factors into account. He says that nine of 10 states ranked as the most economically free have unemployment levels lower than the national average.
That’s true. But the data is full of noise. The states to which he refers are all small — not a major metro area in the batch — and several of them are energy-rich. And there are still plenty of the “unfree” states mixed in among the unemployment winners. Nevada, the highest unemployment state, is rated one of the 10 most “free.” (DeSantis acknowledges that outlier, attributing it, quite reasonably, to recession-specific factors other than Nevada’s freeness.)
I ran the Gingrich stuff past my esteemed former Strib colleague Dane Smith, who is now president of the think tank/advocacy group Growth and Justice (full disclosure: Growth and Justice was founded by MinnPost founder/editor Joel Kramer). Smith studies this stuff hard.
He emphasized that all through the ‘70s, ‘80s and ‘90s, when it was closer to the top of state tax list and ranked high in various other measures of Gingrichian unfreedom, Minnesota’s economic growth was highest in the Midwest.
Curiously (and inconveniently for the taxophobes), he noted that Minnesota’s unemployment rate briefly rose to the national average for the first time a couple years ago not long after Minnesota cut income taxes by a record amount in 1999 and 2000.
But finally, Smith suggested that we keep the differences between state tax levels in perspective. “The differences are pretty small,” Smith emailed me, “a matter of no more than 3 cents on the dollar between top and bottom. (Most states have effective overall state-local tax rates of between 10 and 13 percent).
“Finally, conservative economic policy has held sway over the last 30 years, and it’s been terrific for those in the top 10 percent, 5 percent and especially top 1 percent of incomes. It’s been a dreary 30 years for everybody else, but especially those at the bottom and in the very middle. They got very little trickle, as Paul Krugman says.
“Finally, finally, the United States a century ago put only about a tenth of its income and wealth to public use. Now the public sector accounts for about a third of the economy and during and after World War II, our public ‘take’ was even higher. According to conservative theory, this tripling of the effective tax rate in our nation should have reduced us to a howling wasteland. But instead, we became the most powerful and richest nation on earth and built the strongest middle class in our history, with high home ownership and two cars in many garages.
“We’re still among the lowest taxed of the wealthy democratic advanced nations. And all those other nations with better socioeconomic indicators – longevity, high incomes, low violence, better health — have much higher taxes and more equal economic outcomes.”