By Jeremy Jackson, Ph.D.
Recent reports paint a bleak picture of the North Dakota economy. As the next legislative session approaches, we would do well to consider their findings.
Last year, I wrote about the Mercatus Center’s State Fiscal Condition Rankings in the op-ed North Dakota Ranks 2nd in State Fiscal Health, but for how long? The answer, as it turns out, is not long at all. Just one year later, North Dakota has dropped to 19th, falling behind our regional neighbors of Montana, Nebraska and South Dakota. This drop in ranking was driven by scores in two areas: Service Level Solvency (where North Dakota ranks 49th) and Budget Solvency (where North Dakota ranks 38th).
Service Level Solvency is the measure of a state’s ability to increase spending and taxes in the event that citizens demand more services. It looks at the proportion of taxes, revenues and expenses to personal income in a state. Our ranking suggests that, relative to other states, North Dakota is not in good position to increase taxes without harming the economy because spending is already high relative to the tax base. Budget Level Solvency looks at a state’s ability to meet current expenditures with current revenues. The poor budget solvency score for North Dakota reflects that state revenues only covered 98 percent of expenses in 2016.
In addition, the Fraser Institute recently released its 2018 Economic Freedom of North America Report. In 2017, North Dakota ranked 12th in the U.S.; in the latest report, our ranking rose to 11th. At first glance, this looks pretty good. However, our low ranking is due to the state’s favorable scores in the taxes and labor market freedom categories - where North Dakota ranks first and second, respectively. In contrast, the state ranked an abysmal 40th in the category of government spending. This ranking is based on (1) general consumption expenditures by government, (2) transfers and subsidies, and (3) insurance and retirement payments all as a percentage of state income. While it is well-accepted that North Dakota has a revenue problem, this suggests the state may also have a spending problem.
While most readers probably expect me to prognosticate about impending financial doom unless the state gets its fiscal house in order, that is only partially true.
Many researchers have studied the relationship between economic freedom and economic growth. The positive relationship between the two is quite robust. Of the categories of economic freedom, the government spending category has the most positive effect on economic growth. States with lower government spending, lower taxes and more labor market freedom (e.g., a low minimum wage) have higher economic growth.
Research has also found that economic freedom is a predictor of state migration flows. In general, people tend to migrate toward states with greater economic freedom. But the results are more nuanced than that. It turns out that people, especially those with a college education, tend to move to states with higher government expenditures but lower transfer payments (entitlement payments). Interstate migrants are also attracted to states with low tax burdens and high labor market freedom.
One of the key ingredients to future economic growth in North Dakota is attracting a high quality work force. This likely can’t be done without attracting migrants to the region. Massive cuts to government spending, particularly education, won’t help in attracting workers to the state.
Lawmakers have been quick to rein in spending in response to recent revenue shortfalls. If measures are taken to promote revenue stability, such as those I outlined in the recently published report Prairie Prosperity: An Economic Guide for the State of North Dakota, the state can be well-positioned to maintain reasonable spending levels along with a continued commitment to low taxes. By addressing the concerns highlighted in these national rankings, lawmakers can ensure North Dakota stays on the pathway to prosperity.
This op-ed appeared in InForum.
The views and opinions expressed in this article belong to the author and do not reflect the official policy or position of any agencies he/she is employed by or affiliated with.