Saturday, March 15, 2008


Hillary R. Clinton and Barack Obama are racing around the states to win the primaries (here and here) . Recently, they've been fetching up for the support in Texas and Ohio where they were storming woes of economic protectionism, blaming NAFTA for the loss of jobs. Eventually, Ohio is facing tough times marred by the disease of low growth, job losses and high tax wedge. The consequences of a misguided economic policy have not arrived on a free lunch menu. In fact, even in economic policy there is no such thing as free lunch. Between 1997 and 2007, Ohio faced no new jobs created. In fact, 200,000 jobs were lost in manufacturing since 2000. Per capita income grew by 43 percent compared to 55 percent growth in income per capita in Texas.

On the other hand, Texas is an economic powerhouse of the west. The economic growth Texas has been strongly boosted by 1,615,000 new jobs added between 1997 and 2007, net domestic migration has reached an incredible 667,000 while unemployment remained on the level of 4,5 percent. The pace of job creation was twice of the U.S level.

Obamanomics and Hillarynomics doesn't fit well in Texas. Since 2004, $168 million of exports resulted in a growing number of jobs. The Dallas News reports that General Motors has already announced plans to build a new plant for producing hybrid cars near Dallas (link).

Where are actually the reasons for Texas's stunning economic performance and Ohio's failures. The answer lies in the echo called competitive advantage. Ohio already ranks very low (47th out of 50 states) in measuring the competitiveness (link) with a very high top marginal income tax rate, high corporate tax rate (10,5 percent), minimum wage law and high progressivity of personal income tax (6th highest in the U.S). As no surprise, Ohio's economy has stagnated. But, manufacturing jobs did not move to overseas locations such as India or China. They moved out to more business-friendly states such as Texas. It might be a joke, but Ohio certainly lays out red carpet for companies leaving the state.

In addition, Ohio's worker are forced to join the union whether they wish or not. Such a gimmick and populist rule has quickly returned the costs unanticipated by the politicians. Labor market conditions are among the worst in the U.S, facing no new jobs created since 1997. Tighted into a closed snip by trade unions inevitably means no incentives for foreign and domestic companies to invest in Ohio. In recent year, Texas has become a hot beacon for companies such as Samsung and Fujitsu. Only foreign companies added 345,000 net new jobs to the economy of Texas.

Texas has no income tax levied on individuals. That is an enviable competitive advantage attracting companies and businesses to invest in a business-friendly environment. That is actually the working of the rule "invest-in-low-tax-states(countries)". The evidence from Texas shows that the benefits of competing globally as an investment location are huge and therefore it is no surprise why Obamanomics and Hillarynomics fear global tax and business competition. Considering the ideas of Barack Obama and Hillary Clinton, the U.S might rather look like Ohio's bear-mood economy than the growing economy of Texas.

Alexis de Tocqueville was once trade that trade is the natural enemy of all violent passions (link). The economic benchmark of Texas and Ohio clearly shows the size of benefits of interstate competition in tax rates and quality of locations. Surely, there are always the enemies of free trade and investment. The seeds of tax competition and quality of the particular place as business and investment location might be bitter, but the benefits are tremendous.

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