Regulation, Taxes, and Freedom

A few weeks ago I wrote a blog post about the Human Development Project, a project sponsored by the Social Science Research Council to develop indicators of individual wellbeing across U.S. states and demographic groups. The basic idea is to use available measures of education, health and mortality, and income to compare how much people in different places are “free to achieve” (to borrow a phrase from Amartya Sen) different goals or activities that they value. The HD score ranks a weighted set of group-averaged outcomes: life expectancy, education, and income are standardized and given equal weighting in a composite score. The HD indicators provide one way of thinking about how much freedom people have to pursue socially valuable opportunities.

There is, however, another conception of freedom, freedom from interference, which is more popular in American political culture. The libertarian ideal gives priority to the ability to own, use, and transfer property without state interference, that is, to “engage in consensual acts of capitalism” (to borrow a phrase from Robert Nozick). The Mercatus Center, a libertarian think tank, has developed their own ranking of states based on the degree to which states regulate business, restrict some activities, and tax private property – the less regulation and the lower the taxes, the better. Items in the index include many familiar targets of libertarians such as health-insurance coverage mandates, occupational licensing, eminent domain, the tort system, land-use regulation, and also some civil liberty restrictions – a fairly broad category that includes campaign finance restrictions, limits on civil unions, and marijuana possession laws.

So how do the two indices correlate in their ranking of states?

 In the figure below I have plotted the Mercatus Center scores from 2009 against the recently published HD scores for white men from the “Century Apart Report” (the picture would look similar for other racial/ethnic groups, although the average values would be lower for blacks, Native Americans, and Hispanics).

There is a distinct negative correlation between the two indicators: states that rank high on the HD index such as California and New Jersey rank near the bottom on the Mercatus scores, and vice versa. There are a few exceptions: libertarian New Hampshire, for example, ranks reasonably highly on both scales, as do Colorado and Virginia.

This chart suggests a hypothesis: more regulation and state interference may (overall) promote higher levels of individual wellbeing. After all, intrusive taxes pay for more public health clinics and better schools, regulations on businesses prevent the release of harmful pollutants that cause premature death and disability. With a simple cross-sectional scatterplot, it goes without saying that we cannot establish causality. It’s also worth noting that I do nothing to control for an array of potential confounders such as the age distribution, natural resource endowments of states, and immigration (race is taken care of already by stratification). There are other things that may be endogenous to this relationship that could also point to more fundamental causes – culture and religion – although these factors are harder to defend when comparing historically similar states such as Massachusetts and New Hampshire. Also, not all indicators in the Mercatus index have a very causally direct bearing on life expectancy (for example, restrictions on who can get married).

One appealing feature of this chart is that it mutes the criticism that the outcome is “rigged” against the libertarian viewpoint: the Mercatus score was constructed completely independently of the HD score, and uses indicators that staunch libertarians think measure good laissez faire government. In fact, dyed in the wool libertarians may not be troubled by this picture – what matters to them is not how the race is run, only that the race is run without interference. Those that care about ends, and not merely means, may be more moved. A large proportion of Americans subscribe to the belief that promoting individual liberty is a means to greater prosperity (not just economic, but other kinds of flourishing and wellbeing), so evidence that challenges the uncomplicated view that more regulation leads to worse outcomes could make an impact. To really understand this chart, however, we need to know more about what intelligent regulations and taxes do to promote wellbeing, which is really one of the billion dollar questions of public policy. Plenty of regulations are costly and burdensome, and plenty of taxes are poorly spent, but we really know very little about how to transform governments into better producers of individual wellbeing. Bureaucracy involves many complex functions such as measuring uncertain outcomes, contracting for services, managing personnel, and fostering supportive and caring communities.  Some states may not only be regulating more activities, they may be regulating more intelligently than others.

About Brendan Saloner

I am a postdoctoral fellow at the University of Pennsylvania in the Robert Wood Johnson Health and Society Scholars Program. I completed a PhD in health policy at Harvard in 2012. My current research focuses on children's health, public programs, racial/ethnic disparities, and mental health. I am also interested in justice and health care.
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2 Responses to Regulation, Taxes, and Freedom

  1. Nick says:

    It is an interesting hypothesis, but one that really needs to be tested with something like panel data. It is sometimes remarked by libertarian theorists that Government gets larger and more bloated once people are rich enough to afford it (the dispersed costs of public spending become less noticeable). In order to understand the development measures of today, we need to be able to see the policies of decades before.

  2. Hi Nick,

    Thanks for that thought — I agree, and there may be some work already with panel data that tries to do this. You may be interested to know that both the Mercatus scores and the HD scores are meant to be updated annually or biannually, so perhaps one day we will have a panel of sorts (although to really get at the timing of this we’d probably need a couple of decades).

    -Brendan

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