Follow-Up To Federal Vs. State Government

***Originally posted on 2/28/08***

Some time ago I blogged about the different roles of federal and state government. If you haven't read it, please do so now. It is central to understanding what I'm about to discuss.

[...quietly humming the Jeopardy theme song while you go read the previous blog...]

Excellent! Now that you've read that, here's proof of how the system was designed to work. WorldNetDaily recently posted a story with the headline, "California Exodus Turns To Stampede" which illustrates my point perfectly [emphasis mine]:

California, which once lured Americans from near and far, is now driving out millions of the most productive residents – including high percentages of the most affluent.

"When California faced a Mount Everest-sized $14 billion deficit in 2003, one of the major causes for the red ink was the stampede of millionaire households from the state," says a report called "Rich States, Poor States" by economists Arthur Laffer and Stephen Moore. "Out of the 25,000 or so seven-figure-income families, more than 5,000 left in the early 2000s, and the loss of their tax payments accounted for about half the budget hole."

And it's not just the rich leaving.

Based on data from moving companies, California had the second-highest domestic population out-flow of any state in 2005, according to the report, "despite the beautiful weather, beaches, and mountains."

Former Governor Gray Davis was successfully recalled a few years ago because he had tanked the state's economy. Schwarzenegger replaced him by running as a Republican who would be fiscally sound, but he has unfortunately implemented many liberal Democrat policies. Now it's come back to bite him, and the state is in worse shape than it was under Davis. There are some key points to consider here before addressing the fed vs. state question.

First, California has one of the highest tax burdens in the country. High taxes never help the economy, they actually hinder it by discouraging success and profit. Second, did you notice that the biggest group of people moving out of the state are the rich? That's because taxes affect them the most (for an explanation of this, I refer you to yesterday's explanation of how taxes work against the rich more than anyone else). If this doesn't illustrate that principle in real life, nothing will (especially the part about what happens when the rich don't show up).

Now, how does this story illustrate my point about federal vs. state government? Because Californians are 'voting' with their feet. They are leaving California in droves because they don't like the policies that the state has implemented. This is the key result of our concept of government, and the precise problem with putting too much control at the federal level! If the tax policies in California have resulted in a mass migration out of the state (especially by the state's most productive people), then they are clearly not good policies. If the same bad tax policies applied to all states, where would people go? They'd either be stuck with bad policies, or they'd leave the country. Either way, it would hurt the country.

This is why the federal level should be as limited as possible - the states are microcosms of legislation, and can be used to test new ways of doing things without damaging the country at large. If something doesn't work, people will go to a state where things work better. If California wants people to come back, they'll have to fix their policies to attract people once again.

It's really quite simple, but I don't think most people understand the critical importance of this design. It is all about the freedom to choose, and when the federal government issues a mandate, that freedom is gone. I love this story for the reason that it illustrates the concept in the real world - there could not be a better example! Just look at the numbers of a report published by the American Legislative Exchange Council [emphasis mine]:

"States are in direct competition with each other for human capital and business investment. State governments that think they can attract jobs and people, and grow their economies, by taxing their citizens at a higher rate than their neighbors are sadly mistaken," said Democratic Arkansas state Sen. Steve Faris, ALEC's 2008 national chairman. "Legislators should take a close look at where their state ranks in this book and use it as a tool to help them improve."

The report provides economic competitiveness rankings for all 50 states based on 16 policy variables with a proven effect on the migration of people and investment capital in and out of states. States with the lowest tax, spending, and regulatory burdens win the competitiveness contest.

So, when you hear me talk about big government being a bad thing, this is precisely why. A big federal government inherently removes freedom from the people, and there is far greater potential for bad policies or abuse of power because there's no way to get away. I also have a hard time understanding why any American would accept any tax increase when it has been proven over and over and over that the way to accelerate the economy -- and overall prosperity -- is to do just the opposite.

There's my two cents.