There’s a somewhat famous quote from Adam Smith (“there is a great deal of ruin in a nation“) about the ability of a country to survive and withstand lots of bad public policy. I’ve tried to get across the same point by explaining that you don’t need perfect policy, or even good policy. A nation can enjoy a bit of growth so long as policy is merely adequate. Just give the private sector some “breathing room,” I’ve argued.
Growth will be weaker with bad policy, of course, but if a nation already is relatively rich, then perhaps voters don’t really care.
But there’s a catch. If you add demographic change to the equation, then bad policy can be a recipe for crisis rather than slow growth. This is one of the reasons why I’m worried about the long-run outlook for Europe, with particular concern about Eastern Europe (by the way, we also have to worry in America).
Simply stated, you have to pay attention to the ratio of producers to consumers. And that’s why demographics is important. Falling birthrates and increasing lifespans will wreak havoc with Europe’s tax-and-transfer welfare states.
But there’s another form of demographic change that also can have a big impact. Migration patterns can alter the economic vitality of a jurisdiction. I’ve written about the exodus of French entrepreneurs who move to other countries with better tax systems, and the same thing happens with migration between American states.
And you probably won’t be surprised to learn that Illinois is usually on the losing end.
The Wall Street Journal opines on the state’s grim outlook.
…taxpayers are fleeing the Land of Lincoln in record numbers. According to the Census Bureau, Illinois now leads the nation for the steepest population decline. Between July 2015 and July 2016, Illinois lost some 114,000 people in net migration to other states, with total population decline of 37,508 (including births and deaths). For the third year in a row it was the only state to have lost population among the nine in its Great Lakes and Mid-America region.
But what’s really important, the WSJ explains, is that Illinois is losing people who are net producers and contributors.
…the average person moving out of the state earns some $20,000 more than the average person moving in. According to IRS data for tax year 2014 (filed in 2015), the average income of the taxpayer leaving Illinois was $76,824 while the average income of the new arrival was $56,689. That gap is widening and the differential can be traced to policy decisions as the state staggers under pension debt and an entrenched Democratic-public union machine in Springfield. In an effort to cover growing debt, in January 2011 state lawmakers raised the personal income tax rate to 5% from 3% and the corporate income tax to 9.5% from 7.3%. …The exodus accelerated to 73,500 from July 2011 to July 2012, 67,300 in 2012-2013, 95,000 in 2013-2014, 105,000 in 2014-2015 and 114,000 this year.
The class-warfare tax hike in 2011 was a terrible signal to investors and entrepreneurs.
Illinois already was losing both taxpayers and taxable income during the first decade of the century and the tax increase accelerated the process.
And keep in mind that the state also has a gigantic unfunded liability because of absurd promises of lavish pensions and fringe benefits for state and local government employees.
It’s almost as if the politicians in Springfield want to make the state unattractive.
Though the situation isn’t totally hopeless. Voters elected an anti-tax governor in 2014 and there’s a possibility that the destructive tax increase of 2011 won’t be renewed.
The Wall Street Journal makes a very wise recommendation to the Governor.
Democrats are trying to shake Mr. Rauner down for a repeat. He needs to hold firm to stop the state’s population exodus.
Needless to say, it would be a good idea to let the tax hike expire. That being said, that simply gets the state back to where it was in 2010, which wasn’t exactly a strong position.
The bottom line is that Illinois may have passed the tipping point and entered a death spiral. Sort of akin to being the Greece of America.
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When I was attending college in Illinois 25 years ago I was also in the National Guard and knew some of the locals. Nice enough people, but economically illiterate as they could be. Many worked for state or local government in their everyday jobs, and they liked to brag about all the ways they were maximizing their benefits. If you asked them how the state would be able to afford to pay such lavish benefits, they were confident that there was plenty of money to go around, and that the government would just shake down the wealthy people who had way more money than they deserved or needed.
Where else would speeding be a felony? Illinois!
The State is the Jackass Party on steroids. Corruption is everywhere. Did you hear the one about the county treasurer that bought a 3 million dollar horse ranch with dozens of horses after only a handful years on the job?
Immagine the hundreds of thousands of lesser crooks that don’t get caught. ©2016
PS. Your readers should not besmirch the land of Obama (Wait! That’s Africa!!); they will be bailing the state out in a few years. You thought GM was a ripoff? Just wait for this one. 136B and counting.
Don’t get me wrong. The world is becoming a much better place for almost all; developed or not. It is just that many of today’s developed world countries will not be in the developed world of 2040 or 2060. Their citizens will be begging for the fantastic new things that other countries will be creating.
How many companies from the 1950s S&P are still in the index today?
Today’s comfortable hippies will be living a wretched life by the fantastic to us living standards of 2040 and 2060. What was once “enough for a non greedy person” will be below bare minimum by the standards of the future — even after undergoing the progressive 1% annual European style growth.
Illinois. Now that they’re hurting they need help. Immediate help. Not the help that will come in five years once growth kicks in. And the only entity capable of immediate help is the government. And the only way government can find help is through direct and/or indirect redistribution.
The death spiral. It’s a fate of the voters’ own making.
That is why the time to be wise is when you are doing well.
Unfortunately the dominant motto amongst citizens is : “Now that we’ve become a wealthy society, we sure can afford some more redistribution, and some central planning of my own preferences”.
The whole western world is on a death spiral as few, very few, developed countries can match average world growth any more. It was not always that way. America rose to the top of the world by keeping a growth rate well above world average even after it became a developed nation.
For all their newfound education and computer simulation capabilities, most citizens seem to still ignore the basic arithmetic of compounding and exponents.
Some, few, very few nations will escape — often serendipitously. The key to individual success is to have the intuition and spot them ahead of time.
Grew up in Illinois. Still have family there, but it isn’t the same state. The Democratic machine has just destroyed everything about Illinois that was great. Big Blackhawks, Bears fan but I guess I’ll have to catch them when they come down to my new location. Hint: It’s in Texas 🙂
Illinois is a good example of why abolishing the electoral college in the US would be a bad idea. The demographics of the state ensure that Chicago controls the popular vote and as a result the rural communities end up footing the bill for massive government spending that tends to benefit only the urban area.
That is why my husband and I realized we could not afford to retire in Washington State — ridiculously high property taxes, high cost of living, worsening traffic (due to “green” social engineering) and worsening quality of life. Sold our property in Washington and moved ourselves and our wealth to Idaho. Before we left, Jay Inslee (D Gov, WA) was on a Seattle radio talk show. I called in and told him on air that we were leaving — and that we represented the law abiding, tax paying, low social service using people he should want to keep. Didn’t care. We are happier and prospering in Idaho.
Returning to Illinois after a long absence, I was shocked. This once rich and happy state is now like the second half of Atlas Shrugged.
This is why Karl Marx said that the revolution must occur everywhere at once (lest productive people just leave).