Federalism: The Keystone to Safely Reopening America

From the beginning, the federal response to the COVID-19 pandemic rightfully relied on the principle of “federalism” to guide policymaking, with states taking the lead in managing the crisis response. In a new study famed economists Stephen Moore and Dr. Arthur B. Laffer argue federalism will determine how and when state economies recover from the economic shutdown. Just as state policy determined the economic outlook of states prior to the economic shutdown, so will it determine the speed of the economic recovery. Unfortunately, Moore and Laffer predict negative GDP growth for Q2. Given -4.8% GDP growth for Q1, negative GDP growth for Q2 means many state economies will officially be in recession. However, with the right policies in place, Moore and Laffer find states can end their recessions by late summer and begin a swift recovery this fall.

Moore and Laffer expect the recession resulting from the economic shutdown to be short, despite sharp decreases in employment and quarterly gross domestic product (GDP) growth. Simply, economic data do not support the media narrative of a looming depression. Plus, the economic foundation built over the recent market expansion is likely still present and will aid in the economic rebound as states begin to reopen their economies.

Moore and Laffer also expect the speed and magnitude of the economic recovery will vary greatly depending on the state. First, the COVID-19 pandemic is hitting densely populated states harder than more rural states. Since the virus is spread by human-to-human transmission, population density will be a large factor determining how quickly states can safely reopen.

External economic factors will also affect how quickly state economies rebound once reopening begins. The energy sector has its own problems unrelated to the COVID-19 pandemic, and these problems will likely persist as the virus wanes. Resource-rich states like Wyoming, and North Dakota may see slower economic growth coming out of the economic shutdown if  oil and gas industries remain plagued by globally low prices. On the other hand, California and Washington’s economies are greatly influenced by technology companies that were less affected by the economic shutdown than other industries. These state economies can expect a faster rebound than energy-dependent states that will likely still be struggling with the downturn in the energy economy.

Finally, just as state policy determined the economic outlook of states going into the economic shutdown, state policy will determine how quickly state economies will recover, regardless of an advantageous reopening strategy. The state economies Moore and Laffer expect to recover fastest are Washington, Colorado, Utah, South Carolina, Georgia, Florida, Arizona and Nevada. Except for Washington (technology economy) and South Carolina (retirement economy), each of these states were in the top 20 states for economic outlook in the ALEC-Laffer Rich States, Poor States: State Economic Competitiveness Index, authored by Dr. Arthur B. Laffer, Stephen Moore and ALEC Chief Economist Jonathan Williams.  Conversely, the states Moore and Laffer expect to recover the slowest are Pennsylvania, Wisconsin, Ohio, Michigan, Rhode Island, Illinois, New Jersey and Connecticut. Except for Wisconsin, Michigan and Ohio, each of these states rank in the bottom third of states in economic competitiveness.

The ALEC-Laffer Rich States, Poor States: State Economic Competitiveness Index uses 15 equally weighted policy variables proven to affect state economic performance in the long run. Each of these variables directly relate to policies under the control of state policymakers. Moore and Laffer’s work indicates that economically competitive states will recover faster and stronger than uncompetitive states.

Moore and Laffer are correct in their recent analysis: if states insist on the same anti-growth policies that were on the books at the beginning of the economic shutdown, their economic recoveries will be anemic. Instead, states must adopt pro-growth policies to come out of the COVID-19 pandemic stronger than when it began.