by Gary Alexander
August 3, 2021
I have lived all my life in coastal states. Currently, I write from a small island near Victoria, BC, while our other Market Mail authors write from East Coast states like Florida, Virginia, and New York. In late July, I spent a week in what the coastal elite call “flyover country,” but more specifically it is the geographical center of America. After Hawaii and Alaska gained Statehood in 1959, America’s center shifted north and west from Kansas to Belle Fourche, north of Rapid City and Mount Rushmore in western South Dakota.
The occasion was the annual Freedom Fest, held in the shadow of Mount Rushmore rather than under the neon glitter of Las Vegas, due to the unwillingness of Nevada politicians to guarantee housing for large conferences in the era of COVID. South Dakota, by contrast, had no mask mandates (and barely enough hotel rooms), but Governor Kristi Noem, her husband, and Lt. Governor Larry Rhoden welcomed us.
The 250+ featured speakers, as always, covered a variety of subjects – from fine arts and philosophy to politics and investments. I spoke on several subjects, which I summarized in my last three columns. This time, let me cover highlights from two other speakers. First, economist Steve Moore was effective in several formats in arguing for more financial freedom. In his first talk, he joked that President Joe Biden had mentioned in a live CNN town hall on Wednesday, July 21, our opening day, that his multi-trillion-dollar spending packages will “reduce inflation.” Moore was referring to a $3.5 trillion spending package and perhaps $1.5 trillion more in infrastructure spending for $5 trillion in “anti-inflationary spending.”
President Biden was repeating what he had said on Monday, July 19, when he said that more government spending “will be a force for achieving lower prices for Americans.” But Moore responded: “On what planet is the President living when $5 trillion in fiat money creation is considered to be anti-inflationary?”
Moore added, “Government spending doesn’t stimulate the economy. It de-stimulates the economy and causes inflation. One thing we learned from Milton Friedman is government spending doesn’t stimulate anything except government. We should be aggressively cutting government spending now, not raising it. If these policies worked, Argentina, Mexico, and Zimbabwe would be the richest countries in the world.”
As if to verify Moore’s analysis, the core personal consumption expenditure (PCE), the Federal Reserve’s preferred inflation measure, came out on Friday, July 30, a week after Freedom Fest ended. The PCE rose at an annual rate of 3.5% in June, up from 3.4% in May, reaching its highest growth rate since April 1992.
Fed chair Jerome Powell has repeatedly called the current inflation surge “transitory,” but in his latest testimony last Wednesday, July 28, he started to waffle on that premise. At the start of this year, the Fed had predicted PCE inflation to rise 1.8% in 2021. By March, he bumped it up to 2.4%, and in June the Fed raised their forecast to 3.4%, nearly double their forecast of six months earlier. Some crystal ball!
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Grover Norquist, President of Americans for Tax Reform, had kind words to say for South Dakota’s tax structure, then he quickly added that there are eight states that have zero state income tax and at least five other states now in the process of cutting state income taxes. He added that, “People are moving to the lower tax states from high-tax states,” a trend explored in great detail in Steve Moore’s book, written with fellow economist Art Laffer, “An Inquiry into the Nature and Causes of the Wealth of States” (2014).
The clear division between high-tax (mostly “blue”) states and low-tax (mostly “red” states) is obvious upon closer examination. The editors of The Wall Street Journal recently titled an editorial, “A Tale of Two Recoveries: Why is the jobless rate so much higher in Democratic-run states?” (July 22, 2021)
In April, as the table above shows, the six states with the lowest jobless rates (all under 3.5%) are all red states. In June, that list expanded to become the top nine states with the lowest unemployment rates being governed by Republicans. Meanwhile, the 10 states with the highest jobless rates are run by Democrats.
The high-tax Democratic states continue to lose population to lower-tax states. Prolonged lockdowns in blue states have resulted in permanent small business closures, while stiff regulations and high taxes tend to throttle small business formation there. According to Census Bureau data, Florida recorded twice as many new business applications per capita over the last year as New York. Democratic-run states are also mostly continuing with the $300 unemployment bonus checks (sponsored by the Democratic Congress) through Labor Day, while most Republican governors have already ended this unnecessary handout.
It is pretty clear which policies work best to reduce poverty, increase wages, and create jobs, and which promote the opposite, so it remains a mystery why voters choose politicians that tend to choke off growth.
South Dakota – a Strong Pro-Business State in Search of a Labor Force
When I stayed two extra days in South Dakota after the conference, I could see the fruits of the state’s business-friendly, low tax environment in action. There were both high points and some warning signs.
Arriving in Rapid City, South Dakota on July 20, there were no cabs at the airport, and the Uber and Lyft wait times were averaging 30 minutes, so I took a long van ride to my hotel. Rides were scarce all week, so the conference hired big busses to ferry hundreds of attendees to hotels or remote conference events.
In 2019, pre-COVID, South Dakota was voted among the Top Five states in several key categories and among the Top 10 in moving destinations – a spectacular statistic considering its small population (under one million) and its remote rural location in the upper Midwest. It is clearly a great state for business:
- State for Affordable Business Costs (source: Forbes, 2019)
- State for Cost of Doing Business and Business Friendliness (CNBC, 2019)
- Best State for Fiscal Stability (US News & World Report, 2019)
- Low Tax Burden State (US News & World Report, 2019)
- State for Inbound Migration (United Van Lines, 2019)
South Dakota is also one of eight states with no state income tax. In addition, the state boasts:
- No corporate income tax
- No personal income tax
- No personal property tax
- No business inventory tax
- No inheritance or estate tax
- A “right to work” state
- A low crime rate
South Dakota has one of the lowest unemployment rates in the nation, under 3% since March, bottoming at 2.8% in April and May, but therein lies the rub for businesses, and a threat to the statistical home run streak described above. Among the 50 states, South Dakota ranks #47 in available work force and #48 in infrastructure. As I cruised the roads there last week (on July 25 and 26), I saw long lines everywhere and as I stopped for lunch, I found a couple of famous chain restaurants closed with signs sadly proclaiming:
“Temporarily closed for staffing issues” … and “CLOSED; currently hiring, please call us at ….”
Still, the Rushmore Region of South Dakota is booming. As I drove south to Mount Rushmore last Monday, the parking lots to “Reptile World” and “Bear Country USA” were packed, with long lines to enter the parks. So was Mount Rushmore. American flags flew everywhere in this fiercely patriotic state. (The number of military veterans in the Rushmore Region is 18,593, or 70% above the per capita norm.)
As of 2020, the population of Rushmore Region had increased by 6% since 2015, rising from 185,000 to 196,000 and it is expected to grow another 4% to 204,000 by 2025. There are currently 36,752 millennials (age 24-40, born 1981-1997 and of prime working age) in the region, but there is still a worker shortage.
If only we could get 95% of U.S. Millennials to go back to work, we might see 7% GDP growth in 2021.