Obama Misreads Message of 'Live Free or Die'

Aug. 24 (Bloomberg) -- Stick with me, families, on this experiment of government expansion. That is the implicit message from President Barack Obama this summer.

Recently, for example, Obama sat down with an Ohio couple, Joe and Rhonda Weithman, to talk about how federal help in the form of cash for Joe's business and subsidy for Rhonda's health care would help the Weithmans and families like them recover.

Reading the transcript, I got the sense that the president was making the point that the money or breaks the Weithmans got weren't the dole, but rather a gift of a higher economic quality. The message was that such smart subsidies encourage private work. The president predicted the government presence generally in this recession would prove a net economic bonus, suggesting that his policies would yield a nation "stronger than it was before this crisis struck."

The nation doesn't have to wait for the Obama experiment to finish to learn the outcome. Such experiments have been running over decades at the state level. Even before Obama was born, some states were applying the Obama rule of "spend, even if it means higher taxes, and you will grow." Others operated on the philosophy that less government, even perhaps in times of trouble, served their residents better.

J. Scott Moody of Public Choice Analytics, a New Hampshire public policy consultant who specializes in cross-state analysis, ran his own experiment. Moody compared Maine, a state that more than 60 years ago embarked on one path, with New Hampshire, which went a different route. Like the president, Moody favors an emphasis on the household pocketbook. He therefore spends time looking at per capita personal income of individuals.

Maine Leads

At the end of World War II, Maine boasted a bigger economy and a bigger population than New Hampshire. In some other respects the two states were similar. They were both in New England, and both were struggling with the death of old industries such as textiles. In 1946, per capita income was $9,610 and $9,768 for Maine and New Hampshire, respectively.

Moody breaks down his per-capita income figure into two components, revenue from the public sector and revenue from the private sector. Pay from governments, such as a public school teacher's pay, is included in the public-sector number along with traditional benefits.

Back in 1946, only 16.6 percent of what Maine residents earned or collected came from a government, federal, state or local. For New Hampshire, that rate was 18.4 percent. Neither state had an income tax or a sales tax. Then the divergence started.

Legislative Trick

Maine lawmakers argued that the general welfare would be served by a new sales tax to pay for a larger government presence, a safety net. Voters weren't so sure. In 1951, lawmakers prevailed via a trick: they appended their general sales tax to legislation for veterans' bonuses.

As Maine's late U.S. Senator Edmund Muskie commented in an oral history in the Bates College Archive, the sales tax, so crafted, "couldn't lose" in a vote in the legislature. Rejecting the levy would be depriving veterans, an impossibly unpatriotic act at the Cold War's height. In 1969 Maine adopted an income tax as well.

As early as 1945 New Hampshire signaled it would differ by adopting "Live Free or Die," as its motto. Over the decades, New Hampshire lawmakers did impose significant taxes, from levies on business and unearned income to the state's detested "view tax" -- an assessment for water-view (but not waterfront) real estate.

Shouldering a Burden

Still, the state government never burdened citizens with sales or income taxes. Overall today, Maine residents shoulder a heavier tax burden than do those of New Hampshire. State and local taxes take 12.6 percent of personal income in Maine, the sixth-highest share among states. In New Hampshire state and local taxes take 8.7 percent, putting New Hampshire at 49th for tax burden.

The result? Decade in, decade out, New Hampshire's economy grew faster than Maine's, so that the Granite State surpassed the Pine Tree State in 1984 and today boasts an output that is 20 percent bigger. Maine's recessions and double dips were worse than New Hampshire's. Eventually New Hampshire also won the population contest, passing Maine, in part thanks to migration. Last month, joblessness was 8.1 percent in Maine, better than Ohio but still bad, and 5.8 percent in New Hampshire.

What about that family pocketbook that the White House highlights? Bureau of Economic Analysis data show average per capita income for Maine in 2009 was $36,745, a bit more than Ohio. In New Hampshire that number was $42,831, eighth highest in the nation.

Income Breakdown

Moody explains disappointing performance of states like Ohio and Maine using the breakdown between public-sector and private-sector income. In 2009 the share of personal income that Maine residents took from all government was up to 36.4 percent. For Ohio it was 32.9 percent. For New Hampshire, the figure was 24 percent. Moody's data suggest that the precious distinction between laudable civil service posts and plain old welfare doesn't hold up. Government money, smart or dumb, damps initiative.

It's wrong for the president to ask for patience. The results of the government experiment are in, courtesy of the states. Double dips are more likely with policies like his. And most Americans would prefer a future that looks like New Hampshire to one that looks like Maine.

(Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Amity Shlaes at amityshlaes@hotmail.com

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net.

© Copyright 2010 Bloomberg

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