The Country May Be Close To A Recession, But These States Are Still Growing

A recent report from the Bureau of Economic Analysis (BEA) showed that national GDP shrank at an annualized rate of 1.6% in the first quarter, more than previously thought. New data released today, however, shows that some states experienced economic growth over the same period. The country may be teetering on the edge of a recession, but states that implement pro-growth economic policies can soften the blow.

America’s GDP shrank in the first quarter of this year, and another quarter of negative growth will put the economy in a recession according to a common rule of thumb that defines a recession as two quarters of negative GDP growth.

But even if the country is in a recession, that does not mean that every state or local economy is shrinking. The United States is a big country, both in size and population, and there is a lot of variation at the state level. The 50 states have different resources, geographic features, demographics, and public policies. All this variation leads to different economic outcomes, so while some states are struggling, others can be thriving.

Recent data from the BEA shows that four out of the 50 state economies grew in the first quarter despite the negative number at the national level. Leading the way were New Hampshire (1.2%) and Vermont (0.7%). The map below from the BEA shows the growth rates for all 50 states.

States that want to improve their ability to grow even when the rest of the country is reeling should focus on increasing economic freedom. Research that analyzes countries, states, and metropolitan areas consistently finds that more economic freedom leads to better economic outcomes, including faster GDP growth.

There are several things states can do to increase their level of economic freedom and thus promote more growth and innovation. Simpler tax codes with lower rates, fewer exemptions, and broader bases incentivize work and investment. Indiana recently enacted a plan to reduce its income tax rate from 3.23% to 2.9%. Arizona, Iowa, Idaho, and Ohio are some of the states that recently simplified their tax codes by reducing the number of income tax brackets. Iowa and Idaho, along with Utah, also cut their corporate income tax rates. New Hampshire will join Florida, Texas, and six other states that do not tax any income once its tax on investment income is phased out 2027. States that want more economic growth should enact similar tax reforms.

Regulatory reform can also increase economic freedom and generate more growth. Research shows that too much regulation has several negative consequences, including higher prices, less employment, and more income inequality. A red tape reduction plan that reduces the number of regulations is one way to avoid these harmful effects. Kentucky, Missouri, Oklahoma, and Rhode Island have set red tape reduction targets over the last few years.

Another way to boost growth is through a regulatory budget that requires agencies to cut rules for each one they add. Ohio recently passed legislation requiring two restrictions to be cut for each one added.

Becoming a right-to-work state is another pro-growth reform. Currently 27 states have right-to-work laws that prevent people from being forced to join a labor union as a condition of employment.

Right-to-work laws boost GDP by boosting employment. A recent study from the Mackinac Center for Public Policy in Michigan found that counties in right-to-work states have higher levels of employment than adjacent counties in non-right-to-work states.

Worker satisfaction also increases when right-to-work laws are enacted. A study published in the Journal of Law and Economics found that the enactment of a right-to-work law increased workers’ self-reported current life satisfaction, expected future life satisfaction, and sentiments about current and future economic activity.

Economic freedom may seem like a nebulous concept, but at its core it is about ensuring people have the freedom to work, invest, and create new businesses. Commonsense reforms that remove barriers and incentivize economic activity, such as simpler tax codes and less regulation, are the essence of economic freedom. States that increase economic freedom will have stronger economic growth, and if the country falls into a recession, they will be better prepared to withstand it.