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Political ideology and economic freedom

in the US states

Christian Bjørnskov* Aarhus School of Business, Aarhus University

Niklas Potrafke+

University of Konstanz

March 15, 2011

WORK IN PROGRESS – COMMENTS WELCOME

Abstract:

This paper empirically investigates how political ideology influences economic liberalization as

measured by the size of government, tax structure and labor market regulation. Our dataset of

economic freedom indicators compiled by the Fraser Institute covers 48 US states over the 1981-2005

period. We employ several indicators of political ideology that have been used in the literature and

introduce a new index that considers regional differences in Democratic and Republican Party ideology.

The results suggest that (1) Republican governors and Senates dominated by Republicans have been

more active in economic liberalization than Democrats, (2) coding ideology with the new index gives

rise to more clear-cut results, (3) divided government hardly counteracted ideology-induced economic

policies, even though disagreement between the governor and the Senate had some counteracting

effects.

Keywords: economic freedom, taxation, regulations, ideology, panel data

JEL Classification: O51, P16, R11, R50

* Aarhus School of Business, Aarhus University, Department of Economics, Frichshuset, Hermodsvej 22, DK-8230 Åbyhøj, Denmark. Email: chbj@asb.dk. +

University of Konstanz, Department of Economics, Box 138 D-78457 Konstanz, Germany, Email: niklas.potrafke@uni-konstanz.de.

SEPIO – CES, U. Paris 1 – 29 mars 2011, 16h, salle 17 – MSE, 106-112 bd de l’Hôpital, Paris 13e

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1. Introduction

While political polarization between leftwing and rightwing parties and electoral cohesion have

declined in several OECD countries such as Germany or Japan, both still play a great role in the United

States. The influence of political ideology on economic policy-making appears to have become clearer

after the Presidential elections in November 2008. For example, President Obama worked to increase

the role of government in the economy by introducing compulsory health care insurance, tighter

regulations of the financial sector, and quasi-nationalizing parts of the auto industry. Several American

voters nevertheless disagreed with Obama’s economic policies and demonstrate against a compulsory

health care insurance and increasing public debt (REF PEW). In the midterm elections in November

2010, a majority consequently voted for the Republicans. With a Republican majority in the House, i.e.,

divided government, President Obama cannot implement his preferred policy without a substantial

number of Republican votes. Common sense therefore predicts that divided government moderates

ideological policy influences.

That Democrat governments attempt to implement more expansionary economic policies and

divided government results in counteracting effects appear to be ’conventional wisdom’. While political

economy models describe how government ideology and institutional characteristics such as divided

government are expected to influence economic policy-making, median voter models suggest that

ideological positions are unlikely to ensure majorities in elections. The conception of ideology-induced

policies also contradicts common wisdom in several OECD countries that voting for a leftwing or

rightwing party does not make a difference. The public debate often transmits the median-voter notion

that it does not matter whatever party one votes for because all politicians will implement nearly the

same policy. In Germany, for example, the leftwing Social Democrats and the rightwing Christian

Democrats have indeed implemented quite similar economic policies since 1990.

Ideological phenomena in the United States and its consequences are therefore worthwhile to

investigate in more detail since focusing on federal states overcomes a number of practical problems.

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Several studies have shown that political ideology influences economic policy-making in the United

States. At the federal level and across the US states leftwing / Democrat governments seem to have

pursued more expansionary fiscal policies than rightwing / Republican governments by increasing

public expenditures and tax burdens (e.g., Blomberg and Hess, 2003, Reed 2006, Rose 2006, Chang et

al. 2009, Alt and Lowry 1994). The result of ideology-induced fiscal policies across the US states is not

only meaningful because states have the power to choose different policies and institutions. In

particular, different economic policy-making under leftwing and rightwing governments reflects

manifold preferences in the electorate and shows that politicians are not forced to provide policy

platforms that gratify the preferences of the median voter. Yet, the influence of government ideology

on more encompassing measures of economic policy has been ignored in the empirical political

economy literature in the US states. Against the background of sustained interest in the role of political

ideology in US economic policy, this is a surprising omission. We therefore use the index of “economic

freedom” developed by Karabegovic et al. (2003) which includes three components – the size of

government, the tax structure, and labor market freedom – to investigate whether ideology-induced

effects across the US states can also be shown for the more encompassing measures of economic

liberalization. The economic freedom indicators by Karabegovic et al. (2003) are primarily based on

fiscal policy measures and thus focus on government intervention in the public sector. In contrast to

the cross-country economic freedom indicators by the Fraser Institute (e.g., Gwartney et al. 1996 and

2009) only the labor market component relates to regulation policies.

A challenging issue is how to measure political ideology. When measuring parties’ and politicians’

ideological position, one faces three main problems: 1) the comparability of scales across countries; 2);

the potential multidimensionality of political positions and 3) the stability of scales across time and

space. By restricting our attention to the United States, we partially circumvent the first problem on the

comparability of scales across countries. The second problem on the potential multidimensionality of

political positions is also of less concern, as suggested in the pioneering work by Poole and Rosenthal

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(1991, 2001, 2007). While ideology in some countries is, in fact, a multidimensional concept, Poole and

Rosenthal show that the vast majority of decisions taken in Congress can be placed on a left-to-right

scale. In this paper, we therefore explicitly deal with the third problem, the stability of scales across

time and space. This is pertinent since the positions of the two American parties have not been stable,

but have grown apart in recent decades. Likewise, political ideologies in the Democratic and Republican

parties are not homogenous across the US states. For example, Southern Democrats are more

conservative than Democrats on the East Coast and have also historically differed from the rest of the

party (Poole and Rosenthal, 2007). We therefore use the DW-Nominate data by Poole and Rosenthal

to approximate these differences. Specifically, we use state and party-specific positions of members in

Congress to scale the ideological position of parties in politicians’ home states. The DW-Nominate data

allow us to measure ideological positions with more precision than previous studies.

Veto players can counteract ideology-induced economic policy-making. In the United States,

divided government plays an intriguing role. Divided government occurs when the governor is

ideologically distinct from the majority of either chamber (House and Senate) of Congress. To be sure,

scholars have investigated the influence of divided government on economic policy-making at the

federal level and in the US states. Several studies have, however, ignored to distinguish between the

three types of divided government: 1) situations in which the governor is from party A, but both

chambers are dominated by party B, i.e. a situation with divided government but a unified congress; 2)

situations in which the governor and the majority in the House belong to the same party, but face a

Senate majority of party B (approval division); and 3) situations in which the governor and the majority

in the Senate belong to the same party, but face a House majority of party B (proposal division). In this

paper, we investigate whether these three types of divided government have counteracted ideology-

induced economic-policy making.

We use the new ideology measure that considers regional differences of the political positions of

the Democratic and Republican Party, respectively, to empirically investigate how political ideology

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influenced economic liberalization in the US states. The dependent variables are economic freedom

indicators compiled by the Fraser Institute covering the 50 US states over the 1981-2005 period. We

perform all analyses using both the new index and the standard Democrat/Republican dummy

indicator of party identity that have been used in the literature and compare them with the new

ideology indices (ideology of the governor, House and Senate). We also separate divided government

into its three main types and examine which types block ideological influences.

The results suggest that (1) Republican governors and Senates dominated by Republicans have

been more active in economic liberalization than Democrats, (2) coding ideology with the new index

gives rise to more clear-cut results, (3) divided government hardly counteracted ideology-induced

economic policies, even though disagreement between the governor and the Senate had some

counteracting effects.

The rest of the paper is organized as follows: Section 2 discusses the related literature on

ideology-induced economic policy-making across the US states and formulates the hypotheses to be

tested. Section 3 presents our indices on political ideology in the US states. Section 4 presents the data

on economic freedom and specifies the empirical model. Section 5 reports and discusses the estimation

results, and investigates their robustness. Section 6 concludes.

2. Ideology-induced policies across the US states

2.1 Ideology-induced policies

Investigating the influence of government ideology on economic policy-making is one of the

prominent topics in public economics and political economy. Political economic theories describe why

and how political ideologies are expected to be associated with economic policies. The partisan

approach focuses on the role of party ideology and shows the extent to which leftwing and rightwing

politicians will provide policies that reflect the preferences of their partisans. According to the Michigan

School, leftist parties appeal more to the labor base and promote expansionary policies, whereas

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rightwing parties appeal more to capital owners, and are therefore more concerned with reducing

inflation (cf., Converse 1964). The partisan approach also often assumes that the economy can be

described by a (short-run) Phillips-Curve-tradeoff and that politicians are able to exploit the tradeoff

strategically by fiscal and monetary policies. With respect to short-term economic performance, the

partisan models provide clear-cut predictions: leftist parties seek (or will accept) higher rates of inflation

to get lower unemployment and faster growth, rightwing parties seek (or will tolerate) higher

unemployment and slower growth to obtain lower inflation. This basic pattern holds for the classical

partisan approach (Hibbs 1977) and also for the rational approach (Alesina 1987).

Partisan theory implies that leftwing and rightwing governments have different preferences as to

the size and scope of government, the proper means to achieve shared goals and, thus, with respect to

economic policy: leftwing governments favor more government intervention, more income

redistribution and the use of expansionary fiscal and monetary policies. In contrast, rightwing

governments traditionally believe in the free market and favor less government intervention.1

Scholars have extensively examined to what extent and in which policy areas government

ideology has influenced economic policy (e.g., Alesina et al. 1997, Tavares 2004, Bjørnskov 2008). The

empirical results show that government ideology influenced privatization and deregulation policies in

industrialized countries as predicted by partisan theories. Rightwing governments have typically been

more active in privatizing and deregulating product markets (see, for example, Bortolotti et al. 2004,

Potrafke 2010). In contrast to privatization and deregulation policies, government ideology hardly

influenced fiscal policies in OECD countries after 1990. Before the 1990s, leftwing governments in

OECD countries tended to spend more on welfare expenditures. On the one hand, rightwing

governments also increased public spending and public debt. A prime example is Germany where the

conservative chancellor Helmut Kohl did not continue his fiscal consolidation from the 1980s but

1 However, another reason for manipulating economic policies is electoral motives. In this paper, we nevertheless focus on

the influence of political ideology and do not investigate electoral cycles. Interested readers may find recent evidence of electorally motivated policies in, e.g., Shi and Svensson (2006).

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dramatically increased spending after the German Unification in 1990. On the other hand, leftwing

politicians such as Tony Blair in the United Kingdom or Gerhard Schröder in Germany also

implemented quite market-oriented fiscal and social policies in the end of the 1990s. Empirical studies

investigating ideology-induced fiscal policies in OECD countries thus show that electoral cohesion

declined.2

In the United States, political ideology has played an important role in fiscal policy at the federal

level (cf. Blomberg and Hess, 2003; Haynes and Stone, 1990; Alesina and Sachs, 1988; Krause and

Bowman, 2005). Confirming traditional partisan theory, many studies at the state level also find that

leftwing politicians pursued more expansionary fiscal policy than rightwing politicians, although results

in the literature are not consistent.3 For example, the results by Chang et al. (2009) suggest that the

growth rate of government spending was higher under Democratic governors over the 1951-2004

period. Besley and Case (1995a) likewise find that taxes and government spending was higher under

Democratic governors over the 1950-1986 period even if the incumbent Democrat was ineligible for

reelection because of term limits. Alt et al. (2002) also find that Democratic governors collected higher

general revenues and spend more per capita over the 1986-1995 period. Two studies report no

evidence of partisan effects. Rose (2006) suggests that the party composition of the state governments

did not significantly influence per capita general expenditures over the 1974-1999 period. Primo (2006)

also does not find ideology-induced government spending over the 1969-2000 period.

Scholars have also examined the influence of legislature ideology on fiscal policies in the US

states. Reed (2006) finds that tax burdens 1960-2000 were higher when Democrats controlled the state

legislature compared to when Republicans were in control but that the political party of the governor had

little effect. In a similar vein, the results by Besley and Case (2003) show that when Democrats

controlled the House, states had higher taxes and expenditures over the 1960-1993 period. On the

2 Government ideology does not only concern economic policy issues, but also policy issues such as immigration (Llavador

and Solano-García 2011) or international relations (Potrafke 2009). 3 Scholars have examined how government ideology influenced economic policy-making across counties in other federal

states such as Canada (e.g., the companion paper by Bjørnskov and Potrafke 2011).

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other hand, Besley and Case (2003) find that Democrat governors pursued different labor market

policies than their Republican counterparts.

Several factors constrain the influence of ideologically motivated politicians and parties.

Institutional features such as the influence of interest groups, checks and balances and divided

government are likely to counteract ideology-induced effects in economic policy. For this reason,

partisan politicians will probably implement their preferred policies incrementally, step by step over the

legislative period. It is not likely that a newly elected government can pursue its most preferred policies

from the beginning of the legislative period. This suggests investigating the influence of government

ideology and electoral motives on the changes in economic policy. In addition, specific institutions may

still limit the room for ideology-induced policy making.

In federal states such as the United States, both chambers of parliament decide on economic

policy. When political majorities in the two chambers differ, governments are not always able to

implement their preferred policies. The institutional feature most commonly explored in studies of US

policy-making is that of divided government: when the governor is ideologically distinct from the

majority of either chamber (House and Senate) of Congress (cf. Krehbiel, 1996). Theoretically, by

balancing the influence of different ideologies, divided government may thus lead to policy

convergence (Alesina and Rosenthal 1996).4 Yet, even this feature varies considerably across the US

states and over time. Divided government has been comparatively rare in South Dakota and Maryland

in recent decades while New York and Delaware have had divided governments in the entire period we

consider in this paper.

Political scientists and political economists have been divided on the merits, drawbacks and

consequences of divided government. Most of the literature has focused on divided government as a

source of gridlock, i.e. on an “inability to change policy” (Saeki 2009). Within this view, divided

government would imply a situation in which politicians are unable to solve salient problems because 4 The model by Alesina and Rosenthal (2000), however, predicts that ´checks and balances` induce more divergence in

platforms, especially when uncertainty is high and the legislature is more powerful than the executive.

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solutions proposed by the president are likely to be blocked by either the House or the Senate. With the

exception of Nebraska – the only state with a unicameral political system – this situation could also

arise in the state legislatures in which Congress can block gubernatorial initiatives. In this view, even in

the face of severely adverse shocks, politicians would be unable to take effective action.

Yet, another view holds that legislative gridlock caused by divided government contributes to

policy stability. With divided government, legislatures can only decide on whatever compromise both

parties can agree on and what is, in some either economic or political sense, objectively necessary. The

compromise and identification of necessary steps in turn depend on leader characteristics and other

institutional features and lead to both a decrease in policy production as well as a decrease in

subsequent policy repeal (Chiou and Rothenberg 2003; Michael, 2010). Parties anticipating divided

government can also have strong incentives to adopt more polarized policy positions (Alesina and

Rosenthal 2000). In addition, divided government implies that political oversight is improved as

partisans gain an incentive to balance the ideological bias of their counterpart (Fox and van Weelden,

2010).

Most of the studies on divided government have predominantly focused on the federal level (e.g.,

Calcagno and Lopez 2011). Similar gridlocks are likely to occur across the 49 two-chamber states, and

to have implications for the influence of political ideology on policy making. In particular, when

exploring policy changes, situations with divided government would seem to exclude any partisan

influences while unified governments would be more able to shift government spending, tax policy and

institutional characteristics in ideological directions. Of the comparatively few studies to explore this

situation, Alt and Lowry (1994) find clear evidence that states with divided government respond

differently to economic shocks than those with unified government (see also Lowry et al., 1998; Alt et

al., 2002).

The focus on the state level nonetheless allows us to go conceptually further than most of the

divided government literature and distinguish between types of divided government. Specifically, three

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types of divided government exist: 1) situations in which the governor is from party A, but both

chambers are dominated by party B, i.e. a situation with divided government but a unified congress; 2)

situations in which the governor and the majority in the House belong to the same party, but face a

Senate majority of party B (which we term approval division); and 3) situations in which the governor

and the majority in the Senate belong to the same party, but face a House majority of party B (proposal

division). Situations 2) and 3) are both cases with a split legislature while case 1) is a split-branch

situation (cf. Alt and Lowry, 1994).

We observe overall divided government, proposal division and approval division in our data. In

2005, for example, the governors Janet Napolitano (Democrat (D), Arizona) and Mike Huckabee

(Republican (R), Arkansas) faced overall divided government: their party did not have the majority in

either parliamentary chamber. Other governors, such as Tim Pawlenty (R, Minnesota) and Phil

Bredesen (D, Tennessee), only faced approval division while George Pataki (R, New York) and Brian

Schweitzer (D, Montana) faced proposal division. Since 1981, proposal division has been common in

Delaware and North Dakota while approval division has been common in Indiana and New York.

Overall divided government in which the governor is from party A, but one or both chambers are

dominated by party B is extensively analyzed in the literature (e.g. Baron and Ferejohn, 1989; Krehbiel,

2000). Most studies have ignored whether situations with only proposal or approval division could

differ from a situation of split-branch government. Yet, at least two reasons exist to consider the

consequences of these situations to be different.

A first reason is that the main role of state Houses is to pass legislation. Any proposals for state

legislation and policy therefore need to be put forward and approved in the House, which would lead

to a situation in which the ideological influence of the House is substantial. Senates have to approve of

legislation and policies, thereby providing them with the potential power of blocking proposals. Given

that proposing legislation is influenced more by ideological considerations than blocking legislation we

would expect to find situations with proposal division more likely to alleviate ideological influences

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than situations with approval division. An example is to publish a proposal only because of signaling

reasons even if it is known with certainty to not pass the House. A second reason is that senators are

elected for longer periods than representatives, and thereby are likely to adopt a somewhat longer time

horizon in policy-making. As such, given that much ideological policy-making aims at securing short-

run goals, senators would be likely to behave in a less ideological way. This second reason thus also

provides a rationale for expecting that proposal division is more likely to alleviate ideological policy-

making than approval division. A possible exception would be situations in which ideological proposals

may have long-term consequences, in which case one would expect them to be more likely to be

blocked by an ideologically opposed Senate.

2.2 Institutional background of economic policy-making in the US states

A set of other institutional features could also block or change ideological influences. The overall

institutional frameworks adopted by the 50 US states have several similar characteristics. All, with the

exception of Nebraska, have bicameral political systems, all have elected governors, and all except

Louisiana adhere to a British common law judicial system. However, due to the substantive powers

delegated to the states, many potentially important institutional details vary across the United States.

The institutional limitations and powers delegated to the states are outlined in the Tenth

Amendment to the US Constitution and further regulated by the Commerce Clause. The Tenth

Amendment states that “The powers not delegated to the United States by the Constitution, nor

prohibited by it to the States, are reserved to the States respectively, or to the people”, implying that

institutional and policy choices not explicitly delegated to the US Congress are within the power of the

state legislatures. These powers are further delineated by what is usually known as the Commerce

Clause, which was originally supposed to ensure that the federal government only regulates matters

affecting interstate commerce. However, the interpretation of what defines interstate commerce

widened markedly during the 20th century (see, for example, Wiseman and Ellig 2007). With the change

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in the legal interpretation adopted by the US Supreme Court, the influence of the federal government

also increased.

While the last voting restrictions were eliminated in the early 1960s, state regulations of campaign

finance laws, districting, and voter registration requirements and procedures vary. Certain states require

that voters register more than a month prior to elections (e.g., Georgia), while Maine and North Dakota

allow voters to register on Election Day, and Wyoming does not recognize that voters even need to

register. Some states have also introduced laws, such as California’s well-known ‘Proposition 13’,

intended to make it more difficult to increase government spending. 15 states had by 2005 imposed

supermajority requirements on new taxation in order to curb the increasing state budgets and takings.5

Most states also have some form of requirement that the legislature must submit a balanced

budget or similar balanced budget requirements, as those introduced in Massachusetts in 1998 and

California in 2004. By 2005, only eight states – Hawaii, Indiana, Missouri, New Hampshire,

Pennsylvania, Vermont, Virginia, and Washington – had not imposed clear requirements on either the

governor or the state legislature (NASBO, 2007).6 Likewise, governors in the majority of states have the

power to veto specific line items and appropriations, thus further putting a formal cap on expenditures

and tax increases.7

Against this background, a significant question is how states have expanded their economic reach

so considerably. While 17 states did not even raise income taxes in 1950 (Besley and Case 2003), three

states raised more than 10% of Gross State Product in taxes by 2005. Similarly to the variation in

budgetary institutions, labor market regulations vary widely across the 50 states. Minimum wages and

the attendant legislation vary in general as well as in detail. While minimum wages are regulated through

5 These states are Arizona, Arkansas, California, Colorado, Delaware, Florida, Kentucky, Louisiana, Mississippi, Missouri,

Nevada, Oklahoma, Oregon, South Dakota, and Washington (Knight, 2000). On restrictions on spending and taxation see also Poterba (1994, 1995), Holtz-Eakin (1988), Hagen (1991). 6 In principle, Idaho only has weak formal requirements. However, NASBO (2007: 34) notes that for the governor to submit

an unbalanced budget would be “political suicide”. Other states have some form of statutory requirements with uncertain consequences. 7 The consequences of these institutional differences are highly disputed, and it is questionable whether such formal

requirements have actual effects (cf. Poterba 1996, Knight 2000; Primo 2006). See, for example, Besley and Case (2003) and, Lowry (2008) for surveys of fiscal policies and institutions in the US states.

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political agreement spanning several years in Illinois, Montana introduced an automatic annual cost-of-

living adjustment in 2007 (Fitzpatrick and Perine, 2008).8 These labor market regulations are also

ideologically contested with cross-country studies supporting that labor market policies are affected by

government ideology (Botero et al. 2004); the same appears to be the case across the Canadian

provinces (Bjørnskov and Potrafke 2011).

A final question is which level of government is most relevant for partisan policy-making. The

literature has primarily explored the effects of the ideological position of the governor, yet ideological

positions in the House and the Senate are also likely to influence partisan policy-making (Alt and

Lowry, 1994, Reed, 2006). The role of the government as well as the lower chamber is to initiate

legislation. The role of the upper chamber (Senate) is to approve or disapprove of proposals from

government and the House. As such, even though the Senate may not have to directly turn down a

piece of legislation to exert its influence. The Senate could affect policy making indirectly if some

legislation is proposed in the case that the governor or representatives deem its chances to pass Senate

to be too low. The actual ideological influence of the three levels of government is thus an outcome of

a complex game of political interaction.

2.3 Hypotheses

Following the implications of the related literature on partisan politics in the US states and

government ideology and economic liberalization, we form a set of directly testable hypotheses. The

hypotheses to be investigated in the following are:

1. Republican governors have been more active in economic liberalization than Democratic governors.

8 On the influence of the US president in the legislative process see, for example, McCarty and Poole (1995). The empirical

results by McCarty and Poole (1995) suggest that the US president has less influence in the legislative process than was intended by theoretical predictions.

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2. Republican dominated legislatures have been more active in economic liberalization than Democratic dominated

legislatures.

3. Divided governments counteract ideology-induced policies.

4. Counteraction varies across types of divided government.

To test these hypotheses, we first need a measure of government and parliamentary ideology that

is consistent and comparable across time and states.

3. Data

3.1 Measuring political ideology across the US states

Several pitfalls are associated with measuring political ideology, as outlined in Castles and Mair’s

(1984) pioneering paper. Measuring political ideology consistently across time and space involves

assessing the dimensionality of ideology, choosing a scale of ideology common to all units of

observation, and in most cases making the implicit or explicit assumption that ideology is scale-

invariant across time. Scholars have employed two measures for political ideology in the US states:

governor ideology (Republican / Democrat) and the ideological position of the legislature (e.g., Reed

2006) – that is the political ideology of the House and the Senate. Most studies exploring evidence

across the 50 states treat scale issues as resolved by assuming that the positions of the Democrat and

Republican parties do not change over time, or change so consistently across the states that all changes

are picked up by a joint time trend. Most studies assume that there are no material differences between

party positions across the states. For example, scholars assume that Massachusetts Democrats and

Illinois Democrats share the exact same ideology, and that Arizona Republicans and Maryland

Republicans do so too. Alt et al. (2002) is a notable exception.

Party positions are likely to differ across the US states. We follow Berry et al. (1998) in employing

political positions in the US Congress to estimate state party positions. We deviate from Berry et al.

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(1998) in employing Poole and Rosenthal’s (2006) DW-NOMINATE data on political positions in the

US Congress to relax the standard assumption that members of specific parties hold the same

ideological positions across all US states. We furthermore distinguish between the political ideology of

governors and the two chambers of parliaments.

Poole and Rosenthal (2006) deal with the dimensionality question – whether the set of political

decisions taken by Congress is distributed along a single or multiple ideological dimensions – by

exploring roll-call votes in the US Congress. Their study shows that Gerring’s (1997: 975) definitional

assessment that a set of values “becomes ideological only insofar as it specifies a concrete program, a

set of issue-positions” holds for the two American parties. The vast majority of votes can be placed on

a uni-dimensional left-to-right scale, which they define as between -1 and +1. In the 1981-2005 period,

which we analyze in this paper, an assumption of uni-dimensionality is thus warranted.9 However,

Poole and Rosenthal’s data also exhibit two specific features: 1) that party positions have not remained

stable, but have moved apart; and 2) that representatives of the same party from different states can

place themselves in quite different positions on a left-right scale of political ideology.

Our identifying assumption is that the political positions taken by members of Congress from

different states reflect the ideological positions of their party competing for state government. This

relaxes the standard assumption that ideological party positions do not vary across states or over time.

We place the Democratic Party in every individual state at the average ideological position of Democrat

representatives from this state, and do the same for the Republican Party, and use these positions to

calculate our ideology index. We acknowledge that our identifying assumption implies that the

ideological positions of federal representatives in Congress reflect state-specific voter preferences and

state party positions to a sufficient degree. Congressmen (and state parties) need to gratify the

preferences of the voters in the individual states to become elected. For example, voters in the Midwest

9 Poole and Rosenthal document that two dimensions of American politics arose in specific periods. In particular in the late

1950s and early 1960s, the civil rights question formed a separate dimension distinguishing Southern Democrats from the rest of the country.

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are more conservative than voters on the East Coast. Election-motivated as well as ideology-induced

politicians will consider the state-specific differences of the electorates. We therefore believe that our

index is more precise than mere party identity measures because it considers varying ideological party

positions across states or over time.

As suggested by Figures 1 and 2, the choice of how to measure ideology is not innocuous. Figure

1 shows the overall shift of party ideological positions by plotting the average Democrat and

Republican positions between 1981 and 2005: average policy positions between Republicans and

Democrats became more polarized over time. The index illustrated in Figure 1 allows the Democrat

and Republican parties at the state level to take up more than a singular point on the left-to-right line.

For example, averaging the positions of members of Congress of the two parties across the 106th to

110th Congress, the state averages of Democrat positions vary between -.553 (Massachusetts) and -.154

(Oklahoma). State averages of Republican positions vary between .209 (Connecticut) and .729

(Colorado). The positions furthermore vary over time, and show that parties’ ideologies may change.

For example, Democrats became more leftwing over time in states such as Arizona (moving from a

DW-score in 1981 of 0.019 to score in 2005 of -0.528), New Mexico (DW-score in 1981: 0.268; DW-

score in 2005: -0.506) and Virginia (DW-score in 1981: 0.090; DW-score in 2005: -0.352). In other

states such as Hawaii, Idaho and Wyoming, the DW-score for Democrats did not change. Republicans

became more rightwing over time in states such as Arizona (DW-score in 1981: 0.323; DW-score in

2005: 0.705), Indiana (DW-score in 1981: 0.252; DW-score in 2005: 0.660) and Tennessee (DW-score

in 1981: 0.220; DW-score in 2005: 0.620). The DW-score for Republicans did not change in states such

as Hawaii, Idaho and Wyoming. In Oregon, Republicans even became more leftwing over time (DW-

score in 1981: 0.665; DW-score in 2005: 0.405). As such, our index of ideology across the US states is

substantially more flexible than those used in most existing studies.

To illustrate the structure of our index, Figure 2 shows the average ideology of the state

parliaments across the 1981-2005 period, measured as either the average ideology of seats in state

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Houses and Senates or state governors, and employing either a standard -1/ +1 coding of party identity

or the coding of party ideology based on Poole and Rosenthal’s (2006) DW-NOMINATE placements.

Figure 2 also illustrates the discrepancy between the ideology of the incumbent governments and the

average positions of the parliaments. We follow Bjørnskov (2008) in calculating the average position of

the state parliaments as the average party identity / ideology, weighted with the shares of seats occupied

by either party. We place independent members at 0, unless we know them to be ideologically extreme,

in which cases we place them at either -1 or 1.10

The choice of calibrating state-specific party positions makes a substantial difference, and the

span of party ideological positions is quite wide. The most leftwing Democratic Party position in our

dataset is that of Massachusetts in recent years (at an index of -.55) while the Republican Party in

Massachusetts in 1990-91 also takes the most leftwing position in our dataset (index -.09). Conversely,

our procedure places the Republican Party in Colorado in 2005 as the most rightwing (index .72) while

the Democratic Party in New Mexico in 1981 takes the most rightwing position for that party (index

.27).

The data on political ideology cover 48 states. The two exceptions for which there are no data are

Alaska and Nebraska. Alaska is excluded because it has not sent a Democratic representative to

Washington since 1981, which implies that we cannot calculate an ideology score for Alaska

Democrats. Nebraska is excluded because of its special status in the United States by being the only

state with a unicameral political system, which is moreover broadly non-partisan. Following the related

literature we cannot categorize Nebraskan politics in partisan terms.

3.2 Data on economic freedom in the US states

10

We for example place all libertarian members of any state legislature at the rightwing extreme position of 1. We likewise place members of the Green Party at the leftwing extreme of -1.

18

We use the dataset on economic freedom in the US states first introduced by Karabegovic et al.

(2003). This dataset is available for the 1981-2005 period and contains yearly data for the 50 US states

(balanced panel).

The index of economic freedom includes three components: 1) the size of government,

composed of general government consumption expenditure (% of GDP), total provincial transfers and

subsidies (% of GDP), and social security payments (% of GDP); 2) the tax structure, measured as an

index equally weighting tax revenue (% of GDP), the top marginal tax rate and its applied income

threshold, indirect tax revenue (% of GDP) and sales taxes (% of GDP); and 3) labor market freedom,

measured as the extent of minimum wage legislation, government employment (% of total provincial

employment) and union density. Each of the subcomponents enters with equal weights in the three

components of the index. The construction of these indices follows a political logic as they are pooled

into measures of expenditure policy, revenue policy, and labor market policy. The overall indicators are

scaled to take on values between 0 (minimum of economic freedom) and 10 (maximum of economic

freedom).11

Figure 3 illustrates that average economic freedom in the analyzed sectors was quite

pronounced in the 1980s (maximum 7.18 in 1989), but remarkably decreased in the beginning of the

1990s. Since 1993, economic liberalization has proceeded steadily for some years, but declined again in

2000. Over the 1993-2005 period, changes have been made in most of the areas covered by the

indicators, but most spectacularly in the size of government, and to a lesser extent, in labor market

freedom. Figure 5 illustrates that overall economic freedom was most pronounced in states such as

Florida, Tennessee and Texas (overall indices on average 8.01, 8.27, 8.06) and less pronounced in states

such as Maine, New York, Rhode Island and West Virginia (overall indices on average 5.88, 5.51, 5.80,

5.48). In Texas, however, overall economic freedom steadily declined in the 1980s from 9.0 in 1980 to

8.0 in 1988. In New York, economic liberalization was proceeding rapidly till the end of the 1990s. In

11

For further details on the construction of the economic freedom indicators, as well as the primary data, see Karabegovic et al. (2003).

19

Mississippi, the overall index dropped from 7.8 in 1981 to 6.6 in 2005, an effect mostly driven by state

intervention in the government sector (Figure 6). In particular, Figure 6 also shows a dramatically

decreasing size of government index (i.e. rapid growth of the government sector) in Alaska (8.9 in 1981

and 3.8 in 2005). In New Mexico, the size of government indicators decreased from 8.6 in 1981 to 5.9

in 2005. The tax structure has been liberalized in states such as Delaware (Figure 7). US labor markets

became more flexible over time (Figure 8). The labor market freedom index increased on average from

6.22 in 1981 to 6.78 in 2005 with labor market deregulation proceeding particularly quickly in states

such as Michigan, Minnesota, West Virginia and Wisconsin. The figures show that economic freedom

has varied over time and across the US states. We will therefore investigate the influence of political

ideology on economic freedom in an error-correction model that considers variation over time and

across states.

3.3 Correlation between economic freedom and political ideology

In order to illustrate the association between political ideology and economic freedom across

the US states, we present correlations between the averaged economic freedom indices and averaged

ideology of the governors. One can see with the naked eye that considering ideological differences

across the US states results in a positive association between economic freedom and Republican

governors (Figure 8), whereas economic freedom hardly appears to be associated with the common

Democrat/Republican dummy variables (Figure 9). Measuring ideology appears to play an important

role.

4. Empirical model

The base-line error correction panel data model that investigates hypothesis 1 and 2 has the following

form:

20

∆ Economic Freedom Indexijt = α1 Ideologyikt-1 + α2 ∆ Ideologyikt +Σl δl1 Xilt-1 + Σl δl2 ∆ Xilt + ηi + εt +

uijt

with i=1,…,48; j = 1,…, 4; k=1,…,9; l=1,…,11; t=1,...,24 (1)

where the dependent variable ∆ Economic Freedom Indexijt denotes the first difference of economic

freedom index j. We distinguish between the four indicators of “Overall economic freedom”, “Size of

government”, “Takings and discriminatory taxation” and “Labor market freedom”. Ideologyikt

describes the ideological orientation of either the governor, House or Senate as discussed in the

previous section. In order to test whether the coding of the ideology variables (common measures

versus the DW measure) has an influence of economic freedom we distinguish between six different

ideology variables: the common Democrat/Republican coding for the governors, majority in the House

and Senate and our new coding for the governors, majority in the House and Senate, respectively. In

either way, we include (1) the level of the ideology variable in period t-1 which is the long-term effect

of ideology on economic freedom and (2) the first difference of the ideology variable which is the

short-term effect of ideology on economic freedom. Σl Xilt contains eleven exogenous economic and

institutional control variables that we also include in levels in period t- 1 (long-term effect) and in first

differences (short-term effect). We include the dependency ratio (persons aged below 15 and above 65

as a share of total population), women as a share of total population, blacks as well as Hispanics as a

share of total population, total population, employment, the consumer price index (CPI), the number

of dollars received back for every dollar spent from the fiscal equalization system, a supermajority and a

balanced budget dummy variable. We expect economic freedom to decrease the higher is the number

of transfer receivers and the tighter are institutional restrictions. The appendix provides descriptive

statistics of all variables included. Lastly, ηi represents a fixed state effect, εt is a fixed period effect and

uijt describes an error term.

21

The base-line error correction panel data model that investigates hypothesis 3 and 4 has the

following form:

∆ Economic Freedom Indexijt = α1 Ideologyikt-1 + α2 ∆ Ideologyikt

+ β1 Divided Governmentimt-1 + β2 ∆ Divided Governmentimt

+ γ1 Ideologyikt-1* Divided Governmentimt-1

+ γ2 ∆ Ideologyikt-1* ∆ Divided Governmentimt

+Σl δl1 Xilt-1 + Σl δl2 ∆ Xilt ηi + εt + uijt

with i=1,…,48; j = 1,…, 4; k=1,…,6; l=1,…,8; m=1,…,3 t=1,...,24 (2)

The model described in equation (2) is similar to the model in equation (1). We now also include

the Divided Governmentimt variable which is a dummy variable that takes on the value one when

government in a state was divided and zero otherwise. We distinguish between three different kinds of

divided government (section 2): 1) the governor is from party A, but both chambers are dominated by

party B, 2) ‘proposal division’ and 3) ‘approval division’. “Ideologyikt* Divided Governmentimt” is an

interaction term between the individual ideology variable and the divided government dummy variable.

We expect that ideology-induced economic policies are counteracted under divided government and

thus, the coefficients of the interaction terms to have a negative sign. We again include the level of the

divided government variable in period t-1 and its interaction with the respective ideology variables in

levels in period t-1 (long-term effect) and the first difference of the divided government dummy

variable and its interaction with the first difference of the respective ideology variable (short-term

effect).

We now turn to our choice of estimation procedure. We estimate the model with feasible

generalized least squares and implement heteroscedastic and autocorrelation consistent (HAC) Newey-

West type (Newey and West 1987, Stock and Watson 2008) standard errors and variance-covariance

22

estimates, since the Wooldridge test (Wooldridge 2002: 176-177) for serial correlation in the

idiosyncratic errors of a linear static panel-data model implies the existence of unrestricted serial

correlation for all the four economic freedom indicators. In the robustness tests section we also

describe results when the models are estimated by a dynamic bias corrected estimator.

5. Results

5.1 Basic Results

Table 1 shows the regression results when the common Democrat/Republican ideology

measures are used. We include the political ideology variables of the governor in columns (1) and (4),

political ideology of the House in columns (2) and (5), and political ideology of the Senate in columns

(3) and (6). In columns (1) to (3) we present results without control variables. The control variables in

columns (4) to (6) mostly display the expected signs. The coefficient of the first difference of the

dependency ratio has a negative sign and is statistically significant at the 1% level in column (4) and at

the 5% level in columns (5) and (6). A higher share of persons aged below 15 and above 65, i.e.

effectively outside the labor market, thus had a negative effect on economic freedom in the short run

while the level of the dependency ratio in period t-1 (the long-run effect) does not turn out to be

statistically significant. The level of the share of females in period t-1 has a positive sign and is

statistically significant at the 5% level in columns (5) and (6) but does not turn out to be statistically

significant in column (4). The coefficient of the first difference of the share of females – the short-run

effect – does not turn out to be statistically significant. The coefficient of the level of the share of

Hispanics in period t-1 (long-run effect) does not turn out to be statistically significant, whereas the

coefficient of the first difference of the share of Hispanics has a positive sign and is statistically

significant at the 10% level, although only in column (4). Likewise, the share of blacks, total population

and supermajority requirements do not turn out to be statistically significant across all equations.

Employment had a strong positive effect on economic freedom in the short run: the coefficient of the

23

first difference of employment is statistically significant at the 1% level in columns (4) to (6). However,

employment did not influence economic freedom in the long run, indicating that employment effects

are transitory. Higher consumer prices also had a negative influence on economic freedom in the short

run: the coefficient of the first difference of the consumer price index is statistically significant at the

1% level in columns (4) to (6). Again, the long-run effect of higher consumer prices on economic

freedom does not turn out to be statistically significant at conventional levels. Finally, fiscal equalization

had a positive influence on economic freedom in the long-run although the effect is minor: the

coefficient of the level of fiscal equalization transfers received is statistically significant at the 1% level

in columns (4) to (6) and indicates that economic freedom increased by about eight percent of a

standard deviation when fiscal equalization transfers received increased by one standard deviation (.3).

In the short run, fiscal equalization transfers received did not influence economic freedom.

The results in Table 1 show that the common ideology measures hardly influence overall

economic freedom. The coefficient of the first difference of governor ideology has the expected

positive sign and is statistically significant at the 10% level in column (1) but lacks statistical significance

in column (4). The numerical meaning of the effect in column (1) is that increasing governor ideology

by one standard deviation induces an increase of the economic freedom indicator of about 10% of the

standard deviation in the short run. The long-run effects of governor ideology also do not turn out to

be statistically significant. Average ideology in the House does not influence overall economic freedom:

the coefficients of the level in period t-1 and the first difference of the common House ideology

measure do not turn out to be statistically significant (columns 2 and 4). The coefficient of the first

difference of Senate ideology has the expected positive sign and is statistically significant at the 5% level

in column (6) but lacks statistical significance in column (3). The numerical meaning of the effect in

column (6) is that increasing Senate ideology by one standard deviation induces an increase of the

economic freedom indicator of about 10% of the standard deviation in the short run. The long-run

effects of Senate ideology also do not turn out to be statistically significant.

24

Table 2 provides the results with the alternative DW ideology measures. As expected, the

influence of the control variables does not change compared to the results in Table 1. However, in

contrast to the results presented in Table 1, Table 2 reveals more pronounced ideology-induced effects

employing the more precise DW ideology measures. The coefficient of the first difference of governor

ideology again has the expected positive sign and is statistically significant at the 5% level in column (1)

and at the 10% level in column (4). The long-run effect of governor ideology is statistically significant at

the 10% level in column (1), but lacks statistical significance in column (4). Ideological differences may

be statistically significant but so small that they are without economic or political significance (cf.

McCloskey, 1985). The numerical meaning of the effects in column (1) and column (4) is that

increasing governor ideology by one standard deviation induces an increase of the economic freedom

indicator of about 10% of the standard deviation in the short run. The effects of Republican majorities

in the House as measured by the DW variables are not robustly associated with economic freedom.

Conversely, Republican majorities in the Senate as measured by the DW variables strongly influenced

economic freedom in the short-run: the coefficient of the first difference of the ideology variable is

statistically significant at the 5% level in column (3) and at the 1% level in column (6). The numerical

meaning of the effects in column (3) and column (6) is that increasing Senate ideology by one standard

deviation induces an increase of the economic freedom indicator of about 30% of the standard

deviation in the short run. This effect is thus also numerically more pronounced than the effects with

the common measure of Senate ideology. In the long run, however, Republican majorities in the Senate

as measured by the DW variables do not have a lasting influence.

The findings when employing the DW measure thus suggest that political ideology, more

precisely measured, influences economic freedom. Table 3 therefore provides more specific

information by showing the results for the sub-indicators of economic freedom. To save space, we only

report the coefficients and t-statistics of the ideology variables that belong to regressions with the entire

set of control variables included; the main findings with the control variables do not change.

25

The choice of the ideology measures also matters for ideology-induced effects on the sub

indicators of economic freedom. The long-run effect of ideology in the House as measured by the

common variables is shown to have an unexpected negative influence on economic freedom in the

“Size of Government” sector, which is statistically significant at the 10% level. No other coefficients of

the ideology variables as measured by the common variables turn out to have a significant influence on

the “Size of Government” indicator. By contrast, Republican majorities in the House and Senate as

measured by the DW variable increased economic freedom in the “Size of Government” sector. The

effects are statistically significant at the 1% level and 10% level.

Measuring ideology also matters for ideology-induced effects on economic freedom in the

“Taxation” sector: the ideology of the Senate as measured by the common ideology variable appears to

have a negative long-run effect on economic freedom in the “Taxation” sector, although the effect is

only significant at the 10% level. Yet, the coefficient of the ideology of the Senate as measured by the

DW ideology variable (long-run effect) does not turn out to be statistically significant. In the short-run,

on the contrary, changes to the average ideology of the Senate as measured by the common and the

DW variables have a positive influence on economic freedom in the “Taxation” sector, which is

substantially larger using the DW measure.

Finally, regarding labor market freedom we find no statistically significant ideology-induced

effects when we use the common ideology measures. By contrast, Republican majorities in the House

and the Senate as measured by the DW variables have a positive influence on labor market freedom in

the long run. The ideology-induced effect of the House is statistically significant at the 10% level and

the ideology-induced effect of the Senate is statistically significant at the 1% level.

5.2 Effects with divided government

Overall, the estimates suggest that Republican governors and Senates have been more active in

promoting overall economic freedom and deregulating the size of government sector. These findings

26

occur clearly with the DW measures of government ideology, yet the findings may still reflect

substantially heterogeneous effects, depending on institutional characteristics. In particular, divided

government is expected to counteract ideology-induced policies: when a Republican governor faces a

partly or fully Democratic dominated legislature, he or she may well be prevented from implementing

market-oriented policies (and vice versa) (cf., Alt et al., 2002). We have therefore included a divided

government variable that takes on the value one with divided government and zero otherwise. We also

include an interaction term between the ideology variables and the divided government dummy

variables. The findings are summarized in Table 4.

Including a dummy variable for divided government suggests first that divided government is

associated with lower labor market freedom in the short run, but not in the long run. Only in the case

of area 3 – labor market freedom – do the results with divided government differ substantially from

those without. Average ideology in the Senate is still statistically significant, yet this effect evidently only

arises when government is not divided. With divided government, Senate ideology does not influence

labor market freedom.

Overall divided government hides two different forms of divided government that could have

different consequences. The results in Tables 5a, 5b and 5c refer to the analysis similar to Table 4, but

we now distinguish between proposal and approval division. Table 5a reports the results of exploring

the effects of governors’ ideology. In the short run, a change of governor ideology toward the political

right is significantly associated with more overall economic freedom, but only when neither type of

divided government occurs. We find no significant short-run effects on the separate indices and no

effects in the long run. However, the importance of separating the two types of division becomes clear

when exploring the effects of governor ideology on taxation. The results show that without division,

there is no association between governors’ ideological positions and changes in the tax burden.

Conversely, with proposal division, we find a clear negative effect (coefficient -.1059, std. dev. 0434)

27

while the effect turns significantly positive with approval division (coefficient -.0912, std. dev. 0316).

Governor ideology is still associated with labor market freedom when government is unified.

Tables 5b and 5c report the results when using the average ideology of the House and the

Senate. While the results in Table 5b are similar to those in Table 4, the results in Table 5c with Senate

ideology differ. In the short run, Senate ideology is significantly associated with changes in government

size, although not with proposal division, but with the largest coefficient when ideological shifts are

accompanied by approval division. The short run effects on tax burdens are not affected by either type

of divided government. On the contrary, in the long run we find that Senate ideology is strongly

associated with labor market freedom when either there is unified government or proposal division

(coefficient .1707, std. dev. 0502). With approval division instead, there is no significant association.

We have calculated marginal effects on the influence of political ideology given the different

types of divided government. Starting with the effects of governor ideology, we identify three effects

significant at the five percent level: 1) a negative effect of (Republican) ideology on taxation with

proposal division; 2) a positive effect of ideology on taxation with approval division; and 3) a positive

effect on labor market freedom without divided government. Changing governor ideology by one

standard deviation in the long run induces a decrease in situation 1) of 10% of a standard deviation and

an increase of 10% in situation 2). In other words, across a four-year electoral cycle, both will result in a

cumulative change of taxation by about half a standard deviation. Conversely, the effect of governor

ideology on labor market freedom is small, as a one standard deviation change only increases the annual

rate of change by roughly two percent of a standard deviation. Across a four-year period, this becomes

a modest ten percent change.

Turning to the effects of changes in House ideology, only short-run changes in government size

are robust. For situations with unified Congress or proposal division, a one standard deviation change

in House ideology is associated with an increase of the government size index (a decrease of

government size) by about 6-8 percent of a standard deviation; with approval division, this effect is 14

28

percent of a standard deviation. However, as noted, these are mere short-run effects and the results

provide no evidence of persistent changes.

Likewise, we find a significant short-run effect of changes in Senate ideology on government

size of approximately the same size. Conversely, the influence of Senate ideology on labor market

freedom is numerically important. With either unified Congress or proposal division, a one standard

deviation change in Senate ideology is associated with an average annual change in labor market

freedom of about eight percent of a standard deviation. Evaluated across a four-year electoral cycle, this

amounts to a cumulative change in the level of labor market freedom of approximately two standard

deviations. In other words, long-run changes of Senate positions on labor market freedom – a policy

choice with likely long-un consequences – are of clear political and economic significance.

The results in Tables 5a, b and c suggest that divided government only under some

circumstances counteracted ideology-induced policies, yet under other circumstances may have

multiplied them. Furthermore, which particular type of divided government a state faces turns out to be

important.

5.3 Robustness of the results

We checked the robustness of the results in several ways. Economic liberalization in one state is

likely to be influenced by economic liberalization in neighboring states (Case et al. 1993, Besley and

Case 1995b). We have therefore estimated a model in growth rates and included a spatially lagged

dependent variable that considers geographical neighbors (Tables 5 and 6). The spatial weight matrix is

row-normalized. The spatially lagged dependent variables are statistically significant at the 1% level for

the overall economic freedom index and the two sub indicators on the size of government and takings

and discriminatory taxation, but do not turn out to be statistically significant for labor market freedom.

Including the spatially lagged dependent variables does not change the inferences regarding the

ideology variables.

29

We have estimated the model in growth rates using a dynamic estimation procedure. We

employ a GMM estitmator (Blundell-Bond 1998) because the common fixed-effect estimator is biased

when including a lagged dependent variable. The instruments are collapsed as suggested by Roodman

(2006). Applying this procedure ensures not to use invalid and too many instruments (see Roodman

2006 and 2009 for further details). The lagged dependent variable has a positive sign and is statistically

significant at the 10% level when the overall economic freedom indicator is used but does not turn out

to be statistically significant in the other three specifications when the subindicators of economic

freedom. Both ideology variables – the common Democrat/Republican dummy variable and the PR

ideology measure – lack statistical significance at conventional levels in these dynamic panel data

models.

A caveat applying to all panel data models concerns potential endogeneity of the explanatory

variables. It is, however, not reasonable to expect that government ideology is influenced by changes in

economic liberalization in the US states. Good instrumental variables for government ideology are

simply not available, consistent with the prevalent view that voters decide based on predominantly non-

economic information (e.g., Nannestad and Paldam 1997). Moreover, instrumenting ideology with the

help of lagged government ideology would not be reasonable because ideology is highly persistent.

The reported effects could depend on idiosyncratic circumstances in the individual states. We

have therefore tested whether the results are sensitive to the inclusion/exclusion of individual states.

Results are not sensitive to the inclusion/exclusion of individual states.

6. Discussion and conclusions

Whether and to what extent political ideology influences fiscal policy-making and institutional

choices is a major question in public economics and political economy. We have used the economic

freedom indicators by the Fraser Institute to investigate how political ideology influenced economic

liberalization as measured by the size of government, tax structure and labor market regulation in the

30

US states over a 25-year period. To measure political ideology, we have at first employed the common

Democrat/Republican indicators for the governors, House and Senate that have been used in the

literature. The results show that Republican governors and legislatures dominated by Republicans

hardly promoted economic liberalization in the 1981-2005 period. Political ideologies in the

Democratic and Republican party are not homogenous across the US states. For example, Southern

Democrats are more conservative than Democrats at the East Coast. We have therefore used the DW-

Nominate data by Poole and Rosenthal to approximate these differences. The results show that

ideology-induced effects are more pronounced with the new ideology coding than with common

Democrat/Republican dummy variables: Republican governors and, in particular, Senates dominated

by Republicans promoted economic freedom. The result that a more precise measure of political

ideology reveals stronger ideology-induced effects is significant for empirical tests of partisan politics.

Divided government is often expected to counteract ideology-induced economic policy-making.

Our findings show however that overall divided government in the US states hardly mitigated the

influence of political ideology. In contrast to the related literature on the counteracting effects of

divided governments, we also distinguished between three different types of divided government:

overall, approval and proposal division. The results show that the type of division that governments

face has an influence. While we find evidence of ideological influences on labor market regulations

when state governments were unified, we find no such evidence for legislatures with either type divided

government when looking at governors’ ideology and no evidence with approval division when looking

at Senates’ average ideology. With tax policy, we find effects of governor ideology in opposite

directions, depending on whether the state has proposal division (a negative effect) or approval division

(a positive effect). This specific characteristic of the United States – a federal state with two-chamber

systems in all but one state and considerable legislate decentralized power – therefore yields results that

are both similar to cross-country results and provide more interpretative nuance. The distinction

31

between the three types of divided government may explain the mixed results from previous studies

exploring ideological influences across the states.

Acknowledgements

We are grateful for comments from Felix Bierbrauer, Martin Hellwig, David Dreyer Lassen, Leandro de

Magalhaes, Christian Traxler and participants of the 2010 meetings of the Public Choice Society in

Monterey, the 2010 meetings of the European Public Choice Society in Izmir, the 2010 Silvaplana

workshop in Pontresina, the Research Seminar at the University of Lucca in November 2010 and the

Research Seminar at the Max Planck Institute for Research on Collective Goods in Bonn in December

2010 . All remaining errors are of course ours.

32

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Figure 1. Ideological changes in the US states, party-level, 1981-2005

38

Figure 2. Ideological changes in the US states, state-level, 1981-2005

39

Figure 3. Average aggregated economic freedom indicators. 1981-2005. 50 US states.

66.

57

7.5

8

1980 1985 1990 1995 2000 2005year

overall size_of_governmenttakings_and_discrim_taxation labor_market_freedom

40

Figure 4. Overall economic freedom indicator. 1981-2005. Individual US states.

56

78

95

67

89

56

78

95

67

89

56

78

95

67

89

56

78

9

1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010

1980 1990 2000 2010 1980 1990 2000 2010

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware

Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas

Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi

Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York

North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina

South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virgina

Wisconsin Wyoming

YearGraphs by state

Figure 5. Size of government sub indicator. 1981-2005. Individual US states.

46

810

46

810

46

810

46

810

46

810

46

810

46

810

1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010

1980 1990 2000 2010 1980 1990 2000 2010

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware

Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas

Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi

Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York

North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina

South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virgina

Wisconsin Wyoming

YearGraphs by state

41

Figure 6. Takings and discriminatory taxation sub indicator. 1981-2005. Individual US states. 4

68

104

68

104

68

104

68

104

68

104

68

104

68

10

1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010

1980 1990 2000 2010 1980 1990 2000 2010

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware

Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas

Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi

Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York

North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina

South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virgina

Wisconsin Wyoming

YearGraphs by state

Figure 7. Labor market freedom sub indicator. 1981-2005. Individual US states.

46

810

46

810

46

810

46

810

46

810

46

810

46

810

1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010 1980 1990 2000 2010

1980 1990 2000 2010 1980 1990 2000 2010

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware

Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas

Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi

Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York

North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina

South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virgina

Wisconsin Wyoming

YearGraphs by state

42

Figure 8. Average aggregated economic freedom and common Democrat/Republican governor

coding.

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

DelawareFlorida

Georgia

Hawaii

Idaho

Illinois

Indiana

IowaKansas

Kentucky

Louisiana

Maine

MarylandMassachusetts

MichiganMinnesota

MississippiMissouri

Montana

NebraskaNevada

New Hampshire

New JerseyNew Mexico

New York

North Carolin

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South CarolinSouth Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virgina

Wisconsin

Wyoming

56

78

9O

vera

ll E

cono

mic

Fre

edom

-1 -.5 0 .5 1Common Democrat/Republican coding

Figure 9. Average aggregated economic freedom and DW Democrat/Republican governor coding.

AlabamaArizona

Arkansas

California

Colorado

Connecticut

DelawareFlorida

Georgia

Hawaii

Idaho

Illinois

Indiana

IowaKansas

Kentucky

Louisiana

Maine

MarylandMassachusetts

MichiganMinnesota

MississippiMissouri

Montana

Nevada

New Hampshire

New JerseyNew Mexico

New York

North Carolin

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South CarolinSouth Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virgina

Wisconsin

Wyoming

56

78

9O

vera

ll E

cono

mic

Fre

edom

-.4 -.2 0 .2 .4PR Democrat/Republican

43

Table 1: Regression Results.

Error Correction Model Heteroskedastic and autocorrelation consistent (HAC) Newey-West type standard errors.

Dependent variable: First difference of the economic freedom indicators (overall). Common ideology measures (Republican).

(1) (2) (3) (4) (5) (6) Ideology Governor t-1 0.0083 0.0054 [1.59] [1.09] ∆ Ideology Governor 0.0163* 0.0122 [1.95] [1.53] Ideology House t-1 0.0058 0.0057 [0.85] [0.85] ∆ Ideology House -0.0004 0.0013 [0.05] [0.20] Ideology Senate t-1 -0.0069 -0.0054 [0.97] [0.91] ∆ Ideology Senate 0.0102 0.0143* [1.33] [2.00] Dependency ratio t-1 0.5083 0.5568 0.6754 [0.59] [0.65] [0.81] ∆ Dependency ratio -4.8002*** -4.2533** -4.0575** [3.08] [2.66] [2.50] Females t-1 4.4064 7.4346** 7.3059** [1.24] [2.15] [2.11] ∆ Females -4.0618 -1.179 -1.7843 [0.78] [0.19] [0.30] Hispanics t-1 0.3049 0.5555 0.5543 [0.58] [0.97] [0.96] ∆ Hispanics 2.4311* 2.8976 3.2479 [1.99] [1.40] [1.55] Blacks t-1 -0.7197 -0.7712 -0.768 [0.90] [0.90] [0.90] ∆ Blacks 4.7961 4.2553 3.5261 [1.49] [1.29] [1.10] Population t-1 -6×10-10 -5×10-9 -3×10-9 [0.09] [0.64] [0.43] ∆ Population 7×10-9 6×10-9 1×10-8 [0.06] [0.06] [0.13] Employment t-1 0.1971 0.2134 0.268 [0.43] [0.45] [0.57] ∆ Employment 6.2192*** 6.1422*** 6.1953*** [7.97] [8.15] [8.51] Consumer Price Index t-1 -0.0028 -0.0024 -0.0027 [1.67] [1.45] [1.52] ∆ Consumer Price Index -0.0127*** -0.0132*** -0.0135*** [3.08] [3.21] [3.09] Fiscal Equalization t-1 0.1935*** 0.1886*** 0.1876*** [3.33] [3.35] [3.31] ∆ Fiscal Equalization -0.0331 -0.0237 -0.0195 [0.33] [0.23] [0.20] Supermajority t-1 0.0338 0.0294 0.0309 [1.42] [1.26] [1.44] ∆ Supermajority 0.0084 0.0027 -0.0053 [0.19] [0.06] [0.12] Balanced Budget t-1 0.0301* 0.0293 0.0284 [1.72] [1.61] [1.62] ∆ Balanced Budget 0.0325 0.0424 0.0418

44

[0.92] [1.09] [1.09] Fixed state effects Yes Yes Yes Yes Yes Yes Fixed period effects Yes Yes Yes Yes Yes Yes Observations 1152 1143 1143 1152 1143 1143 Number of states 48 48 48 48 48 48 R-squared (overall) 0.29 0.29 0.29 0.21 0.19 0.20

Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%

45

Table 2: Regression Results. Error Correction Model Heteroskedastic and autocorrelation consistent (HAC) Newey-West type standard errors.

Dependent variable: First difference of the economic freedom indicators (overall). DW ideology measures (Republican).

(1) (2) (3) (4) (5) (6) Ideology Governor t-1 0.0280* 0.0214 [1.91] [1.60] ∆ Ideology Governor 0.0467** 0.0384* [2.34] [1.93] Ideology House t-1 0.1116 0.1631* [1.19] [2.01] ∆ Ideology House 0.1847 0.1687 [1.31] [1.32] Ideology Senate t-1 0.0035 0.089 [0.05] [1.17] ∆ Ideology Senate 0.3038** 0.3206*** [2.64] [2.83] Dependency ratio t-1 0.5503 0.7181 0.7858 [0.64] [0.87] [0.93] ∆ Dependency ratio -4.7313*** -4.2875*** -4.3062** [3.08] [2.74] [2.60] Females t-1 4.626 7.8908** 7.8148** [1.30] [2.21] [2.22] ∆ Females -3.6149 -0.0319 -0.7028 [0.69] [0.01] [0.12] Hispanics t-1 0.2851 0.6413 0.5232 [0.54] [1.12] [0.91] ∆ Hispanics 2.4235* 3.22 3.4640* [1.98] [1.55] [1.78] Blacks t-1 -0.7713 -0.7986 -0.8743 [0.97] [0.91] [1.02] ∆ Blacks 5.0452 4.6231 4.0471 [1.53] [1.38] [1.24] Population t-1 -3×10-10 -6×10-9 -5×10-9 [0.05] [0.86] [0.76] ∆ Population 9×10-9 6×10-9 -1×10-8 [0.09] [0.04] [0.10] Employment t-1 0.2004 0.2416 0.2617 [0.44] [0.52] [0.56] ∆ Employment 6.2085*** 6.1857*** 6.1882*** [7.90] [8.22] [8.38] Consumer Price Index t-1 -0.0029* -0.0017 -0.0019 [1.73] [1.09] [1.07] ∆ Consumer Price Index -0.0126*** -0.0123*** -0.0126*** [3.09] [2.89] [3.03] Fiscal Equalization t-1 0.1925*** 0.1934*** 0.1867*** [3.33] [3.50] [3.31] ∆ Fiscal Equalization -0.0328 -0.0287 -0.03 [0.33] [0.29] [0.30] Supermajority t-1 0.0342 0.0243 0.0292 [1.46] [1.10] [1.32] ∆ Supermajority 0.0093 0.0055 0.0013 [0.21] [0.12] [0.03] Balanced Budget t-1 0.029 0.0299* 0.0297* [1.66] [1.77] [1.81] ∆ Balanced Budget 0.0312 0.0434 0.0385

46

[0.90] [1.15] [0.98] Fixed state effects Yes Yes Yes Yes Yes Yes Fixed period effects Yes Yes Yes Yes Yes Yes Observations 1152 1143 1143 1152 1143 1143 Number of states 48 48 48 48 48 48 R-squared (overall) 0.29 0.27 0.30 0.21 0.16 0.18

Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%

47

Table 3: Regression Results. Error Correction Model Heteroskedastic and autocorrelation consistent (HAC) Newey-West type standard errors.

Dependent variable: First difference of the economic freedom indicators (Subindicators). (1) (2) (3) (4) (5) (6)

Common ideology measures DW ideology measures

Are

a 1

Siz

e o

f G

ove

rnm

ent

Ideology Governor t-1 0.0068 0.0289 [1.07] [1.64] ∆ Ideology Governor 0.0155 0.051 [1.32] [1.59] Ideology House t-1 -0.0131* 0.1375 [1.74] [1.27] ∆ Ideology House 0.0001 0.5882*** [0.01] [3.12] Ideology Senate t-1 -0.0067 0.028 [0.69] [0.27] ∆ Ideology Senate 0.0111 0.3576* [0.98] [1.96]

Are

a 2

Tax

atio

n

Ideology Governor t-1 0.006 0.0191 [0.69] [0.84] ∆ Ideology Governor 0.0188 0.0407 [1.52] [1.43] Ideology House t-1 0.0118 0.1207 [1.03] [0.95] ∆ Ideology House 0.0027 -0.025 [0.21] [0.10] Ideology Senate t-1 -0.0198* -0.0227 [1.75] [0.22] ∆ Ideology Senate 0.0292** 0.5505*** [2.30] [2.91]

Are

a 3

Lab

or

Mar

ket F

reed

om

Ideology Governor t-1 0.0041 0.0188 [0.77] [1.23] ∆ Ideology Governor -0.0026 0.0033 [0.44] [0.20] Ideology House t-1 0.0139 0.1852* [1.63] [1.76] ∆ Ideology House 0.0121 0.019 [1.34] [0.11] Ideology Senate t-1 0.0071 0.1992*** [0.93] [2.71] ∆ Ideology Senate 0.0049 0.1485 [0.49] [1.25]

Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%

48

Table 4: Regression Results. Error Correction Model Heteroskedastic and autocorrelation consistent (HAC) Newey-West type standard errors.

Dependent variable: First difference of the economic freedom indicators. DW ideology measures (Republican). Overall Divided Government.

(1) (2) (3) (4)

Overall Area1

Size of Government Area2

Taxation Area3

Labor Market Freedom

Ideo

logy

Gov

erno

r

Ideology Governor t-1 0.0299 -0.0031 0.045 0.0313 [1.42] [0.09] [1.35] [1.29] ∆ Ideology Governor 0.0353* 0.0449 0.0377 0.0095 [1.81] [1.49] [1.45] [0.60] Divided Government t-1 -0.0122 -0.0191 -0.0166 0.0008 [1.53] [1.26] [1.24] [0.10] ∆ Divided Government 0.0104 0.0238 0.0082 -0.0254** [0.79] [1.32] [0.33] [2.58] Ideology Governor t-1* Divided Government t-1 -0.0096 0.0603 -0.0373 -0.0234 [0.39] [1.23] [0.95] [0.76] ∆ Ideology Governor* ∆ Divided Government -0.0009 0.0013 -0.0035 -0.0018 [0.04] [0.05] [0.09] [0.08]

Ideo

logy

Hou

se

Ideology House t-1 0.1664** 0.1573 0.1527 0.1559 [2.02] [1.38] [1.14] [1.56] ∆ Ideology House 0.1712 0.6087*** -0.0337 0.0182 [1.40] [3.34] [0.14] [0.10] Divided Government t-1 -0.0095 -0.0146 -0.0144 0.0032 [1.13] [1.05] [1.01] [0.43] ∆ Divided Government 0.0129 0.0284 0.0085 -0.0230** [0.96] [1.49] [0.34] [2.22] Ideology House t-1* Divided Government t-1 -0.0137 -0.0503 -0.0712 0.0512 [0.32] [0.70] [0.92] [1.04] ∆ Ideology House* ∆ Divided Government 0.1309 0.0017 0.5188 -0.344 [0.57] [0.01] [1.10] [1.62]

Ideo

logy

Sen

ate

Ideology Senate t-1 0.1233 0.0659 0.0793 0.1807** [1.59] [0.57] [0.77] [2.58] ∆ Ideology Senate 0.3382*** 0.3684* 0.6045*** 0.1374 [2.83] [1.94] [3.14] [1.10] Divided Government t-1 -0.0107 -0.015 -0.0155 0.0014 [1.37] [1.11] [1.19] [0.18] ∆ Divided Government 0.0116 0.0263 0.0085 -0.0248** [0.86] [1.44] [0.34] [2.43] Ideology Senate t-1* Divided Government t-1 -0.0639 -0.0753 -0.1914** 0.029 [1.47] [1.09] [2.59] [0.60] ∆ Ideology Senate* ∆ Divided Government 0.1289 0.0465 0.3082 -0.1826 [0.79] [0.15] [1.16] [0.95]

Notes: Absolute value of t statistics in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%

49

Table 5a: Regression Results. Error Correction Model Heteroskedastic and autocorrelation consistent (HAC) Newey-West type standard errors.

Dependent variable: First difference of the economic freedom indicators. DW ideology measures (Republican). Divided Government House (Proposal and Approval Division). (1) (2) (3) (4)

Overall Area1

Size of Government Area2

Taxation Area3

Labor Market Freedom

Ideo

logy

Gov

erno

r

Ideology Governor t-1 .0249 -.0094 .0139 .0552** [.0196] [.0301] [.0299] [.0229] ∆ Ideology Governor .0368** .0458 .0409 .0133 [.0184] [.0296] [.0259] [.0147] Proposal Division t-1 -.0128 -.0173 -.0129 .0024 [.0084] [.0152] [.0133] [.0108] Approval Division t-1 .0069 .0019 .0081 .0059 [.0083] [.0120] [.0172] [.0099] ∆ Proposal Division .0021 .0199 .0030 -.0252

[.0158] [.0166] [.0360] [.0169] ∆ Approval Division .0156 .0217 .0021 .0105 [.0129] [.0144] [.0287] [.0159] Ideology Governor t-1* Proposal Division t-1 .0324 .0355 -.0407 -.0800** [.0237] [.0349] [.0377] [.0305] Ideology Governor t-1* Approval Division t-1 -.0577*** .0379 .0315 -.0125 [.0219] [.0504] [.0318] [.0256] ∆ Ideology Governor* ∆ Proposal Division

-.0096 [.0236] -.0242 .0914** -.0152

[.0309] [.0421] [.0285] ∆ Ideology Governor* ∆ Approval Division .0144 .0255 -.1199*** .0276 [.0207] [.0234] [.0411] [.0289]

Notes: Standard errors in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%

50

Table 5b: Regression Results.

Error Correction Model Heteroskedastic and autocorrelation consistent (HAC) Newey-West type standard errors.

Dependent variable: First difference of the economic freedom indicators. DW ideology measures (Republican). Divided Government House (Proposal and Approval Division). (1) (2) (3) (4)

Overall Area1

Size of Government Area2

Taxation Area3

Labor Market Freedom

Ideo

logy

Hou

se

Ideology Governor t-1 .1634** .1547 .1477 .1488 [.0702] [.0093] [.1102] [.0999] ∆ Ideology Governor .1292 .5540 -.1054 .0177 [.1212] [.1832] [.2517] [.1891] Proposal Division t-1 -.0156* -.0186 -.0189 -.0008 [.0091] [.0149] [.0164] [.0118] Approval Division t-1 .0085 .0084 .0082 .0061 [.0083] [.0119] [.0174] [.0100] ∆ Proposal Division .0033 .0203 .0029 -.0259

[.0175] [.0185] [.0371] [.0173] ∆ Approval Division .0189 .0287* .0072 .0100 [.0136] [.0164] [.0299] [.0165] Ideology Governor t-1* Proposal Division t-1 -.0549 -.1127 -.0872 -.0397 [.0548] [.0799] [.1094] [.0619] Ideology Governor t-1* Approval Division t-1 .0487 .0935 -.0113 .0843 [.0454] [.0847] [.0948] [.0551] ∆ Ideology Governor* ∆ Proposal Division .1604 -.1257 .4256 .0541 [.1244] [.2656] [.3345] [.1865] ∆ Ideology Governor* ∆ Approval Division .3344 .4576 .7394 -.4775* [.2753] [.3909] [.4861] [.2642]

Notes: Standard errors in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%

51

Table 5c: Regression Results.

Error Correction Model Heteroskedastic and autocorrelation consistent (HAC) Newey-West type standard errors.

Dependent variable: First difference of the economic freedom indicators. DW ideology measures (Republican). Divided Government House (Proposal and Approval Division). (1) (2) (3) (4)

Overall Area1

Size of Government Area2

Taxation Area3

Labor Market Freedom

Ideo

logy

Sen

ate

Ideology Senate t-1 .1193 .0764 .0701 .1648** [.0734] [.1112] [.0969] [.0649] ∆ Ideology Senate .3292** .3728* .5746*** .1377 [.1071] [.1894] [.1693] [.1179] Proposal Division t-1 -.0141 -.0146 -.0189 .0008 [.0086] [.0145] [.0150] [.0119] Approval Division t-1 .0059 .0042 .0063 .0034 [.0082] [.0121] [.0164] [.0101] ∆ Proposal Division .0057 .0233 .0034 -.0245

[.0184] [.0179] [.0381] [.0184] ∆ Approval Division .0125 .0198 .0004 .0095 [.0145] [.0154] [.0304] [.0176] Ideology Senate t-1* Proposal Division t-1 -.0528 -.0419 -.1860 .0059 [.0674] [.0499] [.1138] [.0592] Ideology Senate t-1* Approval Division t-1 .0117 -.0069 -.0119 .0502 [.0605] [.0593] [.0982] [.0619] ∆ Ideology Senate* ∆ Proposal Division -.1124 -.1316 .0975 -.1785 [.2279] [.3831] [.3285] [.3353] ∆ Ideology Senate* ∆ Approval Division .2869* .3549 .4098* -.0904 [.1494] [.233] [.2309] [.1802]

Notes: Standard errors in brackets; * significant at 10%; ** significant at 5%; *** significant at 1%

52

Appendix: Data description and sources Descriptive Statistics. Means of the Economic Freedom indicators by state state Overall Area1 Area2 Area3 Frequency

Alabama 7.68 7.25 7.84 7.98 25 Alaska 6.22 5.78 7.23 5.66 25 Arizona 7.78 7.98 6.82 8.55 25 Arkansas 7.12 7.79 7.02 6.54 25 California 6.19 6.32 6.12 6.11 25 Colorado 7.49 7.98 7.28 7.22 25 Connecticut 7.07 7.64 7.14 6.47 25 Delaware 7.85 8.57 8.16 6.82 25 Florida 8.01 8.21 7.26 8.56 25 Georgia 7.53 8.27 7.39 6.98 25 Hawaii 6.18 7.10 5.88 5.56 25 Idaho 6.78 7.49 6.32 6.51 25 Illinois 7.07 7.44 7.38 6.37 25 Indiana 7.48 8.24 7.76 6.45 25 Iowa 7.04 7.52 6.94 6.68 25 Kansas 7.15 7.92 6.58 6.94 25 Kentucky 7.00 7.52 7.09 6.38 25 Louisiana 7.66 7.51 7.59 7.90 25 Maine 5.88 6.31 5.46 5.90 25 Maryland 7.12 7.40 7.16 6.80 25 Massachusetts 7.01 7.26 7.31 6.50 25 Michigan 6.19 6.31 6.79 5.46 25 Minnesota 6.34 6.85 6.19 6.00 25 Mississippi 7.28 7.10 6.65 8.13 25 Missouri 7.46 8.20 7.82 6.34 25 Montana 6.09 6.26 6.30 5.70 25 Nebraska 7.36 8.50 6.93 6.62 25 Nevada 7.34 8.20 7.31 6.50 25 New Hampshire 7.90 8.47 8.30 6.90 25 New Jersey 6.64 7.37 6.64 5.86 25 New Mexico 6.50 7.04 6.25 6.21 25 New York 5.51 5.87 5.48 5.18 25 North Carolin 7.54 8.04 7.48 7.13 25 North Dakota 6.64 7.22 6.36 6.35 25 Ohio 6.33 6.26 6.59 6.17 25 Oklahoma 6.94 7.56 6.75 6.48 25 Oregon 6.26 6.43 6.73 5.59 25 Pennsylvania 6.68 6.66 7.27 6.11 25 Rhode Island 5.80 5.75 5.54 6.10 25 South Carolin 7.71 7.51 6.99 8.63 25 South Dakota 7.61 8.36 7.87 6.58 25 Tennessee 8.27 8.32 8.16 8.33 25 Texas 8.06 8.57 8.04 7.57 25 Utah 7.16 7.77 7.16 6.54 25 Vermont 6.35 6.63 6.01 6.42 25 Virginia 7.86 8.34 7.75 7.48 25 Washington 6.33 6.78 6.54 5.64 25 West Virgina 5.48 5.65 5.54 5.23 25 Wisconsin 6.28 6.80 6.18 5.84 25 Wyoming 7.14 7.49 7.14 6.81 25 Total 6.97 7.36 6.93 6.62 1250

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Descriptive Statistics.

Variable Observations Mean Std. Dev. Min Max Source

Overall economic freedom index

1250 6.97 0.75 4.90 9.00 Karabegovic et al. (2003)

Size of government (sub index)

1250 7.36 0.98 3.80 9.70 Karabegovic et al. (2003)

Takings and discriminatory taxation (sub index)

1250 6.93 0.82 4.60 9.20 Karabegovic et al. (2003)

Labor market freedom (sub index)

1250 6.62 0.91 4.20 9.10 Karabegovic et al. (2003)

Ideology, governors 1250 -0.02 0.99 -1 1 Own collection Ideology House 1207 -0.22 0.97 -1 1 Own collection Ideology Senate 1207 -0.12 0.99 -1 1 Own collection Ideology, governors (Poole & Rosenthal)

1200 0.03 0.36 -0.54 0.72 Own collection

Ideology House (Poole & Rosenthal)

1191 0.00 0.17 -0.45 0.52 Own collection

Ideology Senate (Poole & Rosenthal)

1191 0.00 0.17 -0.44 0.55 Own collection

Divided Government (common)

1250 0.59 0.49 0 1 Own collection

Divided Government (Proposal division) 1250 0.58 0.49 0 1

Own collection

Divided Government (Approval division) 1250 0.61 0.49 0 1

Own collection

Blacks (as a share of total population) 1250 0.10 0.09 0.00 0.37

Census Bureau

Hispanics (as a share of total population) 1250 0.06 0.08 0.00 0.44

Census Bureau

Females (as a share of total population) 1250 0.51 0.01 0.47 0.52

Census Bureau

Age 65 and older (as a share of total population) 1250 0.12 0.02 0.03 0.18

Census Bureau

Aged 15 and younger (as a share of total population) 1250 0.22 0.02 0.18 0.33

Census Bureau

Population 1250 5205564 5667141 418493 3.58E+07 BEA (2010) Employment 1250 0.56 0.06 0.37 0.73 BEA (2010) GDP per capita 1250 142.14 31.40 87.20 212.70 BEA (2010) Consumer Price Index 1250 27800.21 7337.872 14705.49 60390.92 BLS (2010)*

Supermajority 1250 0.21 0.41 0 1 Knight (2000) and NASBO

Balanced Budget 1250 0.80 0.40 0 1 NASBO

No Carry Over 957 0.74 0.44 0 1 NASBO

Fiscal Transfers 1250 1.12 0.29 0.57 2.33

Tax Foundation (2010)

Note: * is constructed on the basis of information drawn from the BLS (2010).