Regulatory Policy

Regulatory Policy

In this study, regulatory policy includes labor regulation, health-insurance coverage mandates, occupational licensing, eminent domain, the tort system, land-use regulation, and utilities. Regulations that seem to have a mainly paternalistic justification, such as home- and private-school regulations, are placed in the paternalism category.

Labor and health-insurance regulation are equally weighted and comprise the two most important issue subcategories for this category. Both sets of policies fundamentally affect the state economy. Labor regulations such as the minimum wage, right-to-work laws, and workers’ compensation can significantly raise the cost of doing business (and correlate strongly with unionization rates by state). Health insurance is one of the most important political issues in the United States today, but most voters seem not to realize that state governments dramatically influence the cost and availability of private health insurance. State health-insurance regulations can increase the cost of health insurance by 50 percent or more.9 Together, these subcategories comprise just over one-half of the total regulatory index.

The lion’s share of labor regulation has to do with right-to-work laws, which strongly influence unionization rates, and with the minimum wage, which is adjusted for median private wages. Right-to-work laws are somewhat controversial among libertarians. On the one hand, they override collective bargaining contracts reached between employers and employee unions, allowing employers to hire workers who do not pay agency fees to a union. On the other hand, some argue that right-to-work laws are justified as a means of employer and employee selfdefense against the mechanisms of the Wagner Act (the National Labor Relations Act [NLRA]), which essentially allows a “union shop” or “agency shop” to form if a majority of workers votes in favor. From the libertarian point of view, the Wagner Act fundamentally violates freedom of association and basic property rights, and right-to-work laws somewhat restore that freedom. (In an ideal world, both the NLRA and right-to-work laws would be repealed.) At much lower weights, we consider disability insurance, mandated family leave, workers’ compensation requirements and funding regulations, mandated employer verification of legal residency, prevailing-wage laws, state occupational safety and health agencies, and smoker-protection laws, in descending order.

For health-insurance coverage mandates, we have tried to weight policies according to their impact on private health-insurance cost and availability. Our index of health-insurance coverage mandates, which is internally weighted by estimated effect on expense (see appendix), is the highest-weighted variable. Second in importance is Massachusetts’s individual health-insurance mandate (which requires individuals to maintain health insurance or pay a fine), followed by community rating on both individual and small-group plans—effectively a form of price control that redistributes wealth from the healthy to the unhealthy. Below these is an assortment of minor regulations that we expect to add to the cost of health insurance.

In the second tier, we have placed occupational licensing and the quality of the legal-liability system. We measure each of these straightforwardly. Occupational licensing examines the number of licensed occupations, including only those occupations for which there is some variance across states. It captures guild-style rent-seeking aimed at fleecing the consumer by artificially limiting the supply of services. The liability-system variable is a rating of state tort systems based on a survey of business owners and managers. It captures an important element of business costs that are passed on to the consumer. Together these variables constitute 28 percent of the overall regulatory index.

Next is eminent-domain reform. Public takings of private property infringe on private-property rights, and the violation is more obvious when it is done without a clear, indisputable public-goods rationale, such as obtaining a right-of-way for public infrastructure. While very few people will ever have their homes threatened for use as a parking lot for one of Donald Trump’s casinos or actually taken for economic development as in the infamous Kelo case,10 this kind of governmental overreach is so problematic that we have to rate this subcategory highly, as 10.7 percent of the regulatory index.11 While most states that have reformed eminent domain have kept open a wide “blight loophole” that could still allow public takings for private interests, we have coded this index to take into account blight reform as well as the incorporation of eminent-domain restrictions into the state constitution (coding details are available in appendix).12

Land-use regulations make up just 5.4 percent of the regulation score. We would argue that property owners can solve most land-use externalities with various contractual arrangements, such as homeowners’ associations. Of course, some land-use planning could be seen as a second-best response to distorted incentives created by road subsidies. However, the land-use variables we include relate mostly to the centralization of the planning process, rather than to zoning per se. The more centralized land-use planning is at the state level, the less likely it is to meet the needs of local people. Nearly half of this subcategory’s total weight comes from a variable for “vertical consistency” in land-use planning, which reflects the state’s determination to make local laws consistent with those of higher levels of government. In descending order of weight, the other variables in this subcategory are the existence of guidelines for a state development plan, regulatory takings prohibitions, state-mandated local land-use plans and horizontal consistency mandates, and internal consistency requirements and an outside group’s assessment of the overall strength of the state planning role.

The least important issue subcategory in regulatory policy is utilities: natural gas, telecommunications, and cable (electricity restructuring is excluded for the lack of reliable, up-to-date information on which states are still attempting to maintain competition at the retail and wholesale levels). While these services are important for household budgets, it is not clear that “deregulation” results in a net increase in individual freedom. The utilities are all characterized by physical connections to the consumer. Because of the natural monopoly element in transmission (parallel connections are judged infeasible), even under deregulation governments maintain “common carrier” regulations that require the regulated owner of the transmission grid to allow open access to competing providers at a regulated price. The transmission grid then becomes a commons, with no profit incentive for the owner to expand, upgrade, or maintain the network. In many cases, retail competition is tightly managed by state governments to prevent anticompetitive manipulation of the market. For these reasons, many analysts insist on the term “restructuring” as opposed to “deregulation” for these industries. <sup>13</sup>  Utilities therefore comprise just 3.6 percent of the overall regulatory index, with natural gas, telecom, and cable weighted equally (see appendix for variable coding descriptions).

Table 2 presents the overall ranking of states on regulatory policy.

Table 2

Although we believe a composite freedom index that includes both economic and personal freedom is most valuable, readers may wish to compare and contrast the states solely in terms of their overall economic freedom. Therefore, Table 3 provides such a ranking. For reasons stated earlier, this economic freedom index should improve on previous rankings and, thus, could be used independently of the overall index as a substitute for previous measures.

Table 3


9. Victoria Craig Bunce, J. P. Wieske, and Vlasta Prikazsky, Health Insurance Mandates in the States 2007 (Council for Affordable Health Insurance, 2007),

10. See Kelo v. City of New London, 545 U.S. 469 (2005) and Casino Reinvestment Development Authority v. Banin, 727 A.2d 102 (NJ Superior Court, 1998).

11. It is not just our sense of justice that suggests a relatively high rating given the strong and quick public and legislative reactions to Kelo.

12. See Ilya Somin, “The Limits of Backlash: Assessing the Political Response to Kelo,” Minnesota Law Review 93 (June 2009): 2100–78.

13. Peter Van Doren and Jerry Taylor, “Rethinking Electricity Restructuring,” Cato Institute Policy Analysis no. 530, pub_display.php?pub_id=2609, accessed August 4, 2008.

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