The midterm elections reinforced the point that institutions matter for our livelihood and prosperity. If our economic and political institutions support freedom, then our social institutions – families, charities and churches – can thrive. If they don’t, then our republic could crumble.
The recent Economic Freedom of the World report notes that the U.S. has moved up to sixth place in economic freedom, based on an index using 42 different policy variables. While this is a good sign for our nation, there’s much that should be done to improve economic freedom at the state level — closer to the people being governed.
Domestically, this year’s Economic Freedom of North America report by the Fraser Institute notes that Florida is the most economically free, based on an index of ten variables related to government spending, taxation, and labor market freedom, while New York is at the bottom again for the tenth year in a row.
The report shows that Texas and California — the other two of the four most populous states — ranked third and 47th most free, respectively. Texas continues to rank near the top, while California has ranked 47th or lower for the last ten years.
There is a clear contrast in these results, which have remained consistent over the years. Florida and Texas provide a high level of economic freedom; New York and California do the opposite.
Residents and employers recognize this distinction. In the last three years, population has grown over three times faster in Florida and Texas. Population in New York barely budged, rising by less than one-half of one percent.
This contrast does not apply only to these four states. What the EFNA report revealed is that when you divide the North American states into four groups ranked by economic freedom, in the most-free states, the average per capita income was 7.3 per cent above the national average compared to roughly 10.5 per cent below the national average in the least-free states. Per capita income was also found to rise faster in states where economic freedom is growing faster.
Furthermore, more than 250 scholarly articles by independent researchers have used the EFNA data to examine economic freedom at the state level, while more than 500 articles have done the same at the national level. The vast majority of that literature finds that economically free areas tend to experience more broadly positive outcomes, including more economic prosperity. One reason is that high levels of taxes, spending, and regulation make it harder for entrepreneurs to succeed. When businesses can’t expand and hire new workers, everyone is worse off.
States that have seen the fastest economic growth, like Florida and Texas, tend to have a common focus in their economic policies: a lower tax burden (especially low or no personal income taxes), slower growth of spending, and a relatively light regulatory burden that makes it easier for entrepreneurs to succeed. States that take the opposite approach, like New York and California, tend to see much less economic prosperity and many more moving trucks leaving the state for greener, and freer, pastures.
Reports agree that institutions matter and there’s a need for improvements in many states.
For instance, a recent report by the Texas Public Policy Foundation notes that Texas has long championed the Texas Model of limited government supporting economic freedom that provides a foundation for greater prosperity. But Texas’ ranking declined to third most economically free indicating, the Lone Star State can improve by passing conservative budgets, providing substantial tax relief, and removing barriers to opportunity so every Texan can have more opportunities to prosper.
Still, high-freedom states like Florida and Texas provide excellent examples of what low-freedom states like New York and California need to do to make their residents more prosperous. Reports like the Economic Freedom of North America provide politicians and policy makers with a report card of sorts. The evidence is clear that increasing economic freedom can help families and entrepreneurs flourish.
Dean Stansel, Ph.D., is an economist at the O’Neil Center for Global Markets and Freedom in Southern Methodist University’s Cox School of Business and the primary author of the Fraser Institute’s annual Economic Freedom of North America report. Vance Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist at the Texas Public Policy Foundation.