Wednesday, December 3, 2014

Economic Freedom in North America | Yes, California is in the Worst Quintile

The Fraser Institute just released their annual study:
In the United States, the most free states were Texas and South Dakota, both at 7.8, followed by North Dakota at 7.7 and Virginia at 7.5. (Note that since the indexes were calculated separately for each country, the numeric scores are not directly comparable across countries.) The least free state was Maine at 5.2, followed by Vermont and Mississippi, both at 5.3. New York was next, ranked 47th with 5.5. 
California tipped the scales at 43rd.  Frankly, seventh from worst is much better than I'd have suspected based on similar, comparable rankings. Generally speaking, California rates in the bottom three in all employment and business rankings while it does to a smidgen better in the analyses that weigh more heavily on personal freedoms.

This in an excerpt from a summary from the National Center for Policy Analysis:  
What does economic freedom translate into? Higher incomes for state residents. As Stansel wrote in the Washington Examiner, Texas, South Dakota and North Dakota had average incomes 20 percent higher than Maine, Vermont and Mississippi. Similarly, the top 10 most free states saw a 3.5 percent growth in employment and 8 percent economic growth, while the 10 least free states saw hardly any employment growth and only 2 percent economic growth.
The full set of studies (including both the US and North American versions) can be found at the Fraser Institute
Interestingly, when analyzing all of North America, the top three jurisdictions (and four of the top five) are Canadian, with Alberta at 8.2 in first place and Saskatchewan at 8.0 in second. Newfoundland & Labrador, Texas, and British Columbia are tied for third with 7.7. The 18 lowest-ranked jurisdictions are all states in Mexico.  Sadly, economic freedom has been on the decline in each of the United States, Mexico and Canada since 2000.  Canada's economic freedom has declined the least of all three countries while the U.S. has declined the most.  

What is economic freedom and how is it measured in this index?
Writing in Economic Freedom of the World, 1975–1995, James Gwartney, Robert Lawson, and Walter Block defined economic freedom in the following way.
Individuals have economic freedom when (a) property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and (b) they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. Thus, an index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions. (Gwartney, Lawson, and Block, 1996: 12) 
The freest economies operate with minimal government interference, relying upon personal choice and markets to answer basic economic questions such as what is to be produced, how it is to be produced, how much is produced, and for whom production is intended. As government imposes restrictions on these choices, there is less economic freedom.  

The researchers looked at six different "areas" of freedom, including governmental size, regulatory takings and discriminatory taxation, overall regulation, the legal system and property rights, monetary policy, and freedom of trade.  Each area is composed of many sub-categories.  Each of these categories of freedom was then scored on a scale of 0-10 with 10 being the most free and different weights applied to the appropriate category. For example, the weight for Area 1 (size of government) was 33.3%. Area 1 has three sub-categories, each of which received equal weight in calculating size of government, or 11.1% in calculating the overall index. Their entire method and all data sets can be found here (on pages 9 to 16 and page 65 in the linked PDF).