The Economic Benefits of Common Sense

Common sense is something of a misnomer, since common sense is not all that common. After all, common sense tells us that lower taxes, smaller government and flexible labor markets create an environment that encourages economic growth. The Fraser Institute’s just-released Economic Freedom of North America report (EFNA) offers proof of that sensible but not-so-common approach to public policy.

As always, the latest EFNA report ranks jurisdictions by measuring size of government, taxation, and labor market restrictions. One of the new wrinkles in this year’s report is that it fully incorporates and ranks Mexican states for the first time.

In this 10th edition of EFNA, Texas and South Dakota have tied for the highest level of economic freedom among all U.S. states. Rounding out the U.S. top 10 are North Dakota at third; Virginia in fourth; New Hampshire, Louisiana, Nebraska and Delaware tied at fifth; Tennessee at ninth; and Indiana, Georgia and Utah tied at 10th. (Alberta has the highest level of economic freedom of any jurisdiction in North America, and Coahuila de Zaragoza is the highest-ranked Mexican state.)

At the other end of the spectrum are West Virginia and Rhode Island (tied at 45th), New York (47th), Mississippi and Vermont (tied at 48th), and Maine (50th out of the 50 U.S. states).

Interestingly, and worryingly, the report notes that “economic freedom has been declining in all three countries.” The average score for Canadian provinces has fallen from 7.8 to 7.6 since 2000; the average score for Mexican states has fallen from 7.1 to 6.9 since 2003; and the average score for U.S. states has fallen most dramatically of all, from 8.2 to 7.5 since 2000.

In fact, although the United States was rated second in the world economic freedom rankings in 2000, the United States plunged to 17th in last year’s rankings, before clawing its way back to 12th in the most recent rankings.

In other words, the self-styled “land of the free” is not as free as it once was -- or as we in the United States think of ourselves. This tumble from the top was inevitable, given the increasing government encroachments on rule of law and private property rights, numerous government interventions, expansion of government spending and regulation, and consequent shrinking of the space for free economic exchange.

Total federal outlays have exploded. Between 2001 and 2013, federal outlays jumped from $1.86 trillion per year to $3.45 trillion per year -- an increase of 85 percent, or about 6.5 percent per year. By way of comparison, in the previous 13-year span, federal outlays grew from $1.06 trillion to $1.78 trillion -- an increase of a comparatively modest 67 percent, or about five percent per year.

Overspending predates the Obama administration. However, it’s worth noting that during the Obama presidency, the federal government has consumed an average of 22.5 percent of GDP. That’s significantly more than the historical average of 21 percent of GDP, revealing a surge in the level of federal involvement in the economy.

Cycle of Success

Turning back to EFNA 2014, my colleagues have used the report to provide more than a ranking of states: EFNA 2014 paints a vivid portrait of the benefits of policies that promote economic growth at the state level -- and the consequences of policies that constrain it.

Economic freedom is one of the main drivers of prosperity and growth, and the evidence shows that states with low levels of economic freedom reduce the ability of their citizens to prosper economically, while states with high levels of economic freedom maximize their citizens’ ability to prosper economically.

Consider that in the most economically free U.S. states, the average per-capita GDP in 2012 (the most recent year of available data) was about $55,000, while in the least economically free states it was just $48,000. In fact, the jurisdictions in the least-free quartile on what my colleagues call “the world-adjusted, all-government index” had an average per-capita GDP of just $10,079, compared to $57,269 for the most-free quartile.

As Fred McMahon, who heads Fraser Institute’s research into economic freedom, explains, “The link between economic freedom and prosperity is clear: States that support low taxation, limited government and flexible labor markets see greater economic growth, while states with lower levels of economic freedom see lower living standards and less economic opportunity.”

Moreover, economic freedom triggers and encourages a virtuous cycle, as lower taxes, smaller government, and freer labor markets have a way of attracting and retaining people, that contributes to economic growth, innovation, and larger tax bases (with smaller per capita tax burdens). Can it be a coincidence that the top 10 states on EFNA 2014 enjoyed an increase in net domestic migration of 147,288 in 2012-13, while the bottom 10 weathered a decrease in net domestic migration of 225,677?

If the best aspect of economic freedom is how it benefits the peoples, nations and states that embrace it, the next best thing about it is that any group of people, any nation, any state can acquire it and enjoy its benefits. In other words, states don’t need a wealth of natural resources, a highly educated or highly skilled population, or gleaming infrastructure to rate highly on economic freedom -- and thus unleash the creativity, talents, skills and energy of their citizens.

They just need the common sense to adopt public policies that allow individuals to act in the economic sphere free of stifling restrictions.

Alan W. Dowd is a U.S.-based senior fellow with the Fraser Institute.