Academic journal article Journal of Regional Analysis & Policy

An Economic Freedom Index for U.S. Metropolitan Areas

Academic journal article Journal of Regional Analysis & Policy

An Economic Freedom Index for U.S. Metropolitan Areas

Article excerpt

Abstract. This paper is the first attempt to produce an economic freedom index for local economies in the U.S. It provides a more comprehensive measure of the restrictions government places upon economic freedom compared to simple fiscal measures like total government spending or revenue. That makes it a valuable tool for a wide variety of researchers seeking to investigate the impact of government upon society, including regional economists and re- searchers in state and local public finance. The two economic freedom indices of nations have stimulated a large body of such research. There are several similar indices that provide the same tool for those examining state governments. Like the other two sets of indices, higher levels of local economic freedom are found to be correlated with positive economic outcomes such as higher per capita income and lower unemployment.

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1. Introduction

The question of why some areas are rich while others are poor has captured the attention of econo- mists for centuries. In his seminal 1776 work, The Wealth of Nations, Adam Smith suggested that the "simple system of natural liberty" was the best way for societies to maximize their prosperity (Book IV, Chapter IX). In theory, keeping infringements on economic freedom to a minimum creates an envi- ronment that should prove to be more conducive to entrepreneurial activity and economic growth. In order to test that theory (and other theories), nearly 30 years ago scholars began an initiative to measure the level of economic freedom in nations across the globe. Those scholars have included Nobel Laure- ates Milton Friedman, Gary Becker, and Douglass North (Gwartney et al., 1996). While there are at least two national and two sub-national indices of economic freedom currently being updated regular- ly, there are no local indices. This paper provides the first local economic freedom index, measuring the level of economic freedom in U.S. metropolitan areas.

The first international report on this important topic - Economic Freedom of the World, 1975-1995 (Gwartney et al., 1996) - defined economic freedom as follows:

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 (p. 12).

The formula has been gradually revised over the years, but the same basic definition remains.

Other similar indices have been developed as well (e.g., Miller et al., 2012), but since Gwartney et al. (2012) provide data going back to 1970, along with annual updates, it provides the most volumi- nous set of data available. There are literally hun- dreds of articles in academic journals that utilize the Economic Freedom of the World data to examine the relationship between economic freedom and a host of economic conditions.1 Their findings have illus- trated a positive relationship between economic freedom and a wide variety of variables (e.g., GDP, GDP growth, literacy, and life expectancy).

The wide differences in economic freedom that we observe at the country level can exist at the sub- national level as well; e.g., residents in Texas and Florida have greater economic freedom than those in California and New York. Economic Freedom of North America (Karabegovic et al., 2002), was the first effort to measure economic freedom in the U.S. states (and Canadian provinces). It provided data for 1981, 1985,1989, and 1993-2000. Since then, data has been provided for every year. Ruger and Sorens (2009 and 2011) recently provided a more comprehensive index of both personal and economic freedom in the U.S. states. …

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