States, Economic Freedom, and Wealth Creation

By Reed, Lawrence W. | Freeman, November 1999 | Go to article overview

States, Economic Freedom, and Wealth Creation


Reed, Lawrence W., Freeman


Montesquieu once observed that "Countries are well cultivated not as they are fertile, but as they are free." The 1999 Index of Economic Freedom, published by the Heritage Foundation and the Wall Street Journal, examined 161 countries and came to the same conclusion: "Countries that have the most economic freedom also tend to have higher rates of long-term economic growth and are more prosperous than those that have less economic freedom." Unequivocally, the numbers show that "countries with the lowest levels of economic freedom also have the lowest standards of living."

One would expect that within a country the same pattern would be evident. Indeed it is, and now we have a comprehensive analysis that proves it: Economic Freedom in America's 50 States by economists John Byars, Robert McCormick, and Bruce Yandle. Commissioned by the State Policy Network, an association of some three dozen state-based free-market think tanks, the report argues that "states with relatively more economic freedom enjoy higher rates of growth . . because individuals in those states are allowed to keep more of their income, and thus the marketplace can more efficiently determine the allocation of resources."

There are profound lessons here for state governments. Their actions and policies do make a difference in the material welfare of their citizens. People respond to incentives and disincentives, and they tend to migrate, taking their skills and capital with them, to those locales where those skills and capital are relatively safe from the depredations of high taxes and regulation. Governors and state legislators who want to accumulate power and centralize resources while proclaiming a desire to spur growth are trying to have their cake and eat it too.

Economic Freedom Defined

From the start, the report assumes a definition of "economic freedom" that comports with the ideas of classical-liberal thinkers. The individual is a sovereign entity that the state respects by minimizing its intrusions and providing for a common defense. Economic freedom is expanded when governments limit "encroachments on opportunities for individuals to engage in voluntary exchange." It is contracted when states interfere with voluntary exchange through an array of costly impositions.

Every state provides its own "bundle" of costs and benefits. The tax burden may be low in a state at the same time the regulatory burden is high. A state may have low tax and regulatory burdens that are at least partially offset by a judicial system that encourages frivolous lawsuits or bestows abnormally large damage awards that overcompensate harmed parties and thereby exposes individuals to higher risks of property confiscation and redistribution. A relatively high level of welfare spending indicates a state is engaged in more income redistribution than others, a violation of economic freedom, and this may offset an otherwise friendly regulatory environment. In any event, the report agglomerates all this information in about as scientific a fashion as is possible.

It assembles data on more than 200 indicators, grouping the resulting measurements under five key categories: fiscal, regulatory, judicial, government size, and welfare spending. Each state is then assigned a rank, from 1 to 50. Idaho turned in the best score as the state with the greatest degree of economic freedom, while New York came in dead last. The five states with the most economic freedom (Idaho, Virginia, Utah, Wyoming, and South Dakota) boasted growth in personal income from 1990 to 1997 that was a spectacular 59 percent higher on average than the five states with the lowest levels of economic freedom (New York, Rhode Island, New Jersey, Massachusetts, and Connecticut). …

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