The Retreat of Economic Freedom Continues

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.

But don’t take my word for it. The U.S. ranks 16th in the Fraser Institute’s latest Economic Freedom of the World index—down from second in 2000. Likewise, studies conducted by the Heritage Foundation reflect a “precipitous downward spiral in U.S. economic freedom since 2008.” This tumble from the top was inevitable given the increasing government encroachments on private property rights, numerous government interventions, expansion of federal government spending and regulations, and consequent shrinking of the space for free economic exchange. And now we are seeing the same downward trend at the state level, as the Fraser Institute’s just-released Economic Freedom of North America report (EFNA 2015) reveals. (EFNA 2015 is based on data from 2013, the most recent available.)

As its name suggests, the Economic Freedom of North America report ranks and compares the levels of economic freedom across North America and within the U.S., Canada and Mexico by measuring the size of government, taxation, regulation and labor market restrictions. In the North America-wide index, the top three jurisdictions are Canadian provinces, with Alberta taking first place, British Columbia coming in second and Saskatchewan tying for third with New Hampshire. In EFNA 2010, by way of comparison, there was only one Canadian province in the top 47 jurisdictions measured. In EFNA 2015, there are eight Canadian provinces in the top 42.

In other words, it seems states are increasingly following D.C.’s lead by over-spending, over-taxing, over-subsidizing, over-regulating and undercutting individual liberty. As a result, many U.S. states are falling behind their Canadian neighbors in economic freedom, just as the U.S. is falling behind its global neighbors.

Interestingly, and worryingly, EFNA 2015 reports that “economic freedom has been declining in all three countries.” The average score for Canadian provinces has fallen from 7.73 in 2003 to 7.65 (with 10 reflecting the highest level of economic freedom); 6.69 to 6.12 for Mexican states; and the average score for U.S. states has fallen most dramatically of all, from 8.24 to 7.59.

The states with the worst scores on the U.S.-only section of EFNA 2015 are New Mexico and Hawaii (tied at 46th), Alaska (48th), California (49th) and New York at dead last (50th).

At the freer end of the spectrum, New Hampshire, as mentioned above, has the highest level of economic freedom among all U.S. states. Rounding out the U.S.-only top 10 are South Dakota in second; Texas and Florida tied for third; Tennessee at fifth; Virginia at sixth; Missouri and Nebraska tied at seventh; and Arizona, Maryland, North Dakota, Colorado and Kansas tied at ninth.

EFNA 2015 highlights 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 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.

Two decades ago, the founders of Fraser Institute’s economic freedom project defined economic freedom—and set the parameters for all future economic freedom studies—this 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.”

As we have seen in the years since that definition was crafted, economic freedom is not some abstraction or theoretical debating point. In the most-free states, the average per capita income is about seven percent above the national average; in the least-free states, the average per capita income is about eight percent below the national average.

As my colleague 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, which contributes to economic growth, innovation and larger tax bases (with smaller per capita tax burdens).

“The freest economies operate with minimal government interference, relying on personal choice and markets to decide what’s produced, how it’s produced and how much is produced,” notes Dean Stansel, co-author of EFNA 2015. “When governments impose restrictions on these choices, there’s less economic freedom.”

And when that happens, people start voting with their feet. Can it be a coincidence that the top 13 states on EFNA 2015 enjoyed an increase in net domestic migration of some 273,000 in 2012-13, while the bottom 13 weathered a decrease in net domestic migration of some 204,000? Moreover, seven of the ten fastest growing states in the union are in the top 14 on EFNA 2015: Arizona, Florida, South Dakota, Texas, Colorado, Nevada and North Dakota.

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

All they need is the common sense to adopt and practice—and maintain—policies that allow individuals to act in the economic sphere, free of stifling restrictions. Regrettably, that sort of common sense seems to be growing less and less common.