New Hampshire leads U.S. in economic freedom three years running; New York still the least-free state

Economic Freedom of North America 2017

Economic Freedom of North America 2017 is the thirteenth edition of the Fraser Institute’s annual report. This year it measures the extent to which the policies of individual provinces and states were, in 2015, supportive of economic freedom, the ability of individuals to act in the economic sphere free of undue restrictions. There are two indices: one that examines provincial/state and municipal/local governments only and another that includes federal governments as well. The former, our subnational index, is for comparison of individual jurisdictions within the same country. The latter, our all-government index, is for comparison of jurisdictions in different countries.

For the subnational index, Economic Freedom of North America employs 10 variables for the 92 provincial/state governments in Canada, the United States, and Mexico in three areas: 1. Government Spending; 2. Taxes; and 3. Labor Market Freedom. In the case of the all-government index, we incorporate three additional areas at the federal level from Economic Freedom of the World (EFW): 4. Legal Systems and Property Rights; 5. Sound Money; and 6. Freedom to Trade Internationally; and we expand Area 1 to include government enterprises and investment (variable 1C in EFW), Area 2 to include top marginal income and payroll tax rate (variable 1Dii in EFW), and Area 3 to include credit market regulation and business regulations (also at the federal level). These additions help capture restrictions on economic freedom that are difficult to measure at the provincial/state and municipal/local level.

Results for Canada, the United States, and Mexico

The all-government index
In Economic Freedom of the World (Gwartney, Lawson, and Hall, 2017), for several years Canada has been ahead of the United States, which is in turn even further ahead of Mexico. This year, Canada and the United States are tied for 11th. The inclusion of variables from that report in our all-government index allows us to display more accurately the gap between Canada, the United States, and Mexico. Thus, in last year’s report, in the all-government index for 2014 two of the top three jurisdictions were Canadian, with Alberta in first place with a score of 8.1 and British Columbia tied for second with New Hampshire at 7.9. Starting in 2015, however, both Canada and Alberta elected new governments who have been making policy changes in taxation and spending that are likely to have a significant negative effect on their economic freedom. As a result, after five years alone in the top position, in this year’s index Alberta is tied for first place with New Hampshire with a score of 8.0. Ten US states are tied for third at 7.9, including Florida, Texas, South Dakota, Nevada, and Georgia. The next highest Canadian province, British Columbia, is now down to 13th at 7.8 (tied with 19 US states); Saskatchewan, Ontario, and Newfoundland & Labrador are tied for 33rd (with 16 US states) at 7.7.

The highest-ranked Mexican states are Jalisco, Baja California, Mexico, and Coahuila de Zaragoza, all tied at 61st with 6.5, a full point behind those ranking lowest in Canada and the United States. The lowest-ranked state is Distrito Federal at 5.5, following Colima at 5.7, and Campeche at 5.9. The lowest-ranked Canadian provinces are New Brunswick, Nova Scotia, Quebec, and Prince Edward Island at 7.5, tied for 56th with New York. The next lowest-ranked states in the United States are Delaware, Minnesota, and Rhode Island, tied with Manitoba at 7.6 in 52nd place.

Historically, economic freedom has been declining in all three countries. Since 2004, the average score for Canadian provinces on the all-government index has fallen from 7.76 to 7.66; the average score for US states fell from 8.20 to 7.78; and for Mexico, from 6.67 to 6.17. However, economic freedom has increased in the United States and Mexico since 2013 and is only slightly lower in Canada.

The subnational indices
For the purpose of comparing jurisdictions within the same country, the subnational indices are the appropriate choice. There is a separate subnational index for each country. In Canada, the most economically free province in 2015 was Alberta with 7.8, followed by British Columbia with 6.6 and Ontario at 6.2. However, the gap between Alberta and British Columbia is shrinking. The least free by far was Quebec at 4.2, followed by Nova Scotia at 5.0 and New Bruns-wick at 5.2.

In the United States, the most economically free state was New Hampshire at 8.3, followed at 8.1 by Florida and Texas. South Dakota is fourth at 8.0. (Note that since the indexes were calculated separately for each country, the numeric scores on the subnational indices are not directly comparable across countries.) The least-free state was New York at 5.3, following California at 5.8. New Mexico and West Virginia were tied for 47th at 6.1.

In Mexico, the most economically free state was Baja California at 8.0. Jalisco was second at 7.7, followed by Coahuila at 7.5. The least free Mexican states were Campeche and Chiapas at 4.9; slightly better were Guerrero at 5.0 and Oaxaca at 5.1.

We have again produced for each province and state a one-page summary that contains all the latest scores and rankings for each of the components of the index as well as historical data on the overall and area scores. For brevity, these are not included in the report but are available at here.

Economic freedom and economic well-being at the subnational level
The jurisdictions in the least economically free quartile (one fourth) on the all-government index had, in 2015, an average per-capita income of just US$2,199, compared to US$46,080 for the most economically free quartile. On the subnational index, the same relationship holds, with the least-free quartile having an average per-capita income nearly 5% below the national average, while the most-free quartile was 7% above it.

In addition, economic freedom at the subnational level has generally been found to be positively associated with a variety of measures of the per-capita size of the economy and the growth of the economy as well as various measures of entrepreneurial activity. There are now more than 230 articles by independent researchers examining subnational economic freedom using the data from Economic Freedom of North America. (Appendix C lists some of these articles that either use or cite Economic Freedom of North America.) Much of that literature discusses economic growth or entrepreneurship but the list also includes studies of a variety of topics such as income inequality, eminent domain, and labor markets. The results of these studies tend to mirror those found for these same relationships at the country level using the index published in Economic Freedom of the World.