For Economic Recovery, States Should Try Economic Freedom

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Much ink has been spilled describing the $1.9 trillion American Rescue Plan Act (ARPA), passed in March. It is designed to help the country recover from the negative effects of the COVID-19 pandemic, including economic ones. Arguably, the US economy would have recovered on its own and this new spike in federal spending was unnecessary.

With or without these funds, however, states and local regions across the country have their own policy tools that could also facilitate economic growth, and political leaders can use them without touching the federal purse. The solution may seem trivial, but it’s backed by evidence: get out or stay out.

For years, Canada’s Fraser Institute has cataloged and published measures of economic freedom for the world and its regions, as well as at the subnational level. Its researchers, and others, have used the data to test the links between economic freedom and positive outcomes and found plenty. In fact, its North American Economic Freedom Index has been used in one way or another by scholars for original research more than 300 times. The index compares US states with Mexican states and Canadian provinces, and separately, looking only at US states.

A 2016 literature review of these studies examined 155 of them in detail. The authors report that, of these, 103 found positive links between economic freedom and things like increased employment, faster economic growth, entrepreneurial activity, and interstate migration. Others were inconclusive. Only one found an explicitly negative impact, and it was small.

The most recent Fraser Institute study, released last month, ranks New Hampshire as the freest US state. The Live Free or Die State is followed by Tennessee, Florida, Texas and Virginia to complete the top five. The five least free on the index are New Mexico, West Virginia, Vermont, California and, at 50th, New York. The position of states in this index is important because economic freedom is associated with many positive outcomes.

My home state of Michigan sits an embarrassing 34th among US states, and I haven’t seen much evidence recently that lawmakers are willing to expand freedom in the Great Lakes state. In fact, just this week lawmakers approved a $1 billion state tax credit in an effort to insure a few large corporations. It was money that could have been used for job-creating, broad-based, freedom-expanding personal income tax cuts. In addition, the legislature appropriated an additional $20 million in ARPA dollars to subsidize a failed tourism promotion program (Pure Michigan). Some government spending is good and some is bad. Pure Michigan is the latter.

The Fraser Institute’s index is created around three broad policy areas: taxes, spending and labor regulations. These areas are made up of 10 sub-categories, such as tax and social revenue as a percentage of income, state expenditure as a percentage of income, and union density. Each government unit assessed in the index gets a score for each variable, ranging from zero (least free) to 10 (most free). These are summed and averaged, and the results are used to rank states and provinces.

Among the more than 100 studies reviewed by researchers in 2016, the area of ​​work in North America’s Index of Economic Freedom was a more powerful factor than taxes or spending. A study, also from 2016, concluded that economic freedom in the United States and Canada is associated with “higher levels of income per capita [and] drop in unemployment rates. The authors find that the relationship was strongest for the index component of freedom in the labor market and that an increase in this freedom is associated with a decrease in the unemployment rate.

In short, economic freedom, as opposed to federal largesse, is probably a better driver of positive state economic growth and recovery.

Michael LaFaive is senior director of fiscal policy at the Mackinac Center for Public Policy, a research and teaching institute in Midland, Michigan. Follow him on Twitter @lafaive.

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