How about good economic news?
According to the just published 2020 edition of Economic Freedom of North America, Missouri ranks 12th among the most economically free states in the country. This is an improvement over last year’s ranking, which was 16th. This is good news, because more economic freedom is associated with better economic results.
The report is published by the Fraser Institute, an independent, non-partisan Canadian think tank on public policy, in cooperation with state research organizations in the United States. The Fraser Institute’s Measure of Economic Freedom is a barometer of restrictions on individual economic decision-making imposed by state and local governments. More restrictions on the functioning of the market interfere with decisions such as what or how much to produce. Calculations are based on data up to 2018, the most recent year of comparable numbers available.
This year’s ranking for Missouri is better, sometimes considerably, than our neighboring states. Kansas was 14th, but Iowa is 28th, Arkansas 29th, and Illinois 34th. Such differences bode well for Missouri’s ability to attract business and people.
To arrive at this overall ranking, the authors of the report use 10 variables in three areas. One is based on government spending as a percentage of income. Another assesses the burden of state and local taxes, such as taxes on income, wages, property and sales. The third component measures how free a state’s labor market is. States with a higher minimum wage (relative to per capita income), a higher ratio of government to total employment in the state, and higher union density are states in which workers and employers are less free to make their own employment decisions.
In the 2020 report, Missouri is doing quite well in the first two areas. In terms of government spending, Missouri is among the freest, ranking 15th. It does even better when the focus is on taxation, ranking 11th. Both are ranked much higher than most of our neighbors. When it comes to labor market freedom, however, Missouri slips a few notches, falling to 28th place.
A large body of research reveals that states with higher levels of economic freedom experience, on average, faster economic growth, greater entrepreneurial activity, and greater prosperity. How is it, then, that Missouri’s economy is historically one of the slowest growing in the country?
The state’s labor market is a matter of concern. An analysis of the Missouri labor market has led us to conclude that the Missouri labor market is beset by too many burdensome restrictions on free choice. The state’s minimum wage, professional licenses, and state tax laws all negatively affect work incentives, putting Missouri workers at a comparative disadvantage. They also slow job creation and hamper economic growth.
Another area of concern is the state education system. In their efforts to cut the state budget, politicians in Jefferson City too often view funding for community colleges and other higher education institutions as ripe for cut. While spending cuts can be made everywhere, if those cuts resulted in lower education levels in Missouri, it could further jeopardize the state’s economic future.
This is not to say that pumping more money into the state education system will magically lead to better economic outcomes. This is not the case, as shown by Stanford University professor Eric Hanushek’s study of the Missouri education system. Missouri graduates from high school at the national average, but the average graduate has a lower skill level than graduates from many other states. Because Missouri’s workforce consists primarily of local graduates, the state is at a competitive disadvantage when it comes to attracting potential employers.
Maintaining and increasing Missouri’s economic freedom is an important part of a better future. Combined with improvements in the education system, this can only improve the economic well-being of residents of Missouri.
Rik Hafer is Professor of Economics and Director of the Center for Economics and the Environment at the Hammond Institute for Free Enterprise at Lindenwood University in St. Charles. He can be contacted at [email protected] Dean Stansel is Associate Research Professor at the Bridwell Institute for Economic Freedom at Southern Methodist University in Dallas, Texas. He can be contacted at [email protected]