Unexpectedly Intriguing!
July 29, 2005

The Canadian-based Fraser Institute has released its 2005 Annual Report of the Economic Freedom of North America (available as a 867KB PDF document). A co-production with the U.S.-based National Center for Policy Analysis (NCPA), the report rates the economic freedom of individual U.S. states and Canadian provinces.

Written by the Fraser Institute's Amela Karabegović and Fred McMahon, along with NCPA's Glenn Mitchell, the report's measure of economic freedom indicates the degree to which an individual citizen of a given state or province is affected by the restrictions placed upon their freedom to freely engage in economic activity by their state and federal governments. These restrictions result in lower values, while higher values indicate a greater degree of economic freedom.

The report breaks the measure of economic freedom across three major areas: Size of Government, Takings and Discriminatory Taxation (or Taxation and Takings), and Labor Market Freedom.

The dynamic table below summarizes the reports ratings for each state or province according to their available economic data for 2002, and includes the contribution of restrictions imposed by each nation's federal government. You may click upon the column headings below to sort the tabulated data from highest-to-lowest value or from lowest-to-highest value. Higher values indicate greater economic freedom.

U.S. vs. Canada
Economic Freedom Index Score
(Including National Government Contribution)
State or Province Overall Index Size of Government Taxation and Takings Labor Market Freedom
CA - Alberta 7.4 8.6 6.9 6.8
CA - British Columbia 5.3 7.2 4.3 4.5
CA - Manitoba 4.9 6.6 3.8 4.3
CA - New Brunswick 4.8 5.7 3.8 5
CA - Newfoundland 4.9 5.7 4.6 4.3
CA - Nova Scotia 4.8 5.6 3.8 5.1
CA - Ontario 5.9 8 4 5.8
CA - Prince Edward Island 4.2 4.7 3.3 4.6
CA - Quebec 4.6 6.8 2.7 4.2
CA - Saskatchewan 5.1 6.5 4.4 4.5
US - Alabama 6.3 5.6 6.3 7
US - Alaska 6.2 5.6 7.3 5.7
US - Arizona 7.1 7.3 6.2 7.7
US - Arkansas 6.3 5.8 5.7 7.3
US - California 6.7 7.6 5.8 6.6
US - Colorado 7.5 8.1 6.6 7.9
US - Connecticut 6.8 7.9 5.4 7.2
US - Delaware 8.4 9 8.3 8
US - Florida 6.8 7 5.5 7.8
US - Georgia 7.4 7.8 6.6 7.9
US - Hawaii 6 6.4 5.8 5.9
US - Idaho 6.6 6.6 6 7.2
US - Illinois 7 7.9 6 7
US - Indiana 7.1 7.5 6.5 7.3
US - Iowa 6.8 6.9 6.3 7.3
US - Kansas 6.7 7.1 5.9 7.2
US - Kentucky 6.5 6.3 6.1 7.1
US - Louisiana 6.4 6.3 5.9 6.9
US - Maine 5.8 6 4.8 6.7
US - Maryland 6.5 6.8 5.7 7
US - Massachusetts 7.1 7.7 6.4 7.3
US - Michigan 6.8 7.4 6.2 6.8
US - Minnesota 7 7.8 5.9 7.3
US - Mississippi 5.6 4.8 5.4 6.6
US - Missouri 6.8 6.8 6.3 7.2
US - Montana 5.5 4.9 5.2 6.4
US - Nebraska 6.9 7.3 6.1 7.4
US - Nevada 7.3 8.3 6.1 7.5
US - New Hampshire 7.3 8 6.2 7.8
US - New Jersey 6.8 8 5.2 7.2
US - New Mexico 5.5 5 4.8 6.7
US - New York 6.2 7 5.1 6.5
US - North Carolina 7.5 7.6 7 8
US - North Dakota 5.9 5 5.8 7
US - Ohio 6.6 7 5.8 7
US - Oklahoma 6.1 5.9 5.5 6.9
US - Oregon 6.5 6.7 6.4 6.5
US - Pennsylvania 6.8 6.8 6.2 7.3
US - Rhode Island 5.9 6.4 4.6 6.8
US - South Carolina 6.7 6.4 6.1 7.4
US - South Dakota 6.8 6.4 6.6 7.6
US - Tennessee 7.1 7.1 6.8 7.5
US - Texas 7.4 7.9 6.4 7.8
US - Utah 7.3 7.6 6.9 7.4
US - Vermont 6.2 6.6 4.9 7
US - Virginia 7.1 6.9 6.7 7.7
US - Washington 6.5 7.3 5.8 6.3
US - West Virginia 5.1 4.2 4.6 6.4
US - Wisconsin 6.7 7.3 5.7 7.2
US - Wyoming 6.7 7.1 5.9 7.2

Why Is Measuring Economic Freedom Important?

The measure of economic freedom is important since it functions as an indicator of the economic growth potential in a country or region. As the report notes, "not only is economic freedom important for the level of prosperity, growth in economic freedom spurs economic growth." When you consider that the barriers and restrictions placed upon the economic freedom of individuals, is it really any wonder that, as the report again notes, "those provinces and states that have low levels of economic freedom continue to leave their citizens poorer than they need or should be."

The report underscores this position comparing the economic performance of the U.S. states with the best and worst records for economic freedom since 1981:

Most US states have maintained a high degree of economic freedom and only a handful have consistently not done so. West Virginia has the worst record but Hawaii, Maine, Montana, New Mexico, North Dakota, and Rhode Island also have consistently low levels of economic freedom in both the all-government and sub-national indexes. Their average per-capita GDP was nearly US$4,700 below the US average in 2002 and their total growth from 1981 to 2002 is 13 percentage points below the US average of 39% total growth in real terms. This is particularly remarkable because poorer states under normal conditions will grow faster than rich states due to the well-known and empirically verified "convergence" effect....

The states that have consistently strong records in both indexes are Colorado, Georgia, Delaware, North Carolina, New Hampshire, Tennessee, and Texas. Their GDP per capita was US$4,400 above the US average in 2002 and their growth from 1981 to 2002 nearly 20 percentage points higher, a remarkable achievement given that economic theory and evidence shows that richer states should grow more slowly than poorer states due to the convergence effect noted above.

Canada's Core Problem

For Canada, the report notes that Canadian provinces consistently have lower scores than U.S. states, and attributes its performance to the effect of Canada's system of fiscal federalism. Here, the report notes that:

To understand the impact of Canada's fiscal federalism, consider a province that reduces economic freedom by, for example, increasing taxes. This will likely have a negative effect on the provincial economy, as both the following results and international testing show. However, the weaker provincial economy means the province will receive an increase in federal payouts (or a reduction in the fiscal outflow if the province in question is a "have" province). The greater the reduction in economic freedom, the greater the negative impact on the economy and the greater the amount of money the province will receive from the federal government. This inflow of funds will, at least in the short term, partly offset the negative impact on GDP and mute the effect of economic freedom, or its loss, on the economy....

On the other hand, if a province increases economic freedom, for example by reducing taxes, and its economy grows, the result is an increased outflow of government revenues to other jurisdictions and a heavier tax burden, given the progressivity of Canadian taxes, which in turn suppresses increases in economic freedom and economic growth. In other words, fiscal federalism mutes the effect of economic freedom in Canada.

As a result, the report's authors find that Canadian provinces are disadvantaged in pursuing economic opportunity, recognizing that "since Canadian provinces have relatively low levels of economic freedom, Canadians are likely to continue to experience lower standards of living relative to American states." As a result, in this "contest" between the U.S. and Canada, the U.S. wins.


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