Unexpectedly Intriguing!
August 29, 2005

Not long ago, Poltical Calculations presented a dynamic table that ranked the economic freedom of individual U.S. states and the individual provinces of Canada according to the size of their governments, the magnitude of their levels of taxation and other takings, the freedom of their labor markets, as well as their overall level of economic freedom. But, in doing so, Political Calculations left two huge questions unanswered: "What Is Economic Freedom?" and "Why Is Economic Freedom Important?"

What Is Economic Freedom?

In the Fraser Institute's original report "Economic Freedom of the World, 1975-1995," the report's authors defined economic freedom, as well as what an index of economic freedom should measure:

Individuals have economic freedom when:

  1. property they acquire without the use of force, fraud, or theft is protected from physical invasions by others is protected from physical invasions by others and
  2. 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.

Why is Economic Freedom Important?

A free economy provides the greatest degree of choice possible to the individuals who live within it. Free economies allow individual personal choice and the complex interaction of individuals in markets to answer basic economic questions of how scarce resources will be produced, valued and distributed. An economy becomes less free through government interference and restrictions, which limit the ability of individuals to conduct economic transactions without restraint.

Economic freedom is also a key factor in determining economic prosperity. Within a national economy, there is a well-documented "convergence" effect that, over time and under normal conditions, sees poorer regions grow faster than richer regions within its borders. As a result, the measure of economic production per capita within the various internal political regions of a country will tend to equalize over time.

Differences in the amount of economic freedom available to individuals living in the various political regions that make up a country can prevent this convergence effect from occurring. The Fraser Institute study of the "Economic Freedom of North America" demonstrated that those states and provinces that had a high degree of economic freedom clearly outperformed the states and provinces that had lower degrees of economic freedom, and maintained this level of outperformance over time. Here's an excerpt from the report (emphasis mine):

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.

By contrast, here is the report's assessment of the performance of the U.S. states with the greatest degree of economic freedom:

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....

Just How Bad is West Virginia?

I'll end the post with the Fraser Institute's assessment of the state:

If there is an economics version of life support, it’s time to put West Virginia on it. Let’s start with the good news: in labor market freedom, the state has bulled its way to 47th all-government and 46th subnational. Now that we’ve dispensed with the good news, West Virginia’s overall rankings for economic freedom were 53rd all-government and a record low 56th state and local. Takings and taxation were 50th and 53rd. The size of government ranking, always bad, is now last at 60th in both categories. West Virginia is the eighth most taxed with a state and local burden of 10.6%, although it dodges the federal bullet to fall to the 38th most-taxed. The state sales tax is high at 6%.

The next generation of leaders in West Virginia definitely have their work cut out for them.

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