The States of Freedom

November 2004 -- Last month, I reported on freedom around the world. Now, two reports have surfaced evaluating economic freedom in the U.S. states.

The larger of the two—the U.S. Economic Freedom Index: 2004 Report—is a 183-page monograph from the Pacific Research Institute (PRI). The other—Economic Freedom of North America: 2004 Annual Report—is from the Vancouver-based Fraser Institute (in conjunction with the Dallas-based National Center for Policy Analysis) and also includes evaluations of Canadian provinces.

Before getting to the findings of these two studies, it is worth looking at their methodologies. PRI's is explained in an "Executive Summary" by Lawrence J. McQuillan, the director of Business and Economic Studies at PRI. It consists of four steps. First, the staff compiled data sets for a large number of variables, such as tax rates, state spending, occupational licensing, and so on. These were then pared down and placed in five sectors: (1) a fiscal sector that deals with income taxes, sales taxes, excise taxes, and so forth; (2) a regulatory sector; (3) a judicial sector, which looks at everything from judicial selection to tort law; (4) a government-size sector; and (5) a welfare-spending sector. Secondly, from these data sets, 48 unique indexes were created by using different weighting techniques. Thirdly, and this is the most original step, the 48 indexes were compared by their "ability to explain (other things equal) human migration" into the various states. Lastly, the index with the greatest statistical link to migration was chosen as best and was used to rank the fifty states.

Clearly, step three is innovative. What is its justification? McQuillan reasons as follows: "We believe people want to be free: they strive and work to be free, and search out locations, governments, and situations where freedom reigns.
Migration is the purest expression of individuals responding to differences in freedom, including economic freedom. We adopt a migration metric for economic freedom. If people are moving from one state to another, other things equal, we assert that this is a market-based response to differences in freedom. Ordinary people, voting with their feet, define freedom. In the end, our index offers the clear advantage that it is evaluated in the marketplace by where people decide to live."

Others will debate this with more sophistication than I can bring to bear. But the hypothesis strikes me as implausible. Yes, when one is talking about outright persecution, then people do often vote with their feet. An old joke says that that is why there are so many Jewish violinists and so few Jewish piano players. Violinists can pack up their instruments and escape over the mountains. But "all Experience hath shewn, that Mankind are more disposed to suffer, while Evils are sufferable, than to right themselves by abolishing the Forms to which they are accustomed." Would Jefferson have moved to Kentucky because it was freer?

One can also make another point: People may seek out societies that accord with their beliefs and attitudes, with scant regard for economic freedom. Millions of immigrants who came to America went home. Presumably, freedom was not the motive for both the original and the reverse migrations. Then, too, following the communist revolution in Russia, many thousands of people emigrated there to build a socialist utopia. Were they "ordinary people, voting with their feet," whose migration defined different levels of freedom?

Economic Freedom of North America presents two scales, both running from 0 (low) to 10 (high). The first scale is called the "Subnational" rating and it evaluates the level of economic freedom in each area by looking only at the effects of state (or provincial) and local governments. The second scale, which really gives one the bottom line, is called the "All-Government" rating, and it evaluates the level of economic freedom in each area after looking at the effects produced by all levels of government. Each of these two ratings evaluates economic freedom in terms of ten variables, and then groups them into three sectors.

The three sectors and ten variables are: I. Size of Government, including the variables (1) general consumption expenditures by government as a percentage of GDP and (2) transfers and subsidies as a percentage of GDP; II. Takings and Discriminatory Taxation, including the variables (3) total government revenue from own source as a percentage of GDP, (4) top marginal income tax rate and the income threshold at which it applies, (5) indirect tax revenue as a percentage of GDP, and (6) sales taxes collected as a percentage of GDP; III. Labor Market Freedom, including the variables (7) minimum-wage legislation, (8) government employment as a percentage of total state (or provincial) employment, (9) occupational licensings, and (10) union density. This last, it should be noted, does not mean the authors think unionization is per se a restriction of economic freedom. Rather, as they write, it is used as a proxy of labor-market laws and regulations.

Among the main conclusions of the authors of Economic Freedom of North America:Economic freedom is important for a region's level of prosperity, and growth in economic freedom spurs economic growth. When one looks at economic-freedom rankings in the all-government category (which after all is the bottom line), it turns out that the correlation with per capita GDP is quite striking. The lowest quintile of states and provinces has an average per capita GDP in U.S. dollars of $20,891. The highest quintile of states and provinces has an average per capita GDP of $36,878. "At any all-government level," the authors write, "holding other variables equal, an increase of one point in economic freedom in a U.S. state will increase that state's per-capita income by US$6,235."

Below are the results of the two surveys. Although the scores cannot be compared directly, the relative rankings show considerable disagreement and offer much food for thought.

Pacific Research Institute Survey:
Economic Freedom in U.S. States
The ranking is from 1 (most free) to 50 (least free).

Fraser-NCPA Survey:
All-Government Rankings
The ranking is from 1 (most free) to 50 (least free).

1. Kansas 18.18
2. Colorado 18.81
3. Virginia 18.86
4. Idaho 19.02
5. Utah 19.35
6. Oklahoma 19.56
7. New Hampshire 20.19
8. Delaware 20.90
9. Wyoming 21.24
10. Missouri 21.82
11. Arizona 21.89
12. Nevada 22.10
13. South Carolina 22.41
14. Indiana 22.69
15. South Dakota 23.34
16. Iowa 23.43
17. Texas 23.52
18. North Dakota 24.00
19. Georgia 24.06
20. Nebraska 24.23
21. Montana 24.63
22. Florida 25.12
23. Arkansas 25.14
24. North Carolina 25.58
25. Alabama 25.87
26. Tennessee 26.16
27. Maryland 26.54
28. Mississippi 26.54
29. Oregon 26.86
30. Maine 26.93
31. Washington 27.28
32. West Virginia 27.73
33. Alaska 27.82
34. Michigan 27.90
35. Hawaii 27.95
36. Vermont 28.04
37. New Mexico 28.37
38. Wisconsin 28.75
39. Kentucky 29.13
40. Louisiana 29.16
41. Massachusetts 29.41
42. New Jersey 30.19
43. Ohio 30.91
44. Minnesota 31.13
45. Pennsylvania 31.58
46. Illinois 32.77
47. Rhode Island 33.21
48. Connecticut 35.21
49. California 38.79
50. New York 39.50

1. Delaware 7.8
2. Colorado 7.6
3. Georgia 7.3
4. Nevada 7.3
5. New Hampshire 7.3
6. South Dakota 7.3
7. Louisiana 7.2
8. Tennessee 7.2
9. Texas 7.2
10. Arizona 7.1
11. Connecticut 7.1
12. Massachusetts 7.1
13. North Carolina 7.1
14. Indiana 7.0
15. Utah 7.0
16. Illinois 6.9
17. South Carolina 6.9
18. Wyoming 6.9
19. Alabama 6.8
20. Kansas 6.8
21. Minnesota 6.8
22. Missouri 6.8
23. Nebraska 6.8
24. Virginia 6.8
25. California 6.7
26. Florida 6.7
27. New Jersey 6.7
28. Oregon 6.7
29. Pennsylvania 6.7
30. Idaho 6.6
31. Iowa 6.5
32. Kentucky 6.5
33. Michigan 6.5
34. Ohio 6.5
35. Wisconsin 6.5
36. New York 6.4
37. Oklahoma 6.4
38. Hawaii 6.3
39. Maryland 6.3
40. Vermont 6.3
41. Arkansas 6.2
42. Mississippi 6.2
43. New Mexico 6.2
44. North Dakota 6.2
45. Washington 6.2
46. Alaska 6.1
47. Rhode Island 6.1
48. Maine 5.9
49. Montana 5.7
50. West Virginia 5.4

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