By Jay Hein
The Fraser Institute has released its annual study on economic freedom in North America. There’s good news for Indiana, but there’s also work to do.
Before we dig into the good news and the to-do list, it may be helpful to discuss what exactly we mean by “economic freedom.”
The Fraser Institute began to pioneer research into economic freedom some 30 years ago. Collaborating with Nobel laureate Milton Friedman, Fraser scholars defined economic freedom this way: “Individuals have economic freedom when (a) property they acquire without the use of force, fraud or theft is protected from physical invasions by others and (b) they are free to use, exchange or give their property as long as their actions do not violate the identical rights of others.”
Put another way, the freest economies operate with minimal government interference, and they rely on individuals and markets to determine what’s produced, how it’s produced, how much is produced and for whom production is intended. As government imposes restrictions on these choices, there’s less economic freedom.
Given those parameters, rankings for the Economic Freedom of North America (EFNA) are determined by measuring each state’s government spending, level of taxation, and restriction or flexibility in the labor market. Based on data from 2017 (the most recent year of available data), New Hampshire takes the top spot in the latest EFNA index. Rounding out the top five most economically free states are Florida (2nd), Tennessee (3rd), Virginia (4th) and Texas (5th).
At the other end of the spectrum, New York is ranked last (for several years running). West Virginia (49th), Alaska (48th), Vermont (47th) and Oregon (46th) also languish in the EFNA cellar.
Indiana comes in at a very respectable 11th in the latest EFNA index. And there’s more good news: The Hoosier state is headed in the right direction – jumping from 23rd in 2007, to 18th in 2011, to 14th in 2015, to 12th in 2016 (data years).
In addition, Indiana is doing very well relative to its neighbors when it comes to maximizing economic freedom and economic opportunity. Michigan is ranked 33rd on the EFNA index, Illinois 34th, Ohio 37th and Kentucky 43rd.
This gives Indiana an advantage in the fierce regional competition for businesses, talent and investment. Indeed, economic freedom is not some abstraction or theoretical debating point. Economic freedom – or a lack thereof – has real-life implications. In fact, economic freedom can be one of the main drivers of prosperity, and the evidence shows that states with low levels of economic freedom reduce the ability of their citizens to prosper economically, while states with high levels of economic freedom maximize their citizens’ ability to prosper economically.
In the most free jurisdictions, for example, the average per capita income is 9.2 percent above the national average, compared to 3.4 percent below the national average in the least free jurisdictions. Per capita income also has been found to grow faster in states where economic freedom is on the rise.
Plus, hundreds of studies by independent researchers have concluded that economically free areas (nations, states and provinces, even municipalities) tend to experience more positive outcomes, including more economic prosperity, than areas with less economic freedom. The main reason: High levels of taxation, spending and regulation make it harder for businesses to grow. When businesses can’t grow, they can’t hire new workers. When workers can’t find opportunities, they move somewhere else or turn to government programs. And when the cycle reaches that point, everyone is worse off.
That brings us back to Indiana’s to-do list. To break into the EFNA top 10 – where New Hampshire, Texas, Florida and Tennessee have dominated for most of the 21st century – Indiana needs to remain committed to sound and smart public policy.
States at the top of the EFNA rankings tend to have a common focus in their economic policies: a low tax burden (which means low income taxes or no income taxes at all), slow growth in government spending, and a relatively light regulatory burden that makes it easier for entrepreneurs to be successful, businesses to grow, taxpayers to save and invest. That’s a formula for more economic growth, more jobs and more opportunities.
States that take the opposite approach tend to see less economic prosperity, and more moving trucks headed outbound for greener and freer pastures.