Economic freedom means economic growth

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Appeared in The Hill, November 1, 2018
Economic freedom means economic growth

As Americans head to the polls today for the midterm elections, they should pause to consider the value of policies that advance economic freedom. Greater voluntary and peaceful association, protection of property rights and less-burdensome taxes are three such policies that can improve the lives of all.

The Fraser Institute recently published its annual Economic Freedom of North America, an index that ranks Canadian provinces and American and Mexican states on the degree to which their policies do not place “undue restrictions” on economic freedom. The report uses data through 2016.

Among the 50 U.S. states, the report ranks Florida as the most economically free, followed by New Hampshire, Texas, Tennessee and South Dakota. The least free are New York, Kentucky, West Virginia, California and Alaska.

The index is built around three major areas: government spending, taxation and labour market liberty. There are 10 variables, including such metrics as tax revenues and rates, minimum wage mandates and union density, and government transfers and subsidies.

Where states end up in this index is no trifling matter. States in the freest quartile have per-capita personal incomes seven per cent above the national average. States in the bottom quartile have per-capita personal incomes 10 per cent below it. But boosting the incomes of the electorate is not the only reason state leaders should strive to improve economic liberty in their states.

To date, researchers working independently of the Fraser Institute have published more than 250 articles using the index. The topics researched are varied but, to quote from the latest report, “The vast majority of the results correlate higher levels of economic freedom with positive outcomes, such as economic growth, lower unemployment, reduced poverty, and so on.”

A recent article, “Targeted State Economic Development Incentives and Entrepreneurship,” published in the Journal of Entrepreneurship and Public Policy, investigated whether any connection exists between incentives from state economic development programs and entrepreneurial activity; it utilized a U.S. national data set published by the W.E. Upjohn Institute of Kalamazoo, Michigan, of state and local incentives offered to businesses.

The paper, which one of us co-authored, found a “robustly negative relationship between development incentives and patent activity,” a proxy for entrepreneurial activity. It also found a negative link between incentives and the percentage of small business establishments in a region. It did find a positive link between incentives and the percentage of large establishments (businesses with more than 500 employees). But those gains for big businesses are not the whole story. There also is a loss among small businesses. Typically, the large businesses have a high profile and influence that crowds out their smaller competitors in search of capital, which all too often comes in the form of taxpayer subsidies.

Taxpayers and businesses are familiar with this dynamic. A billionaire developer calls up friendly state lawmakers and gets a law passed to help subsidize that person’s construction project. An international conglomerate can float the idea of expanding in a state, and government bureaucrats offer up billions of dollars as a lure. Bigwigs get bigger, and small businesses and the forgotten workers get pushed aside.

States should eliminate their corporate and industry subsidy programs, which transfer wealth from the many to the few and interfere with marketplace freedoms. Instead, they should look to eliminate additional barriers to free exchange and give the savings back to taxpayers. A recent study by the Mercatus Center found that a dozen states could reduce their corporate tax burden by more than 20 per cent if they were not busy financing these targeted incentive programs.

Government interventions in the economy may grab headlines and make people talk, especially if politicians can assert that hundreds, or even thousands, of jobs are coming. But the available evidence shows that these assaults on economic liberty destroy more jobs than they create—and economic liberty is the most powerful way to enhance prosperity for all.

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