Economic freedom and Canada’s public policy schizophrenia

In international rankings of economic freedom, Canada has soared past the United States, so it should be no surprise that among sub-national jurisdictions in North America (which encompasses 10 Canadian provinces, 50 U.S. states and 32 Mexican states) three Canadian provinces—Alberta, British Columbia and Saskatchewan—ranked at the top using 2013 data, the most recent available.

But Canada is becoming a bit of a policy schizophrenia country.

Three other Canadian provinces were close to the bottom of the Canadian and U.S. rankings: Nova Scotia, tied with 10 other jurisdictions for 42nd, Quebec and Prince Edward Island, tied for 57th, ahead of only Delaware among the Canadian provinces and U.S. states. The 32 Mexican states were behind all Canadian provinces and U.S. states. The remaining four provinces, Manitoba, New Brunswick, Newfoundland and Labrador, and Ontario were in the middle of the Canada-U.S. pack.

And reversals are coming. Since 2013, Alberta elected a new government and Canada chose a new federal government. And both governments have shown a propensity for policies that reduce economic freedom, putting government in the way of free individual choices by upping taxation (so you have less of your own money to spend as you choose) and increasing government intrusion into the economy, thus reducing space for free exchange.

The relative ranking of the provinces helps illustrate the power of economic freedom. The average per capita provincial domestic product of the top provinces is $70,294; of the four middle provinces, $52,124; and of the three at the bottom, $41,655.

Economic freedom is simply the ability of individuals and families to make their own economic decisions, unhindered by overly large government or restrictive regulations. Over a century of evidence shows that the drive and ingenuity of individuals beats heroic government in creating prosperity. More than 130 policy and fact-based academic articles have used the North American index in research and found that a number of positive outcomes, including increased growth and entrepreneurship, are powered by economic freedom.

Over the past 20 years, Canada has run a fascinating experiment in the ability of economic freedom to drive growth and the lack of economic freedom to inhibit growth.

During much the 1990s, B.C. fell back in economic freedom as the size of government and regulation increased. Long one of Canada’s richest provinces, B.C. fell to have not-status. During the 1990s, B.C. had by far the slowest growth of any province in Canada at just 7.3 per cent per capita over the decade in inflation-adjusted terms.

At the same time, Ontario increased its economic freedom and had a growth rate of 20.7 per cent, almost three times of that of B.C. in the 1990s.

Then, everything turned upside down. Ontario’s economic freedom went into reverse in the first decade of this century and, just like B.C. before it, the province fell to have-not status. This is remarkable denouement for Ontario, the province that had been Canada’s economic engine.

In the decade following 2003, Ontario, like B.C. before it in the 1990s, had by far the slowest growth rate in Canada, remarkably just 3.3 per cent. Meanwhile, B.C. was moving in the opposite direction, increasing economic freedom. With increased economic freedom, B.C. quickly moved out of have-not status and had a growth rate almost five times that of Ontario, at 15 per cent.

It is amazing how we can be resistant to learning even the most obvious lessons—B.C. falling into have-not status when economic freedom was reduced and then soaring when it was increased; Ontario experiencing strong growth when economic freedom was relatively high and then falling into have-not status when economic freedom declined.

The recent elections in Alberta and federally in Canada have elected governments that appear dedicated to repeating the mistakes of B.C. in the 1990s—and Ontario today—by increasing government’s interference in the economy, although growth and prosperity are strongly related to individual economic freedom, not big government.