Prosperity starts with Economic Freedom

As Canadians celebrate that rarest of snowballs in hell’s kilns – a spot in time when Canada’s economy grows faster than the United States’ – we forget how far we have to catch up in employment, wealth and policies that generate prosperity.

Ontario, Canada’s economic engine, is poorer than all but the three poorest US states, West Virginia, Mississippi and Montana. Canada’s second largest province, Quebec, enjoys the same benefits of geography and resource wealth as Ontario but is much poorer. It lags still far behind even the poorest, most disadvantaged states.

New research suggests that the old Ontario-Quebec economic status could be stood on its head. Today, the Fraser Institute, in conjunction with the National Center for Policy Analysis in the United States, releases the first comparative study of economic freedom among US states and Canadian provinces.

The study shows that economic freedom is the most important determinant of a province’s or state’s economic success. These results, which will be published by the European Journal of Political Economy in a special economic freedom edition, parallel international results about the central importance of economic freedom for prosperity.

The results help explain Canada’s dismal economic record. Canadian provinces are clustered at the bottom of the freedom rankings, well behind US states. Only Alberta enjoys a middling freedom score and a middling level of prosperity.

So, what is economic freedom? How is it measured? Why is it important? And what does it have to do with Quebec and Ontario?

Economic freedom is about personal choice – the right to spend the money you earn as you wish without onerous taxation or regulation, the right of individuals through free markets to determine what is produced without government meddling, and the right to work for or employ someone through mutual agreement without government interference. The study measures these factors by examining size of government, taxation and labour market freedom.

Why is freedom important? Any freely-negotiated transaction must benefit both parties. If not, the disadvantaged party would kill the deal. This has consequences throughout the economy. Consumers only choose products with superior quality or price. That forces producers to seek constant improvements. Billions of mutually beneficial transactions power the dynamic that spurs productivity growth and increasing prosperity in free economies.

Restrictions on freedom prevent people from making mutually beneficial transactions. Such transactions are replaced by government action, marked by coercion and lack of choice. Instead of gains for both parties, citizens pay their taxes and accept whatever service is offered. Government attempts to “plan” economic growth have disastrous results.

On the other hand, economic freedom is a powerful engine of growth. Econometric testing shows that a one-point increase in economic freedom on the index’s 10-point scale increases a province’s wealth by $3,800 per person.

Ontario’s economic evolution is a striking example of power of freedom. Ontario’s economic freedom steady declined from 1981 to 1993. Ontarians will recall how deeply the economy suffered. Unemployment rose. Ontario’s economic freedom recovered through the rest of the 1990s and so did Ontario’ economic health.

This is why the comparison with Quebec is so interesting. Quebec and PEI are the least free provinces. Quebec is a third poorer than Ontario and less than half as affluent as many of the freest US states.

Polls suggest Quebec voters may about to shrug off the province’s statist past and liberate its markets. Quebec has undergone radical transformations before. Just as the “Quiet Revolution” socially liberated Quebec, Quebecers now lean to liberating their economy.

Meanwhile many fear Ontario is poised to head down the path it took in the 1980s, limiting economic freedom with disastrous consequences. That could allow Quebec to race past Ontario, just as Ireland raced past the once much more prosperous Canada after the emerald isle liberated its economy and became an economic gem.

There’s much more to tell you about economic freedom. The research highlights the idiocy of Canada’s fiscal federalism. In the United States, a one-point increase in freedom boosts the economy by more than $10,000 per person, three times the impact for Canadian provinces.

This is because Canada’s fiscal federalism damages freedom. Ottawa takes billions of dollars out of free, and thus prosperous provinces, weakening their growth, and gives it to unfree provinces. The provincial politicians who created bad policy in the first place get Ottawa’s cheques – a prize for bad policy.

Lack of economic freedom costs every Canadian thousands of dollars a year in lost income. Only if we free our economy can we make good-news comparisons with the United States a permanent phenomenon rather than a passing occasion for chest-thumping.