Friday, May 19, 2006

Economic Freedom Index: The States
Mike Rappaport

As readers of this blog may know, I am always very interested in the Economic Freedom of the World Index put out by the Wall Street Journal and the Heritage Foundation.  Now, the Pacific Research Institute has put together an Economic Freedom Index for the States -- a brilliant idea.  The study ranks states based on five criteria: financial, regulatory, judicial, government size and welfare spending.  Some states do really well on one factor, and really badly on another.  For example, California is number 3 on judicial, but number 50 on regulatory. 

Here are some of the results.  At the low end:   

50 New York

49 California

48 Connecticut

47 Rhode Island

46 Illinois

And at the top:

1 Kansas

2 Colorado

3 Virginia

4 Idaho

5 Utah

One obvious thing to do is to compare how the blue and red states do.  Unsurprisingly, the blue states do poorly in terms of economic freedom.  Only New Hampshire and Delware are in the top 20.  So 18 of the 20 most economically free states are red.  Not exactly a shocker.   By contrast, not one of the 10 states which are least free is a red state.  While this is not surprising, it should be emphasized. 

Update: I had initially listed Indiana as a blue state, but was mistaken.  (I attribute the mistake to the disorientation caused by a geographically challenged person having to navigate three maps -- red and blue, economic freedom, state names -- late at night.) 

Further Update: Another mistake.  I had initially omitted Delaware from the top 20.

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Mike Rappaport


So, what is the standard unit of economic freedom in terms of which the relative importance of these various factors is assessed? You could call it the Milton.

Posted by: hoya | May 19, 2006 5:38:21 AM

Since when is Indiana a blue state?

Posted by: Will Baude | May 19, 2006 5:42:01 AM

Right. OK, Mike, here's a million bucks, and
you've got a choice of living in New York City
or Kansas City, San Francisco or Denver. What's
it gonna be? Or, how about a choice between
Chicago and Salt Lake City?

Posted by: steve | May 19, 2006 5:47:13 AM

Steve (although you didn't ask me), I'd live in Boise, Salt Lake or Kansas City (anytime but the summer). A million bucks goes alot farther in those places than NYC, SF or Chicago.

Posted by: charles | May 19, 2006 7:24:58 AM

Salt Lake City is apperently a great place to raise a family (I remember reading a story about non-Mormon urban professionals moving there), so I'd pick it over Chicago. I'd still pick NYC or San Fran over Kansas City though.

I'd be interested in seeing a graph comparing per capita income to this metric of economic freedom.

Posted by: Jacob | May 20, 2006 11:05:35 AM

I'm surprised Virginia ranks so favorably. Northern Virginia is known for intrusive local govt and things like gross-receipts taxes, which they enforce assiduously by cross-referencing state tax returns and which make starting and running a small business difficult. The devil is always in the details in these matters. The worst states are the ones like CA and NY that combine intrusive rules, high taxes and aggressive enforcement. I suspect that some places that look bad on paper, like Chicago, are really better in practice because their political cultures are relatively relaxed and inefficient and they don't enforce all the rules strictly. Unfortunately, you can't always easily find out about this stuff unless you live in an area for a while or know someone who does and who is in your business.

Posted by: Jonathan | May 20, 2006 11:19:09 AM

Okay here are the top 5 states for per capita income (data from 2005

1 Connecticut (vs. 48th economically free)
2 Massachusetts (vs. 41st economically free)
3 New Jersey (vs. 42nd economically free)
4 Maryland (vs. 27th economically free)
5 New York (vs. 50th economically free)

Now here's how the top 5 states for economic freedom compare
1 Kansas (vs. 27th per capita income)
2 Colorado (vs. 10th per capita income)
3 Virginia (vs. 9th per capita income)
4 Idaho (vs. 46th per capita income)
5 Utah (vs. 47th per capita income)

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

Posted by: Jacob | May 20, 2006 12:07:08 PM

Number 2 in economic freedom, number 8 in per capita income, a high health ranking, mountains on its' fringe, skiing, hiking, fishing, rafting, snomobiling and more nearby, public lands comprise 1/3 of its' land area, clean air (EPA ranked as a clean air city), and experiences all 4 seasons every year, I'll take Denver and you can keep your million bucks, I'll earn my own, thank you.

Posted by: Steve-o | May 22, 2006 5:50:55 PM

Jacob: The correlation is pretty clear. I would suggest that the causality runs from wealth to lack of freedom; in other words, the wealthier states, able to afford more government and trying to protect that wealth, become less economically free. If this is true, then per capita income from past years would be even more negatively correlated with economic freedom today.

Also, the MA/CT/NY/NJ axis is an outlier, because the wealth there is largely a reflection of the concentrated money-making power of the Street. That wealth depends on large banks, funds, and insurers, not innovators or producers.

Posted by: sammler | May 23, 2006 2:21:00 AM

I find the relative rankings of Tennessee and Virginia odd, having lived in both. Tennessee has much lower and less intrusive taxes (no personal property or income tax), much less environmental regulation, and much less spending on public secondary schools.

Posted by: SamChevre | May 23, 2006 12:43:53 PM