Evidence that economic freedom improves outcomes

Last Economic Freedom for North America A report by the Fraser Institute marks the first time that economists have a full four decades of data on economic freedom across all 50 United States. Those less familiar with economic research claim that economics is not a science because economists cannot perform controlled experiments. However, where economists cannot perform controlled experiments (behavioral economists do controlled experiments), they use complex statistical techniques to compensate for the fact that they must take in data as it comes in. Here, the Fraser Institute for Economists presents a treasure trove of data that provides insight into the impact of larger and smaller government footprints among state economies.

Economic freedom is not the same as lesser governments. Indeed, in many cases, improved economic freedom requires more government. Economic liberty is rather “right government,” a government that, as Thomas Jefferson said in his first inaugural address, “will prevent (people) from harming one another, (but) leave them free to organize their own endeavors…” They are freer economically when Their governments prevent people from harming one another, whether through violence, theft, fraud, defamation, pollution, or any of the many other ways that the most powerful can exploit less. But societies are also freer economically when their governments leave people and companies alone to make decisions for themselves. Exploitation is as much anathema to economic freedom as the nanny state.

There is no perfect way to measure economic freedom, as is often the case, so economists must settle for reasonable measures. Fraser created a semi-objective measure of economic freedom. The “quasi” part comes from the fact that the Fraser researchers had to identify measures that were compatible with the idea of ‚Äč‚Äčeconomic freedom. The “objective” part is for government agencies to put the numbers in the metrics. In calculating the index of economic freedom for each state, Fraser combines state and local government spending, government transfers and subsidies, state pension payments, tax rates and brackets, minimum wage relative to median income, and government employment. Fraser simply averages the metrics together and puts the score on a scale from 0 (least free) to 10 (most free). Reasonable people could argue that some measures should be weighted more than others, but Fraser tries to keep researchers’ opinions out of the equation by taking simple averages.

As of 2020, the last year Fraser did the calculations, economic freedom among the 50 states ranged from 4.3 (New York) to 7.9 (Florida). In all, economic freedom among states has risen over decades from an average of 5.2 in 1981 to nearly 6.4 in 2020. This is a marked improvement. Even New York, the least free state in the union, raised its score from 2.7 in 1981.

Data source: Fraser Institute.

It is reasonable to assume that small states will be more economically free because small states do not require huge government spending on infrastructure and social welfare programs that come with large populations and more complex economies. However, degrees of economic freedom do not follow a pattern according to country size.

Two of the most economically free states, Florida and New Hampshire, are on opposite ends of the size spectrum. Florida is the third largest state by population and fourth by economy. New Hampshire is 42nd by population and 40th by economy. So too, two of the least free states, New York and Vermont, are of opposite sizes. New York is the fourth largest state by population and the third largest by economy. Vermont is the third smallest state by population and the second smallest by economy.

But laissez-faire follows a consistent pattern when it comes to social and economic outcomes. This pattern is evident when we divide the states for each year into two groups according to the average degree of economic freedom for that year. For each year from 1981 through 2020, let’s call the 25 states that scored above the average the “most free” states for that year, and the 25 states that scored below the average, the “least free.” Divided in this way, we can compare each year the economic metrics that matter most to people: unemployment, poverty, income, and income inequality.

From 1981 through 2020, a quarter of the 50 states (Florida, New Hampshire, South Dakota, Texas, Tennessee, Virginia, Georgia, North Carolina, Idaho, Indiana, Missouri, and Colorado) appear among the other 25 free states each year. During that same period, a quarter of the states (New York, California, Vermont, Oregon, Maine, West Virginia, Rhode Island, Alaska, Minnesota, Ohio, Michigan, and Washington) appeared among the 25 least free states each year. The remaining half of the states moved back and forth between the two groups, ranking between the freest states some years and the least free states others.

Data source: Fraser Institute.

Consider unemployment rates across the states. In 1981, for example, the average unemployment rate among the 25 states in the “less free” category was 7.8 percent. That same year, the average unemployment rate among the 25 states in the “freer” category was 6.7 percent. In 1982, the average unemployment rate for the least free states was 9.5% versus 8.8% for the most free states.

In each of the past four decades, the least free states in a given year had an average unemployment rate that exceeded that of the freer states in that same year. From 1981 through 2020, average unemployment was almost a full percentage point lower in the freer states. Over four decades, we’ve seen strong evidence that more economic freedom and lower unemployment rates go together.

Data sources: Fraser Institute, Bureau of Labor Statistics.

From 1981 through 2020, the average poverty rate across states was lower among the freer states 65 percent of the time. Median household income was higher among the freer states 60 percent of the time. And when we adjust household income for differences in cost of living across states (cross-state cost-of-living adjustments only go back to 2008), the freer states showed the highest average household purchasing power 85% of the time. Interestingly, income inequality (data for which also dates back to 2008) was lower for the freer states 60 percent of the time.

Data sources: Fraser Institute, US Census Bureau.
Data sources: Fraser Institute, US Census Bureau, Bureau of Economic Analysis.
Data sources: Fraser Institute, US Census Bureau.

While these findings may come as news to non-economists, they are not for economists who study economic freedom, because the same pattern repeats whether we are comparing states, cities, or countries. When comparing countries, the evidence becomes richer as more free countries show lower rates of child labor, more gender equality, and better environmental outcomes. This is not a “rich” country effect, because the same pattern emerges when comparing poorer and freer countries with poorer and less free countries.

Of course, the data only shows correlations, and correlation is not causation. But, the lack of correlation he absence of causation. Nowhere do we see a relationship between less economic freedom and better outcomes. That is, we have evidence that less economic freedom does not lead to better outcomes.

The sad irony is that when voters are faced with unemployment, poverty, and inequality, they often ask what government can do to mitigate these problems. But the data suggests that, as is so often the case, voters must be asking what government can stop doing, exacerbating these problems.

The last four decades of evidence support the claim Thomas Jefferson made 22 years ago: Societies do best when their governments prevent people from harming one another, but otherwise leave them alone.

Anthony Davies

Anthony Davies

Anthony Davis is the Milton Friedman Distinguished Fellow at the Foundation for Economic Education and Associate Professor of Economics at Duquesne University.

He is the author of Principles of Microeconomics (Cognella), Understanding Statistics (Cato Institute), and Cooperation and Coercion (ISI Books). He has written hundreds of opinion pieces for the Wall Street Journal, Los Angeles Times, USA Today, New York Post, Washington Post, New York Daily News, Newsday, US News, and the Houston Chronicle, among others.

He also co-hosts the weekly Words & Numbers podcast. Davies has served as Chief Financial Officer at Parabon Computation, and has founded several technology companies.

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