Economic freedom is the freedom to buy and sell in markets and use our skills, talents, and property as we choose. Economic freedom enables autonomy, happiness, and prosperity. How do economists measure economic freedom and what do we know about freedom in Alabama?
Two measures exist, produced by Canada’s Fraser Institute and the Cato Institute. Fraser’s Economic Freedom of North America (EFNA) is authored by Dean Stansel, José Torra and Fred McMahon while Will Ruger and Jason Sorens author Cato’s Freedom in the 50 States.
Measuring economic freedom is crucially important for economics. Economists can theorize that free markets generate more prosperity, equality, or happiness than government control, but we need to measure how closely nations or states approach the laissez-faire ideal to confirm this. Research cannot rely on impressions of freedom. (Full disclosure: the Johnson Center is a member of the EFNA Network of centers and researchers who collaborate to continually improve this metric.)
The EFNA uses 10 measures within the areas of spending, taxes, and regulation and plugs into Fraser’s Economic Freedom of the World measure. The EFNA offers scores and rankings based on state-level policies and scores including state-level impacts of Federal policies. Freedom in the 50 States aggregates more than fifty policy measures into fiscal policy and regulatory components. Cato also measures personal freedom and overall freedom. I will only consider the economic portion here.
How does Alabama rate? New rankings for both indexes based on data through 2019 were released this fall. Alabama ranks 29th on the state EFNA score and 18th on Cato’s index. We also rank 18th on the EFNA measure when national policy is included.
Multiple measures allow us to see the sensitivity of scores to choices made in constructing an index. Cato and EFNA do differ. For example, Cato measures labor market freedom using Right-to-Work laws while EFNA does not. Still, both indexes identify the same most- and least-free states: Florida, New Hampshire and Tennessee are the top three (although in different orders) and California, Hawaii and New York are the bottom three.
The EFNA index is available from 1981 and Cato’s index from 2001. How is economic freedom trending in Alabama? Our high and low ranks were 7th in 2004 and 19th in 2018 with Cato and 13th in 1991 and 35th in 2018 with EFNA. While each measure shows a decline in freedom over the past 15 years, the EFNA shows two cycles with peaks in 1990 and 2005. Alabama has never been in the top or bottom five.
Formulas usefully combine numerical measures. We should also consider whether elements of freedom that elude measurement may cause formula output to diverge from reality. As the Bill of Rights demonstrates, constitutions better protect freedom than policies. Alabama has low taxes, and our state constitution limits income and property tax rates. These constitutional protections suggest that the indexes may underestimate Alabama’s freedom.
Economic freedom correlates strongly with prosperity. The freest nations, for example, are much, much more prosperous than the least free. Alabama is middling on economic freedom but a poor state: in 2020 Alabama ranked 47th in per capita personal income and 44th in median household income. By contrast, California and New York were 5th and 3rd in per capita income despite low economic freedom. What should we make of this?
Economic freedom is not the only factor affecting prosperity; others include climate, natural resources, and history. Climate and natural beauty have long attracted people to California. New York City became a hub for industries like finance and fashion decades ago. Once established in a city or state, industries tend to stay put.
Politicians know that people want to live in New York, San Francisco, and Los Angeles and make people bear high taxes and onerous regulations to do so. Yet this will not go on forever, as the recent exodus from these states demonstrates. Alabama has neither Wall Street nor Napa Valley to attract residents, so we should focus on increasing economic freedom.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University. The views and opinions expressed here are those of the author and do not necessarily reflect the policy or position of 1819 News. To comment, please send an email with your name and contact information to Commentary@1819News.com