Economic freedom in North America
Since 2002, the Fraser Institute of British Columbia has published nine editions of its report on The Economic Freedom of North America. This now widely-known report assesses a composite variable called “economic freedom” in each of the 50 U.S. states and 10 Canadian provinces.
The data used to compile the index for states and provinces covers three main areas: the size of government and its spending in relation to the gross domestic product (value of goods and services); tax rates and revenue; and labor market freedom. The index also includes three additional factors — the same for all states within each country: legal system and property rights, sound money and freedom to trade internationally.
Using the world-adjusted subnational government index for overall economic freedom, Vermont falls into 55th place among the 60 states and provinces. It is followed by New York and three Canadian provinces. The “economic freedom winners” are Alberta and Saskatchewan, followed by Delaware, Texas and Nevada.
What keeps Vermont from sinking all the way to the bottom is its relatively high scores for a free credit market (competitive banking sector) and, perhaps surprisingly to some, its relatively low sales tax revenue (since 2003, a 6 percent rate, with exemptions for food and most clothing).
At the subnational level — where differences in national policies are not taken into account — Vermont ranks 53rd. New Hampshire, where many Vermonters shop without paying a sales tax, ranked 11th in this index. Beneath Vermont came New York and five provinces.
At the very bottom came Quebec, the province with the most aggressive and inclusive single-payer health-care system. This certainly makes one wonder about Gov. Peter Shumlin’s frequent assurances that installing single-payer health care here will produce an economic boom.
Big government advocates will challenge the report’s methodology and findings. They tend to regard “economic freedom” not so much as the source of a society’s wealth, but as an annoying nuisance requiring constant reduction in scope. The report also omits noneconomic features of a society, such as quality of life, clean environment, public safety, community values and the like. Add these into the rankings, they say, and Vermont will shoot up, which is probably true.
They will also excitedly point out that the American coauthor, Dr. Dean Stansel, is a free market economist, and the report was supported by the libertarian Charles Koch Foundation and the Searle Freedom Trust. That might account for the criteria used, but the actual data come from public sources.
The summary observations of the report are worth reading in full, especially for policymakers and citizens in 55th ranking Vermont:
“The results of the experiments of the 20th century should now be clear: free economies produce the greatest prosperity in human history for their citizens. Even poverty in these economically free nations would have been considered luxury in unfree economies. This lesson was reinforced by the collapse of centrally planned states and, following this, the consistent refusal of their citizens to return to central planning, regardless of the hardships on the road to freedom.
“Among developing nations, those that adopted the centrally planned model have only produced lives of misery for their citizens. Those that adopted the economics of competitive markets have begun to share with their citizens the prosperity of advanced market economies.
“Restrictions on freedom prevent people from making mutually beneficial transactions. Such free transactions are replaced by government action. This is marked by coercion in collecting taxes and lack of choice in accepting services: Instead of gains for both parties arising from each transaction, citizens must pay whatever bill is demanded in taxes and accept whatever service is offered in return.
“In some ways, it is surprising the debate still rages, because the evidence and theory favoring economic freedom match intuition: It makes sense that the drive and ingenuity of individuals will produce better outcomes through the mechanism of mutually beneficial exchange than the designs of a small coterie of government planners, who can hardly have knowledge of everyone’s values and who, being human, are likely to consider first their own well-being and that of the constituencies they must please when making decisions for all of us.”
Let us hope that during the next few years Vermont policymakers and citizens will come to appreciate that economic freedom leads to prosperity, which is something very much worth having.
John McClaughry is vice president of the Ethan Allen Institute (www.ethanallen.org).