Increasing economic freedom increases economic growth

American states that have lower taxes, smaller government and flexible labour markets tend to have comparatively more economic growth. An annual report from the National Center for Policy Analysis (NCPA) and Canada's Fraser Institute attempts to quantify each state's economic freedom, and then examine what this means for economic growth. This year's report points to good news for all but a few states, most notably New Mexico.

According to researchers, between 2001 and 2003:

All 50 states combined improved their economic freedom score by an average of 1.05 per cent, and had an average economic growth rate of 1.3 per cent.

The top ten states combined averaged about a 2 per cent improvement in economic freedom, and an average economic growth of 2.2 per cent; conversely, the bottom ten states combined averaged a one-quarter per cent decline in economic freedom and averaged growth of slightly less than 0.5 per cent.

While Delaware continues to be the most economically free state (4th straight year), Wyoming showed the most improvement in both economic freedom and economic growth, increasing their freedom score by 3.2 per cent resulting in a 5.8 per cent 3-year average growth rate.

While West Virginia continues to be the least economically free state, they have actually become freer, increasing their score by 1.07 per cent – the 28th best improvement.

Five states became less economically free – New Mexico (-2.56), Louisiana (-0.88), Oklahoma (-0.37), Michigan (-0.07), and Ohio (-0.06).

Six states experienced declines in average growth – Oregon (-1.26 per cent), Colorado (-0.53 per cent), Georgia (-0.5 per cent), Michigan (-0.31 per cent), Illinois (-0.14 per cent) and Connecticut (-0.08 per cent).

Measured in dollars, Wyoming's growth rate translates into a gain of $1,891 per capita, while Oregon's decline in growth translates into a loss of $853 per capita.

While economic freedom is not the sole determinant of a state's wealth, the correlation is strong, concluded the researchers.

Source: Economic Freedom of North America: 2006 Annual Report, National Center for Policy Analysis/Fraser Institute, September 26, 2006.

For text: http://www.ncpa.org/pub/special/pdf/EFNA2006.pdf

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

FMF Policy Bulletin/ 03 October 2006