The steadfast strangling of U.S. economic freedom – and its citizens’ wealth

TheGlobeandMail.com – Report on Business – Government intervention
September 8, 2010.   Neil Reynolds, Ottawa

Get a copy of the Fraser Institute’s newly released Economic Freedom of North America 2010 (at fraserinstitute.org) and check out Canada’s rankings. The conservative think tank’s measure of excessive government is an illuminating document. On a scale of one to 10, with 10 the highest, the Vancouver-based institute calculates economic freedom scores for the 10 Canadian provinces and the 50 American states. It grades Alberta (7.7) as one of the Top 3 “freest economies” on the continent – along with Delaware (8.3) and Texas (7.8). It positions the other nine provinces among the least-free economies, though marginally competitive with the least-free American states: Montana (49th place), Maine (51), Mississippi (54) and West Virginia (55).

People who prefer least-free economies for ideological reasons, and they are always numerous, can turn these rankings upside down and, making 1.0 the highest score, assert the continental economic superiority of Prince Edward Island (4.0), the least-free of the 60 jurisdictions in the competition; and Quebec (4.4), the 59th least-free. From this topsy-turvy perspective, other Canadian contenders for least-free leadership of North America are: Nova Scotia (4.5, in 58th place); Manitoba (4.9, in 57th place); New Brunswick (5.0 in 56th place, just below West Virginia); Saskatchewan (5.6, in 53rd place); Ontario (5.7, in 51st place); British Columbia (5.8, in 50th place); and Newfoundland (6.0, in 47th place).

The Fraser Institute thinks that economic freedom is a good thing and that more of it is better than less. (The freest economies, it says, “operate with minimal government interference” and rely for economic decisions on “personal choice and markets.”) The institute analyzes the statistical relationships between economic freedom and economic growth and weighs the relative importance of the different characteristics of economic freedom – the size of government, for example, or the reliance on discriminatory taxation or the survival of labour market freedoms.

On a scale of one to 10, it’s obvious that Alberta’s 7.7 is a long way from PEI’s 4.0. How, though, to explain the difference, or to quantify it? Oil helps make Alberta rich but it is not an absence of oil that makes PEI restrict economic freedom. Essentially, PEI chooses to be less free, and less rich. “Economic freedom is a powerful driver of economic growth and prosperity,” the institute says. States and provinces “that have low levels of economic freedom continue to leave their citizens poorer than they need or should be.”How much poorer? The institute’s ratings scale operates a bit like a Richter scale – a fractional increase results in progressively greater impacts. A one-percentage-point increase in an economic freedom score, the institute says, produces a dramatic increase in per capita wealth.

Take a jurisdiction (such as PEI) with an economic freedom score of 4.0. Assume that this jurisdiction increased its score by a mere 1 per cent – to 4.04. This apparently marginal increase, the institute says, yields an increase of 1.2 per cent in per capita gross domestic product ($5,335 U.S.) in an American state – or an increase of 0.60 per cent in per capita GDP ($4,150 Canadian) for a Canadian province.

Economic freedom has a more powerful impact in the United States than in Canada because Canada’s “fiscal federalism” transfers so much wealth from richer provinces to poorer provinces, the institute says, that transfer payments move money from relatively free jurisdictions to relatively unfree jurisdictions – increasing the money directly handled by politicians and muting the impact of economic freedom.

Among the 50 states, Virginia and West Virginia produce a remarkable contrast. Originally a single state, West Virginia seceded from the Confederacy during the Civil War. Virginia’s economic freedom score is 7.1, making it the 14th-freest state in the country; West Virginia’s score is 5.5, making it the least free. All the normal economic indicators confirm the separation: Virginia’s average per capita GDP, 1986-2007, was $33,165 (U.S.); West Virginia’s, $21,701. The percentage of Virginians who lived below the poverty line was 9.9; the percentage of West Virginians, 16.9. The unemployment rate in Virginia was 4.08; in West Virginia, 7.68. The number of patents filed annually in Virginia was 135 per capita; in West Virginia, 75. And so on.

The American scores, however, are now destined to fall. The U.S. federal government has enormously increased direct spending, transfer payments and subsidies. Taken together, these extraordinary costs will require higher taxes.

In its rush to “do something,” the Fraser report says, the U.S. made a weak economy worse. Based on the coming erosion of economic freedom, the report calculates the cost to the United States: a permanent decline in real GDP of $4,000 per person, per year. The report calls this a conservative estimate. It says it will be “far higher” than anyone now expects.

It is probably inevitable that Canadians will pay a part of this price.

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