The Fraser Institute this week released the 2015 edition of the Economic Freedom of North America, and Alabama’s economic freedom score remained unchanged. Like the proverbial partially filled glass of water, this could be viewed positively (at least we haven’t lost ground) or negatively.
Economic freedom ratings try to measure how closely we approach a pure market economy, where people are free to order their economic lives as they wish. A market economy allows people to use their talents and knowledge to improve their lives, which generates prosperity. Two decades of research demonstrates that economically freer nations have higher levels of income, faster economic growth, lower unemployment, better environmental quality, and longer life expectancy. The differences in freedom due to state policies across the U.S. affect income growth, entrepreneurship, and business starts.
The Fraser Institute scores range from 0 to 10 (most freedom), and the new scores are based on data from 2013. The freest state, New Hampshire, has a score of 8.2, while New York is last at 5.6. Alabama’s score remains at 6.9, the national average, and we rank 23rd, right in the middle of the pack. Over the past 15 years, Alabama’s score has closely tracked the national average.
Our state’s score might surprise people who think that Alabama is a bastion of small government conservatism. A closer look indicates why this view is incorrect and where we might increase economic freedom. The rankings are based on three components: state and local government spending, taxes and tax rates, and regulation. Alabama’s spending score is average, while above and below average scores on taxes and regulation offset each other.
The spending and taxes scores confirm what I call the “Spend but Don’t Tax” approach to state government. Alabama gets enough money from Washington to fund an average level of spending despite our low taxes. While this seems like a good deal, politicians seeking to take credit for government programs are unlikely to aggressively reduce the scope of government.
Alabama’s scores on the components of taxes reflect our state finances. We have the highest economic freedom score for property taxes, due to the nation’s lowest state and local property tax burden. Our heavy reliance on sales taxes results in a below average score here, while we score above average on income taxes. Many policy experts, though, consider any state income tax to be a major impediment for economic growth.
Regulation offers the most promising path to increased economic freedom. The minimum wage component of regulation, however, illustrates the complicated interplay between Federal policies and state economies. Even though Alabama does not have a state minimum wage, the Federal minimum of $7.25 an hour has a relatively large impact on our labor force because incomes here are below the national average. But the component which drags on our regulation score the most is government employment; Alabama has one of the nation’s largest state and local government workforces.
New York and California have the least economic freedom. And yet New York City, Los Angeles, and the Bay Area are all home to industries that contribute mightily to our national prosperity and offer an excellent quality of life (if you like life in the big city). This may suggest to some readers that economists like me overrate the importance of economic freedom.
The Fraser Institute scores measure freedom today. Industries like banking and finance, fashion, motion pictures, and computers developed decades ago, and reflect past economic freedom. Furthermore, economic freedom is just one of many things people value; restaurants, theater and the arts, and weather matter in addition to the ease of starting a new business. I suspect that politicians in New York and California have for years exploited these cities’ economic vibrancy and quality of life to hike taxes.
We cannot recreate Manhattan or Silicon Valley in Alabama, but state politicians can increase economic freedom. Freedom will then produce new businesses, opportunities, and wealth. In time this will attract new people and improve the quality of life.
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.