Study finds correlation between economic freedom and prosperity

  • A recent report from the Reason Foundation ranked the largest 52 metro regions in the U.S. by economic freedom.
  • It found a strong correlation between economic freedom and per capita personal income.
  • Three factors that could help increase economic freedom include slowing spending growth, reducing income taxes, and reducing labor market interventions.

Economic freedom tends to lead to greater prosperity.

That, at least, was the conclusion of a report earlier this year from the Reason Foundation evaluating the economic freedom index of the 52 largest metropolitan regions in the United States.

The economic freedom index was created by Nobel Laureate economists Milton Friedman, Gary Becker, and Douglas North, along with a number of other economists and public policy experts, in order to quantify how free the economies of individual nations were. This eventually lead to the first Economic Freedom of the World report and later an annual state-level version: Economic Freedom of North America.

Unlike rankings by country and state, this report drills down to the metropolitan level. It found that MSAs with the highest levels of economic freedom tend to have higher rates of population growth, as well as higher per capita income. The most-free quartile of MSAs for example, had a per capita personal income level 5.7 percent higher than the MSA average, while the per capita income of the least-free quartile was 4.86 percent below average.

This trend held true over time, as employment in the most-free quartile grew by 7.76 percent from 2012 to 2016 compared to just 5.44 percent in the least-free quartile, Dean Stasel, the report’s author, told Grassroots Pulse in an email.

“Living in one of the least-free areas amounts to taking an 11 percent pay cut compared to living in one of the most-free areas,” Stasel said, adding that the slower population and job growth in these least-free regions also creates a more stagnant economy with fewer economic opportunities for Americans across the board.

More freedom also made these regions more popular places to live, as the most-free quartile saw a population growth of 4.83 percent from 2012 to 2016 while the least-free grew by only 1.22 percent.

These metrics are just the beginning of the benefits of economic freedom, according to the report. It cited a growing body of research at both the state and local level finding that economic freedom is also correlated with entrepreneurial activity, better local government credit ratings, and greater female labor market participation.

For state and local policy makers interested in increasing their region’s economic vitality, Stasel said the report’s findings suggest three key ingredients for a healthy local economy:

  1. Maintaining fiscal discipline by slowing spending growth
  2. Reducing or eliminating income taxes
  3. Reducing labor market interventions such as minimum wages

MSAs with the highest economic freedom index include Houston-The Woodlands-Sugar Land, TX; Jacksonville, FL; and Tampa-St. Petersburg-Clearwater, FL. At the bottom of the list are Buffalo-Cheektowaga-Niagara Falls, NY; Rochester, NY; and Riverside-San Bernardino-Ontario, CA.

Read the full report from the Reason Foundation here.

Image Credit: Photo by Vlad Busuioc on Unsplash

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