The greater the economic freedom, the wealthier and happier the people.
From minimum-wage laws to higher progressive taxation to greater unionization to larger welfare programs to more regulation, left liberals demand a stronger and more economically active central government. Advocates of laissez-faire, on the other hand, favor smaller government, less regulation, lower taxes, and greater individual opportunity and property rights.
But which economic policy approach actually yields the best results?
We’ve already clearly demonstrated — via international and US state migration rates — that people the world over are naturally drawn toward greater economic freedom. Across countries, and even across states, millions of people every year migrate away from greater taxation and more regulation and toward lower taxation and less regulation. But are they better off?
Let’s take a look at the fifty US states, ranked by their level of economic freedom. The most highly-ranked states have lower tax burdens, deference to property rights, less government spending, and labor market freedom:
Taking into account cost-of-living differences, the top ten most economically free states have an average $52,334 median household income, which is considerably higher than the $43,090 median income for the ten least free. That’s a 21 percent raise for workers by switching state government policies to a smaller government approach. How much more could it be increased if the same were done at the national level?
The observed results are not a question of race or country of origin: African-Americans, Hispanics, Asians, and immigrants also earn substantially more in the more economically free states. While left liberals should be lauded for their apparent concern for the welfare of minorities, the truth is that their policies yield the worst results for them, a standard of living pay cut just for living in a more regulated and heavily taxed state.
One may think that this could be driven by urban vs. rural states more than policies, but the top ten free states are 71 percent urban vs. 72 percent for the bottom ten — a negligible difference. Moreover, the states in between the two are even more urban, at 75 percent, which effectively rules out correlation.
Another objection may be that “the rich” or “the 1 percent” are skewing the numbers — that income inequality is running rampant with less government to level the playing field, as many persistently believe. The exact opposite is the case.
Using median incomes as the measure (instead of average incomes) effectively eliminates the impact of the very wealthy on the numbers. And the “Poverty Measure” is lower in the most free states (13.3 percent) than in the least free (15.1 percent).
But the real measure of income inequality is the Gini index, and we can put aside for now the fact that median incomes are a far better measure of overall economic well-being than inequality of incomes (i.e., 100 people making $1 a day are perfectly equal but not better off than ninety-nine people making $2 a day and 1 making $5 a day, despite the latter’s higher inequality).
If we assume inequality to be an important economic measure instead of a normal byproduct of economic growth, the most free states do better, with a .446 Gini index vs. a higher and less equal .462 Gini for the least free states. Not only that, but the rate of growth of inequality over the past forty years is lower in the most free states compared to the least free: 22 percent vs. 30 percent. In other words, heavier government involvement has led to more income inequality and faster growth of such, while less government has created a more equal growth in incomes.
A final argument might be that while there may be greater income in more free-market states, the increased government regulation and intervention provides greater care and increases the population’s happiness and well-being. But the opposite is the case.
Gallup publishes an annual Well Being Index, which measures and ranks each state’s population across five core measures of well-being:
- Purpose (liking what you do each day and being motivated to achieve your goals)
- Social (having supportive relationships and love in your life)
- Financial (managing your economic life to reduce stress and increase security)
- Community (liking where you live, feeling safe, and having pride in your community)
- Physical (having good health and enough energy to get things done daily)
Averaging each state’s Wellness rank for the past seven years we find that states with greater economic freedom also bring greater happiness and well-being.
So what happens when you create a more laissez-faire and libertarian environment where people make more money, have less poverty, and find greater happiness in their lives? People want to move there. And indeed, looking at state-to-state migration of Americans between 2006 and 2010, we see a net migration flow of 704,000 from the twenty-five least economically free states to the twenty-five most economically free. That’s hundreds of thousands of Americans choosing to relocate away from more interventionist government to more free market oriented government.
Political Party Just One Factor
On that latter point, it’s important to distinguish small-government ideology from Republican party control in a state. While it’s true that there’s a strong correlation between Republicans and economic freedom — the ten most free states had a Partisan Voter Index (PVI) average of R+10.3 vs. D-6.1 for the ten least free — it’s not a perfect correlation either. Two of the top ten states (Virginia and New Hampshire), for instance, are swing states, and two of the bottom ten economically free states (West Virginia and Mississippi) are solidly Republican.
It’s also worth noting what economic freedom is not: it is not corporatism or crony capitalism, where the government bails out banks and subsidizes politically connected businesses, which both major political parties are heavily guilty of. Rather, it’s smaller, less intrusive government.
The reality on the ground is that states with more libertarian free market policies enjoy better results: greater median incomes, a more equitable distribution, less poverty, greater success for minorities and immigrants, and higher overall levels of happiness and well-being. In the political rhetoric landscape the battle of ideology is fierce and filled with demagoguery; in the real world the difference in results between competing economic policies are strikingly clear.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
Source: MISES INSTITUTE