An index of economic freedom in North America ranks Maine in the bottom 10 of states and provinces that offer growth and prosperity to their residents.
As expected, New Hampshire was ranked as one of the states that offer the highest level of economic freedom at the all-government level, which measures restrictions on freedom imposed by all levels of local, state and federal government.
Massachusetts, Connecticut and New York also offer more economic freedom than Maine at the all-government level, which is not surprising.
But even Quebec and Rhode Island beat out Maine at the all-government level as places that provide their residents with more economic freedom. Maine was eighth from the bottom, but at least it did better than Vermont, Mississippi, Nova Scotia and last-place Prince Edward Island.
At the subnational level, which measures restrictions imposed by state and local governments, Maine fared slightly better, coming in at 13th from the bottom. In that index, Maine edged ahead of Rhode Island, Vermont, New York, New Brunswick and Quebec, which came in dead last.
The average per-capita GDP for the 10 worst states for economic freedom in 2010 was $38,017, compared to an average of $48,319 for the other 40 states.
The rankings are listed in the eighth edition of the annual report, “Economic Freedom of North America 2012,” which confirms the findings published in the previous seven editions: economic freedom is a powerful driver of growth and prosperity.
Published by The Fraser Institute in Canada, the report examines key indicators of economic freedom in the Canadian provinces and U.S. states based on size of government, taxation, rule of law and property rights, as well as regulation using data from 2010 (most recent year available). Economic freedom represents the ability of individuals and families to make their own economic decisions, free from government interference.
The study measures economic freedom at two levels: the subnational and the all-government (comprising federal, state/provincial and municipal/local). This year’s report includes a “world-adjusted” index for Canada and the Unites States at the all-government level using data from the report, which ranked Canada fifth out of 144 nations and territories—well ahead of the United States at 16th place.
“The link between economic freedom and prosperity is clear: states and provinces that support low taxation, limited government and flexible labor markets benefit from greater economic growth,” said Fred McMahon, Dr. Michael A. Walker, Research Chair in Economic Freedom at Fraser Institute and co-author of the report. “In contrast, provinces with reduced levels of economic freedom see lower living standards for families and fewer economic opportunities.”
Basically, those provinces and states in North America that have low levels of economic freedom continue to leave their citizens poorer than they need or should be.
“Economic Freedom of North America 2012” rates economic freedom on a 10-point scale at two levels, the subnational and the all-government. The report employs 10 components for the United States and Canada in three areas: 1. Size of Government; 2. Takings and Discriminatory Taxation; and 3. Labor Market Freedom.
Not only is economic freedom important for the level of prosperity; growth in economic freedom spurs economic growth. As expected, the impact of economic freedom at the all-government level is typically greater than the impact at the subnational level, since the first index captures a broader range of limitations on economic freedom than the second.
Results for the United States
The 10 states at the bottom of the all-government index were West Virginia, New Mexico, Mississippi, Vermont, Montana, Hawaii, Maine, Kentucky, Arkansas and Alabama. Their average per-capita GDP in 2010 was $38,017, compared to an average of $48,319 for the other 40 states.
The top 10 states were Delaware, Texas, Nevada, Wyoming, Colorado, South Dakota, Georgia, Nebraska, Illinois and North Carolina. Their average per-capita GDP in 2010 was $51,737, compared to $44,889 for the lowest 40 states.
Economic Freedom and Prosperity
Fraser Institute’s econometric testing shows that a one-point improvement in economic freedom at the all-government level increases per-capita GDP by $13,276 for U.S. states and by $7,584 for Canadian provinces. (All amounts are listed in U.S. dollars.)
At the subnational level, a one-point improvement in economic freedom increases per-capita GDP by $7,641 for U.S. states and by $7,679 for Canadian provinces.
A 1.00% increase in the growth rate of economic freedom at the all-government level (e.g., from 4.00% per year to 4.04% per year) will induce an increase of 0.97% in the growth rate of per-capita GDP for U.S. states and an increase of 0.65% in the growth rate of per-capita GDP for Canadian provinces.
A 1.00% increase in the growth rate of economic freedom at the subnational level will induce an increase of 0.74% in the growth rate of per-capita GDP for U.S. states and 0.64% increase in the growth rate for Canadian provinces.
Comparing the All-Government Level and the Subnational Level
Subnational responsibilities in Canada and the United States differ. Thus, government spending and taxation patterns cannot be directly compared. Instead, Fraser uses an “adjustment factor.” The Canadian provinces do much better in the all-government world-adjusted index since the data that are most favorable to Canada are found at the national level.
The gap which has grown between Canada and the United States in these areas much favors Canada and thus the scores of the provinces significantly increase when these data are included—something that would not have occurred in earlier years when the scores in these areas were closer.
Canadian provinces now hold a slight lead over U.S. states in average economic freedom, with the provincial average at 6.8 compared to 6.7 for U.S. states.
Thus in the world-adjusted index two of the top three jurisdictions are Canadian, with Alberta in first place and Saskatchewan in third. Delaware in second spot is the highest ranked U.S. state. In fact, four of the top 10 jurisdictions are Canadian, with Newfoundland and Labrador in 9th and British Columbia in 10th.
Nonetheless, a Canadian jurisdiction, Prince Edward Island, still lands in last spot, with New Mexico coming in at 59th and West Virginia at 58th. Interestingly, this means that Canadian provinces hold both the top and bottom spots on the adjusted index.
The results of the experiments of the 20th century should now be clear: free economies produce the greatest prosperity in human history for their citizens. Even poverty in these economically free nations would have been considered luxury in unfree economies.
This lesson was reinforced by the collapse of centrally planned states and, following this, the consistent refusal of their citizens to return to central planning, regardless of the hardships on the road to freedom. Among developing nations, those that adopted the centrally planned model have only produced lives of misery for their citizens. Those that adopted the economics of competitive markets have begun to share with their citizens the prosperity of advanced market economies.
Founded in 1974, The Fraser Institute is an independent Canadian research and educational organization with locations throughout North America and international partners in over 85 countries. To protect its independence, The Fraser Institute does not accept grants from government or contracts for research.