McClaughry: Economic freedom in North America

Editor’s note: This commentary is by John McClaughry, the vice president of the Ethan Allen Institute.

Since 2002 the Fraser Institute of British Columbia has published nine editions of its report on The Economic Freedom of North America. This now-widely known report assesses a composite variable called “economic freedom” in each of the 50 U.S. states and 10 Canadian provinces. The data used to compile the index for states and provinces covers three main areas: the size of government and its spending in relation to the Gross Domestic Product (value of goods and services); tax rates and revenues; and labor market freedom. The index also includes three additional factors – the same for all states within each country: legal system and property rights, sound money, and freedom to trade internationally.

Using the world-adjusted subnational government index for overall economic freedom, Vermont falls into 55th place among the 60 states and provinces. It is followed by New York and three Canadian provinces. The “economic freedom winners” are Alberta and Saskatchewan, followed by Delaware, Texas and Nevada.

Big government advocates will challenge the report’s methodology and findings. They tend to regard “economic freedom” not so much as the source of a society’s wealth, but as an annoying nuisance requiring constant reduction in scope.

 

What keeps Vermont from sinking all the way to the bottom is its relatively high scores for a free credit market (competitive banking sector) and, perhaps surprisingly to some, its relatively low sales tax revenues (since 2003 a 6 percent rate, with exemptions for food and most clothing.)

At the subnational level – where differences in national policies are not taken into account – Vermont ranks 53rd. New Hampshire, where many Vermonters shop without paying a sales tax, ranked 11th in this index. Beneath Vermont came New York and five provinces.

At the very bottom came Quebec, the province with the most aggressive and inclusive single payer health care system. This certainly makes one wonder about Gov. Shumlin’s frequent assurances that installing single payer health care here will produce an economic boom.

Big government advocates will challenge the report’s methodology and findings. They tend to regard “economic freedom” not so much as the source of a society’s wealth, but as an annoying nuisance requiring constant reduction in scope. The report also omits non-economic features of a society, such as quality of life, clean environment, public safety, community values, and the like. Add these into the rankings, they say, and Vermont will shoot up, which is probably true.

They will also excitedly point out that the American coauthor, Dr. Dean Stansel, is a free market economist, and the report was supported by the libertarian Charles Koch Foundation and the Searle Freedom Trust. That might account for the criteria used, but the actual data comes from public sources.

The summary observations of the report are worth reading in full, especially for policy makers and citizens in 55th ranking Vermont:

“The results of the experiments of the twentieth 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.”

“Restrictions on freedom prevent people from making mutually beneficial transactions. Such free transactions are replaced by government action. This is marked by coercion in collecting taxes and lack of choice in accepting services: instead of gains for both parties arising from each transaction, citizens must pay whatever bill is demanded in taxes and accept whatever service is offered in return.”

“In some ways it is surprising the debate still rages, because the evidence and theory favoring economic freedom match intuition: it makes sense that the drive and ingenuity of individuals will produce better outcomes through the mechanism of mutually beneficial exchange than the designs of a small coterie of government planners, who can hardly have knowledge of everyone’s values and who, being human, are likely to consider first their own well-being and that of the constituencies they must please when making decisions for all of us.”

Let us hope that over the next few years Vermont policy makers and citizens will come to appreciate that economic freedom leads to prosperity, which is something very much worth having.

Comments

  1. Howard Ires :

    Economic Freedom? Do you mean the freedom you get with a job that pays a living wage? Or the freedom to pay a worker a substandard wage forcing them to collect welfare to feed their family? Please clarify.

  2. Doug Reaves :

    The Fraser Institute is a “think-tank” whose underpinnings reside in Milton Friedman’s economic ideas. If one thinks, as I do, that Friedman’s ideas have led us to the state of economic inequality that confronts us today, then being 55th out of 60 on this list is not a bad thing at all.

    • John Fairbanks :

      And Friedman’s own star, shall we say, has fallen a long way.

  3. Lee Russ :

    As usual, Mr. McLaughry relies on a single report, from a zealous “free market” institute. As usual, Mr. McLaughry doe not provide any link to the report on which he relies; you hear only the parts he wants you to hear, described the way he wants you to hear it described.
    This is the link to the 2013 version of the Fraser Institute report: http://www.fraserinstitute.org/uploadedFiles/fraser-ca/Content/research-news/research/publications/economic-freedom-of-north-america-2013.pdf
    It’s a lot to wade through, and not really worth the effort. Once you look at what the authors consider “freedom” you know how the report is going to come out. A few examples of what makes you free, according to the Fraser Institute: a low ratio of Social Security payments to GDP; low rates of unionization; low or no minimum wage law; low top marginal tax rate; low regulation of credit markets.
    None of that is surprising—that’s what the Fraser Institute (not to mention the Ethan Allen Institute) is. As the Vancouver Observer wrote last year: “As the Conservative assault continues against Canadian environmental charities, The Vancouver Observer has learned that since 2007, foreign oil billionaires the Koch brothers have donated over half a million dollars to the “charitable” right-wing Fraser Institute.”
    http://www.vancouverobserver.com/politics/2012/04/25/%E2%80%9Ccharitable%E2%80%9D-fraser-institute-accepted-500k-foreign-funding-oil-billionaires

    • Thanks Lee…we shouldn’t be surprised about the connection of the Fraser Institute and the Kochs…Maybe John McClaughry and his minions, Roper and Wilton at Ethan Allen are looking for some Koch brothers’ funding too.

      • Lee Russ :

        I’m hopeful that more and more people are catching on to what “economic freedom” means in the real world. It’s a nice-sounding phrase, which appears to mean simply that “the government does nothing.”

        That means, for example, that in a factory employing 100 workers, the owners, managers, and workers are all “free of government.” For the workers, this may mean that they are “free” to work for 50 cents an hour, 16 hours a day, in unsafe conditions; “free” of any government help in surviving under those conditions, and “free” to live in polluted slums. For the owners, this may mean they are free to impose those conditions on the worker, to pollute the environment around the factory, to pay no taxes, and to live in gated, guarded communities.

        As others commenting on this op-ed piece have noted, “freedom,” when it means nothing more than freedom from government, turns out not to be such a hot idea when you are totally powerless. It’s also not such a hot idea when that “freedom” is not balanced with any “responsibility” on the part of the powerful.

        • walter carpenter :

          “Free to work for 50 cents an hour 16 hours a day…”

          Great point, Lee. The early history of capitalism, when it was completely “free of government regulation,” provides great examples of this at work — long hours, little pay, workers living in slums. It was so bad that charities or the workhouse had to provide where the pay was too scant for life, something the industrialists knew well.

    • As Lee appropriately points out, the measures the study tracks are often selective and easily identified as politically tinged (Koch, et al.).

      Yet when studies such as this provide the opportunity, we should not miss the broader point; businesses in Vermont work under one of the nation’s (indeed, North America’s) most burdensome regulatory environments.

      More productively, we should be highlighting the related, and undeniable, side effects:

      - as businesses scale from being VT based to being US & globally focused, the well-established pattern is that they move out of state, or re-allocate their resources to non-Vermont locations to such an extent that they effectively achieve relief from the state’s burdens (IDX, MyWebGrocer, Dealer.com, etc., etc.)

      - this puts us in a poor position as we look to attract companies to our area and garner opportunities for economic development. Too often we are simply not in the imaginable consideration set of places to move a business. This is especially true if we take away federally deployed incentives such as EB-1 visas-for-investment plays or Leahy-influenced federal contracts.

      - in turn, Vermont’s children are denied economic opportunities and exposure to the greater world that these firms provide.

      That’s a shame, because we provide our youth with great educations which they go on to deploy elsewhere: where economic activity flourishes in less regulated climes. The more highly educated they are, the more likely they are to move out of state. I believe the data is pretty clear on this, and it’s not encouraging.

      If we breezily dismiss data points such as these as being politically motivated, ‘feudal’ or Cro-Magnon, we’ve missed a teachable moment. That’s unfortunate, as in so doing we reject the opportunity for debate, which is the needed precursor to modifying our regulatory environment in ways that make our state more attractive to economic development, which is greatly needed.

      The objective should not be to gripe. The objective should be to recognize that companies, in an ever more globalized world, have a competitive context for choice. We should be collectively rolling up our sleeves to identify a positioning that the state can embrace and promote that harnesses many of Vermont’s positive equities; a clean environment, firm commitment to education and immense (and greatly sublimated) technological know-how (to name a few).

      That vision does not currently exist, and we’re the poorer for it.

  4. Tony Redington :

    Right, Quebec takes the bottom of the barrel for “economic freedom.” Compared to Vermont, Quebec’s workers face the problem of lower apartment rents in Montreal (for example), none of the personal responsibility virtues Vermonters gain from co-pays and deductibles for health insurance (don’t those confusing medical bills really make our day here!), suffer the indignities of Province “handouts” of free drug coverage, the tyranny families with young children face with state regulated $8-a-day daycare (no “economic freedom” for the daycare centers!), and oh those six months work leaves for each new baby (with $200 weekly leave pay for a half year–oh, for the other spouse too!) which all means Quebec workers lose the sense of how important it is to support our bosses need for unbroken worker attendance, and finally, how unfair that that Quebec does not burden the younger generation with high tuition and fees with young Vermont college graduates so thankful for learning important financial realities immediately after graduation facing ten of thousands of student loans.
    It is quire amazing we do not have Quebecquers coming across the border so they and their children can access the “economic freedom” ratings of Vermont! As a Vermont parent, I am so proud my children (two in Vermont) never will ever be exposed to the indecencies faced by our neighbors to the north. “Viva Vermont Libre” as Charles de Gaulle would have said.

    • Paul Lorenzini :

      Ever heard of soft tyranny?

      • Lee Russ :

        What’s your point, exactly?

  5. Tom Haviland :

    I could feed a herd of cows all winter on the straw in this piece.

  6. walter carpenter :

    “I could feed a herd of cows all winter on the straw in this piece.”

    Lol Tom:)

  7. Jacob Miller :

    How thoughtful of Mr. McClaughry to channel his inner Ebenezer Scrooge just in time for Christmas.

  8. “Economic Freedom”, as the term is used by the right is just another way of saying “neo-feudalism”

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