Economic Freedom at the Local Level

& Other Related Topics

Prof. Dean StanselFlorida Gulf Coast University

dstansel@fgcu.eduhttp://www.deanstansel.com

•Economic Freedom Project–http://www.economicfreedom.org/–https://www.facebook.com/economicfreedom

•Fraser Institute–http://www.fraserinstitute.org/–http://www.freetheworld.com/

•Economic Freedom of the World•Economic Freedom of North America•Human Freedom Index of the World

Human Freedom Index of the World

• incorporates both economic and personal freedom

• US ranks 7th -- 6th for economic and 21st for personal

• Data is from 2008, so does not reflect policies of the current administration

• The top six were New Zealand, the Netherlands, Hong Kong, Australia, Canada, and Ireland.

Human Freedom Index of the World

• We actually scored higher numerically on personal freedom than economic freedom (8.7 on 0-10 scale, vs. 7.93 for EF)–there were a bunch of countries above us with relatively high personal freedom and not so high economic freedom (e.g., Uruguay, 2nd in PF, 72nd in EF; Portugal, 10th and 48th, ...).

Source: Towards a Worldwide Index of Human Freedom, Fraser Institute & Liberales Institute, 2013 (at www.freetheworld.com)

See also: http://www.cato.org/blog/creating-human-freedom-index

•Economic freedom varies across nations.

–The U.S. is more free than Mexico, but less free than Canada.–Economic Freedom of the World

•Economic freedom varies across states within nations

–Indiana is more free than Kentucky but less free than Tennessee.–Economic Freedom of North America–Freedom in the 50 States

•Economic freedom also varies within states.

–Lexington is more free than Owensboro, but less free than Louisville.–All three of those are less free than Bloomington, Indianapolis, and every other metro area in Indiana.

•This paper provides the first attempt to address that variation by measuring economic freedom at the local level.

Economic Freedom & Prosperity

• Large volume of econometric literature examines the relationship between

economic freedom and prosperity (among many

other things).

• Almost all of it uses national or state data.

Three Problems with National and State Studies

1.Large differences in culture and institutions (esp. across

nations)

2.Relatively arbitrary boundaries

3.Relatively small number of observations (nations or

states)

Three Advantages of Local Studies

1.Much smaller differences in culture and institutions

2.Metro area boundaries represent the local labor

market

3.Many more observations (nearly 400 metro areas)

An Economic FreedomIndex of U.S. Metropolitan Areas

Dean StanselFlorida Gulf Coast University

dstansel@fgcu.edu

Journal of Regional Analysis and Policy, 43, 1 (2013): 3-20.

http://www.jrap-journal.org/ or http://t.co/xfKmP2VHjO

Economic Freedom ofNorth America

Metro Area EconomicFreedom Index

Area 1: Size of Government Area 1: Size of Government1A: General Consumption Expenditures by

Government as a Percentage of GDP1A: General Consumption Expenditures by

Government as a Percentage of Personal Income, 2002Total Expenditures MINUS: Total Expenditures MINUS:

Transfers to Persons Total Assistance and SubsidiesTransfers to Businesses Total Intergovernmental Expenditure to State Government

Transfers to Other Governments Total Intergovernmental Expenditure to Federal GovernmentInterest on Public Debt Total Interest on Debt

1B: Transfers and Subsidies as aPercentage of GDP

1B: Transfers and Subsidies as aPercentage of Personal Income, 2002

Includes transfers to persons and businesses such as : Total Assistance and SubsidiesWelfare Payments

GrantsAgricultural AssistanceFood-stamp Payments

Housing Assistance

1C: Social Security Payments as aPercentage of GDP

1C: Social Security Payments as aPercentage of Personal Income, 2002

Includes payments by: The sum of:Employment Insurance Total Expenditures on Employee RetirementWorkers Compensation Total Expenditures on Unemployment Compensationvarious pension plans

Economic Freedom ofNorth America

Metro Area EconomicFreedom Index

Area 2: Takings and Discriminatory Taxation Area 2: Takings and Discriminatory Taxation2A: Total Tax Revenue as a

Percentage of GDP2A: Total Tax Revenue as a

Percentage of Personal Income, 2002Total Tax Revenue Total Tax Revenue

2B: Top Marginal Income Tax Rate and theIncome Threshold at Which It Applies

2B: Total Income Tax Revenue as aPercentage of Personal Income, 2002

Total Income Tax Revenue

2C: Indirect Tax Revenue as aPercentage of GDP

2C: Indirect Tax Revenue as aPercentage of Personal Income, 2002

Includes: Property Taxes Total Tax Revenue MINUSContributions to social security insurance Total Income Tax Revenue

(i.e., employment insurance, Workers Total Sales Tax RevenueCompensation, and various pension plans)

other various taxesDoes NOT include: Income Tax Revenue

Sales Tax RevenueNatural Resource Royalties

2D: Sales Taxes Collected as aPercentage of GDP

2D: Sales Taxes Collected as aPercentage of Personal Income, 2002

Total Sales Tax Revenue Total Sales Tax Revenue

Area 3: Labor Market Freedom Area 3: Labor Market Freedom3A: Minimum Wage Annual Income as a

Percentage of Per Capita GDP3A: Minimum Wage Annual Income as a

Percentage of Per Capita Personal Income , 2002

3B: Government Employment as a Percentage of Total State/Provincial Employment

3B: State and Local Government Employment as aPercentage of Total Employment, 2002

3C: Union Density 3C: State Union Density, 2002

Fiscal Data

1. From Census of Governments, done every 5 years (ending in 2 & 7).

2. Local data is for ALL local governments within each county.

3. State averages added to local data to facilitate comparisons across metros in different states.a. Local spending ranges from about

20% of state & local spending (HI) to 70% (NV).

b. State of largest central city used if >1.

Labor Market Freedom Data

1. In 2002, 11 states had their own minimum wage higher than the federal level of $5.15 (28 in 2007).

2. Only one city also did so (Washington, DC). (By 2007, San Francisco, Albuquerque, and Santa Fe did too.)

3. Variation here is mostly across states, not metros.

Labor Market Freedom Data-2

3. Union density data from Hirsch and McPherson (Union Stats website)

4. Used state union density b/c:• Missing data for 143 of 384 metros.• They state: “Note: Sample size (Obs)

for many cells are small and should be used with care.”

• Two examples:• Athens, GA, 0% union density in 2005, 11% in

2007• McAllen, TX, 0.5% in 2005 and 12.3% in 2007

Calculations

• Each area equally weighted• Each variable equally

weighted within each area• Each variable given value

b/w 0 and 10• score = ((Max-Obs)/(Max-

Min))*10

Video Break•Occupational Licensing

–Restricts freedom

–Reduces mobility of workers

–Institute for Justice reporthttps://www.ij.org/freedomflix?video=68

http://www.reason.tv/video/show/throw-pillow-fight

Regulation

•Capture Theory

•Bootleggers and Baptists

AreaOverall

EFI Rank

Areas1 & 2

ONLY Rank

Area 1: Size of

Govern-ment Rank

Area 2: Takings and

Discrim-inatory

Taxation Rank

Area 3: Labor

Market Freedom Rank

Naples-Marco Island, FL MSA 8.52 1 8.21 14 9.48 1 6.94 47 9.13 1

Fort Walton Beach-Crestview-Destin, FL MSA 8.39 2 8.43 3 9.25 10 7.60 8 8.32 14

Manchester-Nashua, NH MSA 8.37 3 8.56 1 9.40 3 7.73 7 7.98 27

West Palm Beach-Boca Raton-Boynton Beach, FL MD 8.34 4 8.00 24 9.29 8 6.70 86 9.04 2

Bradenton-Sarasota-Venice, FL MSA 8.33 5 8.22 12 9.16 14 7.27 27 8.56 10

Sebastian-Vero Beach, FL MSA 8.33 6 8.14 17 9.40 4 6.88 53 8.71 4

Rockingham County-Strafford County, NH MD 8.23 7 8.46 2 9.48 2 7.45 18 7.77 45

Palm Bay-Melbourne-Titusville, FL MSA 8.17 8 8.34 5 9.22 11 7.46 14 7.83 36

Sioux Falls, SD MSA 8.11 9 7.85 38 8.82 37 6.89 52 8.63 8

Tampa-St. Petersburg-Clearwater, FL MSA 8.07 10 7.97 26 9.02 23 6.92 50 8.25 17

Charlottesville, VA MSA 8.06 11 8.01 23 9.26 9 6.75 78 8.15 19

Jacksonville, FL MSA 8.05 12 7.82 40 8.59 66 7.06 39 8.52 11

Tyler, TX MSA 8.05 13 8.14 18 8.80 40 7.47 13 7.88 31

Nashville-Davidson—Murfreesboro—Franklin, TN MSA 8.01 14 7.98 25 8.41 91 7.55 11 8.08 22

Pensacola-Ferry Pass-Brent, FL MSA 8.01 15 8.24 9 9.03 21 7.46 15 7.54 66

Ocala, FL MSA 7.98 16 8.33 6 9.07 18 7.59 10 7.28 101

Boulder, CO MSA 7.96 17 7.60 65 8.63 57 6.57 105 8.67 7

San Angelo, TX MSA 7.95 18 8.07 21 8.83 36 7.32 26 7.71 50

Lakeland-Winter Haven, FL MSA 7.92 19 8.22 10 8.96 27 7.49 12 7.30 96

Richmond, VA MSA 7.90 20 7.80 41 8.94 28 6.67 92 8.08 21

AreaOverall

EFI Rank

Areas1 & 2

ONLY Rank

Area 1: Size of

Govern-ment Rank

Area 2: Takings and

Discrim-inatory

Taxation Rank

Area 3: Labor

Market Freedom Rank

El Centro, CA MSA 3.32 384 4.18 384 2.65 384 5.71 270 1.58 384

Visalia-Porterville, CA MSA 4.19 383 4.86 378 3.51 382 6.22 165 2.85 382

Merced, CA MSA 4.31 382 5.15 370 4.25 379 6.06 197 2.62 383

Kingston, NY MSA 4.48 381 4.79 380 6.75 306 2.82 384 3.86 374

Glens Falls, NY MSA 4.50 380 5.10 372 6.87 288 3.32 382 3.32 380

Bakersfield, CA MSA 4.57 379 5.04 375 4.54 377 5.55 298 3.62 379

New York-White Plains-Wayne, NY-NJ MD 4.60 378 4.38 383 5.21 368 3.56 380 5.04 334

Modesto, CA MSA 4.66 377 4.95 377 4.24 380 5.66 277 4.09 366

Fresno, CA MSA 4.79 376 5.20 368 4.50 378 5.90 238 3.98 372

Wenatchee-East Wenatchee, WA MSA 4.88 375 5.30 364 4.62 373 5.98 222 4.06 369

Hanford-Corcoran, CA MSA 4.91 374 5.91 321 5.51 362 6.30 148 2.92 381

Weirton-Steubenville, WV-OH MSA 4.94 373 4.67 382 4.55 376 4.79 361 5.49 312

Fairbanks, AK MSA 4.98 372 5.39 362 3.62 381 7.16 33 4.15 363

Utica-Rome, NY MSA 4.99 371 5.64 346 6.77 305 4.52 369 3.69 378

Binghamton, NY MSA 5.00 370 5.60 348 6.78 302 4.42 374 3.80 376

Stockton, CA MSA 5.01 369 5.49 355 5.26 367 5.72 267 4.03 370

Anchorage, AK MSA 5.02 368 5.20 366 3.27 383 7.14 36 4.66 349

Madera-Chowchilla, CA MSA 5.05 367 5.70 342 5.46 364 5.94 232 3.77 377

Yuba City, CA MSA 5.11 366 5.75 337 5.35 366 6.16 176 3.84 375

Longview, WA MSA 5.12 365 5.68 343 5.40 365 5.97 224 3.99 371

Summary of Results

•All of top 10 are in states with no tax on labor income (FL, NH,

SD)

•9 of bottom 10 are in California or New York (and 15 of bottom

20)

•Only 4 of top 10 were in top 10 before adding labor market

freedom

•6 of bottom 10 were the same

Economic Freedom in Louisville

• Louisville ranked 215 out of the 384 metropolitan areas in the U.S.

• It ranked 1st out of the 5 metro areas in Kentucky, but behind all 14 areas in Indiana.

Rank Area Overall EFI215 Louisville-Jefferson County, KY-IN MSA 6.68219 Elizabethtown, KY MSA 6.66226 Lexington-Fayette, KY MSA 6.60242 Bowling Green, KY MSA 6.47

260 Owensboro, KY MSA 6.38

Rank Area Overall EFI71 Evansville, IN-KY MSA 7.4883 Fort Wayne, IN MSA 7.4185 Elkhart-Goshen, IN MSA 7.4091 Indianapolis-Carmel, IN MSA 7.3497 Lafayette, IN MSA 7.2798 Muncie, IN MSA 7.26105 South Bend-Mishawaka, IN-MI MSA 7.21115 Bloomington, IN MSA 7.15125 Anderson, IN MSA 7.11130 Columbus, IN MSA 7.08141 Terre Haute, IN MSA 7.04198 Michigan City-La Porte, IN MSA 6.77204 Gary, IN MD 6.74

208 Kokomo, IN MSA 6.71

Least Free Fourth Third Second Most Free0%

1%

2%

3%

4%

5%

6%

7%

8%

6.8%

5.9%5.4%

5.0%5.3%

Economic Freedom Quintiles

Un

emp

loym

ent

Rat

e, 2

002

Unemployment Is Much Lower in Metro Areas with Higher Economic Freedom

3.0 4.0 5.0 6.0 7.0 8.0 9.00%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Economic Freedom

Un

emp

loym

ent

Rat

e, 2

002

Correlation Coefficient: -0.416

Unemployment Is Much Lower in Metro Areas with Higher Economic Freedom

Least Free Fourth Third Second Most Free$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$27,732$28,795 $29,051 $29,355 $29,660

Economic Freedom Quintiles

Per

Cap

ita

Per

son

al I

nco

me,

200

2

Per Capita Income Is Higher in Metro Areas with Higher Economic Freedom

3.0 4.0 5.0 6.0 7.0 8.0 9.0$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Economic Freedom

Per

Cap

ita

Per

son

al I

nco

me,

200

2

Correlation Coefficient: 0.164

Per Capita Income Is Higher in Metro Areas with Higher Economic Freedom

Research Using the MEFI

• Bologna, Jamie, et. al. “A Spatial Analysis of Entrepreneurship and Institutional Quality: Evidence from U.S. Metropolitan Areas” Journal of Regional Analysis and Policy, forthcoming.– Increases in freedom were associated with

increases in entrepreneurial activity

• “A Spatial Analysis of Incomes and Institutional Quality: Evidence from US Metropolitan Areas”

Related Research• Stansel, Dean. “Why Are Some Cities

Growing While Others Are Shrinking?” Cato Journal, 31, 2 (Spring/Summer 2011), 285-303.

• Stansel, Dean. “Higher Taxes, Less Growth: The Impact of Tax Burden on Economic Growth in U.S. Metropolitan Areas,” Policy Brief, April 2009, National Foundation for American Policy, Arlington, Virginia, www.nfap.com.

Lower Tax Areas Grow Faster

Population Employment Real Personal Income 0%

20%

40%

60%

80%

100%

120%

140%

160%

64.4%

107.6%

157.3%

21.3%

40.1%

75.5%

10 Lowest-Tax Large Metro Areas 10 Highest-Tax Large Metro Areas

Per

cen

tage

Ch

ange

, 198

0-20

07

Lower Tax Areas Grow Faster

Population Growth, 2000-2007

Employment Growth, 2000-2006

Real Personal Income Growth, 2000-2006

0%

2%

4%

6%

8%

10%

12%

14%

16%

8.6%9.4%

14.7%

2.6%

6.1%

8.2%

50 Lowest-Tax Metro Areas

50 Highest-Tax Metro Areas

Eco

nom

ic G

row

th

Lower Tax Areas Grow Faster

-50% 0% 50% 100% 150% 200% 250% 300% 350% 400%7%

8%

9%

10%

11%

12%

13%

14%

Employment Growth, 1980-2007

Sta

te &

Loc

al T

axes

as

a P

erce

nta

ge o

f In

com

e, 1

977-

2002

Ave

rage

Correlation Coefficient: -0.405

High-Growth Areas Have Lower Taxes

Population Growth, 1980-2007

Employment Growth, 1980-2007

Real Personal Income Growth, 1980-2007

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

9.4%9.2% 9.3%

10.6%

11.0%10.7%

10 Highest-Growth Large Metro Areas

10 Lowest-Growth Large Metro Areas

Sta

te &

Loc

al T

axes

as

a %

of

Inco

me,

197

7-20

02 A

vera

ge

High-Growth Areas Have Lower Taxes

Population Growth, 2000-2007

Employment Growth, 2000-2006

Real Personal Income Growth, 2000-2006

9.4%

9.6%

9.8%

10.0%

10.2%

10.4%

10.6%

10.8%

11.0%

11.2%

10.1%

10.4% 10.3%

11.2%

10.8% 10.8%

50 Highest-Growth Metro Areas 50 Lowest-Growth Metro Areas

1997

Sta

te &

Loc

al T

axes

as

a P

erce

nta

ge o

f In

com

e

Taxes & Growth in Detroit

• 1980: Detroit & Dallas were about the same size.

– Since then Dallas’ population has more than doubled

– Detroit has shrunk

– Over that period, taxes in Detroit averaged 11.3% of income, compared to 9.1% in Dallas.

• All of the other 14 metropolitan areas in MI have had lower taxes than Detroit and all 14 have had better economic performance since 1980 (based on the growth of population, employment, and personal income).

Possible future directions

1. Switch from metropolitan divisions (MD’s) to their larger MSA’s.

2. Do separate ranking for largest MSA’s (population of 1 million+)

3. Incorporate Wharton Residential Land Use Regulatory Index (Gyourko et al.)

4. Use population-weighted state fiscal data for multi-state metros

5. Other measures of regulatory burden?

Prescription for Growth

1.Rein-in spending

2.Reduce the regulatory burden

3.Lower taxes

Prescription for Growth

INCREASE

ECONOMIC

FREEDOM

Case Study/Video

Sandy Springs, Georgia

“The City That Outsourced Everything”

http://www.reason.tv/video/show/sandy-springs-georgia-the-city

An Economic Freedom Index for U.S.

Metropolitan Areas

Journal of Regional Analysis and Policy,

43, 1 (2013), 3-20.

Prof. Dean StanselFlorida Gulf Coast University

dstansel@fgcu.eduhttp://www.deanstansel.com