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How Free Is Your State?



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Professors William Ruger and Jason Sorens have just released their Freedom in the Fifty States Index, which ranks the states based on public policies affecting economic, social, and personal freedoms (e.g., bans on trans fats and the audio recording of police, an individual health-insurance mandate, mandated family leave, etc.). This year they added a section on the consequences of the American Recovery and Reinvestment Act of 2009 (the stimulus), as affected by state and local policies. They also included specific policy prescriptions for each of the 50 states based on their data as well as a survey of state policy experts.

To see how your state fairs in terms of freedom, go here. This year, the freest states were New Hampshire, South Dakota, Idaho, Indiana, and Nevada; the least free states were New York, New Jersey, California, Hawaii, and Massachusetts. There’s also a fiscal-policy freedom ranking, a regulatory freedom ranking, a personal freedom ranking, and an economic freedom ranking. In every single one of them, New York, New Jersey, and California came in at the bottom. If you care about freedom, no matter how you look at it, these states really aren’t for you. Or are they?

Seriously, when I see this ranking I am reminded of a great article and an awesome headline on this exact topic from a few years ago: Nick Gillespie’s “Live Free and Die of Boredom.” Gillespie, who focuses on economic freedom in the piece, makes a relevant observation here:

Until a recent move to the Washington, D.C., area, I spent the last eight years where the land is plentiful, the houses cheap, and the taxes low–in other words, in a zone of relative economic freedom. From 1996 to 1998, I lived in Huntsville, Texas, a prison-and-college town (ain’t they all) with a total population of about 30,000; from 1998 until last summer, I lived in small-town Ohio. My takeaway: Fewer tax and regulatory hassles and, most important, a tremendously lower cost of living are, in the end, probably not that important to people.

Living in Huntsville in particular taught me that the cost of living is far less important than the demand for living. In the mid-’90s, I looked at five-bedroom houses there priced at $100,000 that still weren’t selling. If you can’t move that much house at that low a price, there just isn’t a lot of living going on. (As if to underscore the point, Huntsville is the site of the Lone Star State’s death chamber.) Truth be told, there just wasn’t that much to do, and not simply for the prisoners. Everything was a long drive away, the population was sparse, and so on. That’s one reason it was cheap to live there. Much of the time, economic freedom’s just another word for nothing else to do.

Is it, then, that all these free states have going for them is freedom? It’s not. As my colleague Matt Mitchell has written extensively about economic freedom tends to be a fairly good indicator of prosperity. He reviews the literature and reports that:

The economists Chris Doucouliagos and Mehmet Ali Ulubqasoglu recently reviewed 45 studies examining the freedom-growth relationship. They concluded:

“[R]egardless of the sample of countries, the measure of economic freedom and the level of aggregation, there is a solid finding of a direct positive association between economic freedom and economic growth.”

Studies also find that economic freedom tends to be associated with a whole host of other factors that humans tend to value such as:

Higher income levels: Faria and Montesinos (2009) Dawson (1998), De Haan and Siermann (1998), De Haan and Sturm (2000), Cole (2003), Gwartney et al. (2004) and Weede (2006);

Lower poverty levels: Norton (2003);

Less volatility in the business cycle: Dawson (2010);

Better environmental outcomes: Norton (1998), ch. 2);

even:

Fewer homicides: Stringham and Levendis (2010);

and Greater levels of reported happiness: Ovaska and Takashima (2006)

This, then, raises the question of why so many people live in the least free states like New York, California and New Jersey. That, Matt explained to me this morning is because “freedom matters and impacts economic outcomes, but just as diet and exercise impact health outcome (think of genetics), freedom isn’t the only thing. There is also weather, access to trade routes and other immutable factors.”  

In other words, when it comes to where people choose to live, intrinsic characteristics of a city weigh heavily in the decision. Basically, location matters. It means that while there is no doubt that taxes and regulations (and social liberties too) are some of the factors that define how desirable a location is, it may not be the only important factors for most people. Among the factors that keep people in less than free places are jobs, family, friends and city amenities (few New Yorkers would agree to pack up and in leave in North Dakota no matter how low taxes or how unregulated restaurants are there.) In other words, there is a certain stickiness to places that have nothing to do with how free these places are.

Then there’s the fact that moving is costly and a hassle. Most people’s social lives are grounded in their community and their workplace. Relocating is likely to result in a longer commute for those still employed, disrupts the lives of school-age children, and weakens existing social relationships.

I assume that there are times in people’s lives when this stickiness goes away or isn’t as important — for example, when you are younger, or looking for a job and haven’t settled anywhere yet, or about to retire. I also assume that there are some people who decide where to live based on how free a state is. But I’m not sure how many.

Presumably there’s a point at which taxes, regulations, and infringement of social liberties lead people to pack up and move to a freer state. The question is, what is the threshold? And how many people need to leave a state for lawmakers to change their policies in favor of more freedom?

However this raises another question. How much does freedom in the states matters considering the gigantic size of the federal government? Take fiscal issues for instance. For decades, fiscal power has become increasingly centralized, making a joke of the differences between states. Washington has taken over more and more state functions, largely through grants to state and local governments, also called grants-in-aid. Meanwhile, Washington’s tax bite has grown so big that differences in state tax rates don’t mean as much as they used to. In 2008, 60 percent of all government revenues came from the federal income tax, making it the dominant tax burden in Americans’ lives. In 1930, the figure was 30 percent.

Obviously, other things being equal, it’s less costly to run a business in a state with a low tax rate than in a state with a high tax rate. But that difference becomes less important as the percentage of the total tax bill imposed by the central government grows, especially since you can deduct your state tax bill from your taxable income on your federal return.

In any case, this study is well worth reading and packed with information and interesting policy prescriptions. And if you are in D.C., you can see the authors give a talk at the Cato Institute tomorrow, June 8, at 4 p.m.



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