Excess Government Impairs Economic Freedom

Physician's Money Digest, March15 2005, Volume 12, Issue 5

When it comes to economicfreedom, more often thannot, more turns out to beless. Those are the resultsof the Pacific Research Institute's 2005Index of Economic Freedom (www.pacificresearch.org). Simply put, the moregovernment interference there is on aneconomy—whether it is state or nationalgovernment—the more difficult it is forthat economy to prosper.

Economically Free States

The index makes use of five main categoriesas a means of measuring and comparingeconomic freedom in all 50 USstates. These five categories (ie, fiscal, regulatory,judicial, government size, andwelfare) also take into account numerousvariables (eg, tax rates, state spending,environmental regulations, right-to-worklaws, minimum wage, and tort law).

According to the index, the nation'ssix most economically free states areKansas, Colorado, Virginia, Idaho,Utah, and Oklahoma. The six least economicallyfree states are New York,California, Connecticut, Rhode Island,Illinois, and Pennsylvania.

Interestingly, all six of the most economicallyfree states, and 24 of the top26 for that matter, are states that wentfor President George W. Bush in theNov. 2004 US presidential election. Thebottom six all ended up in Senator JohnKerry's column. Any significance there?Quite possibly.

According to the index, the majorityof voters in the pro-Bush states"would rather their governments haveless interference in their economic activity."Conversely, the states supportingKerry appear to be "more comfortablewith governments that are more activein the economy."

Is one system better than the other?It would appear so. Index researcherspoint to economist Dr. George Stigler'sbelief that the more options available toan individual with regard to economicactivity, the greater the potential is forprosperity. As such, it's not surprisingthat the index found that, across theUnited States, a score indicating greatereconomic freedom is associated withhigher income per capita.

For example, per capita income ishigher in Colorado than it is in California.Virginia's per capita income is almostidentical to that of California. The reasonis that California is a high-tax state, subjectto what index authors call the"oppression tax." In Rhode Island, workerscan lose $3607, or 13.2%, of theirannual income to the oppression tax. ForNew Yorkers, it's $2441, or 7.4%.

Worldwide Carryover

Wall Street Journal

On a wider scale, the lack of economicfreedom impacts the United States as awhole. According to the Index of EconomicFreedom, published by the HeritageFoundation (www.heritage.org) and the, the United Stateshas—for the first time in the 11-year historyof the index—fallen out of theworld's 10 freest economies—tied withSwitzerland for 12th place.

Marc Miles, PhD, a coauthor of theindex, points out, "The United States isresting on its laurels while innovativecountries are changing their approachesand reducing roadblocks." Indeed, whilethe United States' score did not changefrom 2004 to 2005, improvements in theeconomies of Chile, Australia, and Icelandenabled those countries to leapfrog us.

The index ratings reflect an analysis of50 different economic variables groupedinto 10 categories: banking and finance,capital flows and foreign investment,monetary policy, fiscal burden of government,trade policy, wages and prices, governmentintervention in the economy,property rights, regulation, and informal(or black) market activity.

"The United States is eating the dustof countries that have thrown off the20th-century shackles of big governmentspending and massive federal programs,"Dr. Miles notes. Of course, thatdoesn't mean that America is a badplace to live. According to the index, werecorded an overall score of 1.85, makingit one of 17 countries rated as havinga free economy. Another 56 countriesfinished between 2 and 3, categorizingthem as "mostly free." Seventycountries scored between 3 and 4, fora "mostly nonfree" rating, while 12countries were considered repressed.

Both the international study andstate-based studies reach the same conclusion:The more a government interferesin the economy, the more difficultit is for the economy to prosper. Bothinternational and state-based studiesconfirm the undying theories of theBritish-born American patriot ThomasPaine: "That government is best whichgoverns least."