Federal government should follow states’ example on economic freedom
The economy has been in the slowest recovery since World War II. That slow growth has coincided with a steady decline in economic freedom as taxes, spending and regulation have all been on the rise. In fact, a recent Fraser Institute report ranked the United States 16th in the world for economic freedom, down from third in 2000. This is cause for concern, since numerous studies show that economic freedom is associated with prosperity.
The pattern across the states, however, is quite varied and shows promise. According to the newly-released Economic Freedom of North America report, which ranks states on how free their economies are, the average level of freedom at the state and local level has risen slightly in recent years. This is driven in part by slowed growth in tax revenue and government spending during the recession, since states must balance their budgets. The federal government, on the other hand, can just keep on spending by running up larger and larger budget deficits.
States that have seen the fastest growth, like Texas and Florida, tend to have a policy strategy that differs from the national trend: maximize economic freedom. They attract new businesses and residents by keeping the burden of taxes, spending and regulations low. In contrast, states like New York and California that take the opposite approach have seen much less economic prosperity.
Residents and businesses have been voting with their feet in favor of economic freedom. Over the last three years, population in Texas and Florida has grown more than 2.5 times faster than it has in New York and California. Employment and income have also grown faster in those two states. Not surprisingly, Texas and Florida were at the top of the Economic Freedom of North America report’s list for economic freedom among the largest states, while New York and California were at the bottom, ranked 50th and 49th respectively.
What’s going on in states like Texas and Florida should give us hope. There have been more than 200 scholarly articles by independent researchers examining economic freedom at the state level using the report, and more than 400 at the national level using its sister report, Economic Freedom of the World. Most of the literature finds that areas with economic freedom tend to have more prosperous economies, as well as a variety of other positive outcomes.
One reason why is that high levels of taxes, spending and regulations make it harder for entrepreneurs to be successful. When entrepreneurs cannot expand their businesses and hire new workers, it hurts everyone.
Many states seem to understand that when they minimize government meddling in the economy, it grows faster, which is beneficial for all. However, politicians in Washington, and states such as New York and California, fail to understand that simple message.
Federal spending has doubled since 2000 and tripled since 1990, our corporate income tax rate is the highest in the world, and our regulatory burden just keeps expanding. There are more than 80,000 pages of regulations in the Federal Register. It could take years just to read through it, let alone scrutinize it to remove regulations that are unnecessary.
Politicians everywhere should follow the example of economic powerhouses like Texas and Florida. They should eliminate wasteful spending, like corporate welfare programs that put small businesses at a disadvantage. And they should cut taxes, reduce regulations and shrink their government bureaucracies.
Doing so would increase economic freedom, thereby making it easier for entrepreneurs to expand their businesses and hire new workers. That could put an end to what has been the slowest economic recovery since World War II and finally get our economy booming again.
By Dean Stansel