Download Area 1 - Dean Stansel, Ph.D.

Economic Freedom:
What It Is & Why It
Matters
Dean Stansel
Research Associate Professor
O’Neil Center
for Global Markets and Freedom
www.deanstansel.com
www.oneilcenter.org
1
O'Neil Center
for Global Markets & Freedom
◦ The O'Neil Center was established in 2008 by
William J. "Bill" O'Neil (BBA, '55) and his wife
Fay C. O'Neil to study the impact of
competitive market forces on freedom and
prosperity in the global economy.
◦ O'Neil is an American entrepreneur,
stockbroker, and writer, who founded the
business newspaper Investor's Business Daily
and the stock brokerage firm William O'Neil
& Co., Inc.
◦ He bought a seat on the NYSE at age 30 (the
youngest at that time ever to do so).
2
Economic Freedom of North
America (EFNA)
•Fraser Institute’s ranking of the U.S.
states and Canadian provinces.
•First published in 2002.
•The 2015 report was the 11th edition.
•Included Mexican states for 2nd time.
•I have been the primary author of
the last three editions.
3
EFNA Impact
•In 2014, got 513 media mentions;
exceeded previous high by 79%
•Has been cited in over 130
academic journal articles and
policy papers.
•Compared to other state indices:
•Has been produced the longest
•Is the only one updated annually
•Has the most years of data (33)
4
What Is Economic Freedom?
“Individuals have economic freedom
when property they acquire without
the use of force, fraud, or theft is
protected from physical invasions by
others and they are free to use,
exchange, or give their property as
long as their actions do not violate
the identical rights of others.”
5
Area 1: Government Spending
1A: General Consumption Expenditures by
Government as a Percentage of Income
Total Direct Expenditures MINUS:
Capital Outlays; Transfers to Persons, Businesses,
and Other Governments; Interest on Public Debt; and
Expenditures on State Liquor Stores & Utilities
1B: Transfers & Subsidies as a Percentage of Income
Includes transfers to persons & businesses such as:
Welfare Payments, Grants, Agricultural Assistance,
Food-stamp Payments, and Housing Assistance
1C: Insurance & Retirement Payments as a
Percentage of Income
Includes payments for: Employment Insurance,
Workers Compensation, and various pension plans
6
Area 2: Taxes
2A: Income & Payroll Tax Revenue as a Percentage
of Income
Personal & Corporate Income Taxes & Payroll Taxes
2B: Top Marginal Income Tax Rate and the Income
Threshold at Which It Applies
2C: Property Taxes & Other Taxes as a Percentage of
Income
Includes all taxes other than income, payroll, & sales
taxes.
2D: Sales Tax Revenue as a Percentage of Income
All Sales & Gross Receipts Taxes (including excise
taxes on specific goods).
7
Area 3: Labor Market Freedom
3Ai: Minimum Wage Annual Income as a
Percentage of Per Capita GDP
3Aii: Government Employment as a
Percentage of Total Employment
3Aiii: Union Density
8
Calculations
• Each variable given value b/w 0
and 10
•
score = ((Max-Obs)/(Max-Min))*10
• Each variable equally weighted
within each area
• Each area equally weighted
• Overall score is average of 3 area
scores
9
10
Average EFNA Score, U.S.
States, 1981-2013
7.4
7.3
7.3
7.2
7.0
7.0
6.96.9
6.8
6.6
6.4
6.2
6.7
6.7
6.6
6.5
6.5
6.4
6.4
6.8
6.7
6.6
6.5
6.9
7.07.0
7.0
6.9
6.9
6.9
6.9
6.7
6.7
6.6
6.5
6.46.4
6.16.1
6.1
6.0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
5.8
11
How Does Texas Rank?
• Texas ranks
rd
3
• 1st among the largest
states.
• Top 3 for 7 of last 8 years
• Available at:
www.freetheworld.com/efna.html
12
EFNA Score, Texas & U.S.
Average, 1981-2013
8.3
7.8
7.8
7.7 7.7
8.1
U.S. Average
Texas
7.7
7.6
7.5 7.5 7.5 7.5
7.5
7.4
7.3
7.3
7.6
7.3
7.3
6.9 6.9
6.8
6.7
6.4 6.5
6.3
6.5
6.5
6.7
6.7
6.5
6.6
6.6
7.6
7.5
7.3
7.0
6.8
7.9
7.7
7.7
7.7
7.7
7.4
7.2
7.9
7.9
7.8
7.7
7.6
8.0 8.0 8.0
8.0
6.9
7.0
7.0
7.1 7.0
6.9
6.9 6.9
6.8
6.7
6.7
6.6
6.5 6.5
6.1 6.1 6.1
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
5.8
13
Area 1: Government Spending
• Texas ranks 4th.
• 3rd on Variable 1A
(consumption spending): 12.8%
of income
• 2nd on Variable 1B (transfers &
subsidies): 0.2% of income
• 12th on Variable 1C (insurance
& retirement payments): 1.7%
of income
14
Area 2: Taxes
• Texas ranks 4th.
• 2nd on 2A (income & payroll tax
revenue): 0.3% of income
• 1st on 2B (income tax rate): 0%
• 37th on 2C (property & other tax
revenue): 4.5% of income
• 37th on 2D (sales tax revenue):
4.1% of income
15
Area 3: Labor Market Freedom
• Texas ranks 4th.
• 19th on 3Ai (minimum wage):
34.4% of per capita income
• 14th on 3Aii (government
employees): 10.3% of total
employees
• 16th on 3Aiii (union density):
6.0% of total employees
Why Does It Matter?
Areas with more economic freedom
have higher: GDP, GDP growth,
Income (& income share) of
poorest 10%, political freedom,
civil liberties, life satisfaction,
literacy, life expectancy, and
environmental quality
And, lower: unemployment, child
labor, infant mortality rates, and
corruption
17
18
19
Per Capita Income Is Much Higher in
Nations with Higher Economic
Freedom
Most Free ……………. Least Free
Sources: The Fraser Institute; The World Bank, World Development Indicators, 2015
Per Capita Income Is Much Higher in
States with Higher Economic Freedom
Per Capita Income, Percent
Above/Below National Average
8%
6%
4%
2%
0%
Most Free
Second
Third
Least Free
-2%
-4%
-6%
-8%
-10%
Economic Freedom Quartiles
Most Free ……………. Least Free
Per Capita State Income Growth Is Positively
Correlated with Economic Freedom
Average Growth in Per Capita Income,
2004-2013 (percent) (Deviations from
National Mean)
0.0500
0.0400
0.0300
0.0200
0.0100
-0.0060
-0.0040
0.0000
-0.0020
0.0000
-0.0100
0.0020
0.0040
0.0060
-0.0200
-0.0300
-0.0400
-0.0500
-0.0600
Average Growth in Economic Freedom at the AllGovernment Level, 2004-2013 (percent) (Deviations
22
from National Mean)
Higher Population Growth
• The 25% of states
considered most free had ,
population growth of 5.4%
over the last five years,
compared to less than half
that (2.6%) in the bottom
25%.
23
Unemployment Is Much Lower in
Metro Areas with Higher Economic
Freedom
8%
Unemployment Rate, 2002
7%
6.8%
5.9%
6%
5.4%
5%
5.0%
5.3%
4%
3%
2%
1%
0%
Least Free
Fourth
Third
Second
Economic Freedom Quintiles
Most Free
Local Economic Freedom
in Texas
• Austin ranked 90th out of the
384 metro areas in the U.S.,
17th out of the 26 in Texas.
• Dallas ranked 26th out of 384.
• Houston ranked 30th.
25
26
The Texas Model
• Over the last 5 years, Texas (top
3 for economic freedom) ranks:
• #2 in population growth
• #2 in employment growth
• #2 in GDP growth
• #2 in personal income growth
• Only North Dakota ranks higher.
27
14%
Texas
NY & CA
12.1%
12%
10%
8.7%
8.7%
8%
6%
4%
3.6%
2%
0%
Population
Growth, 20092014
Employment
Growth, 20092014
28
45%
41.0%
40%
25%
NY & CA
34.0%
35%
30%
Texas
21.8%
22.8%
20%
15%
10%
5%
0%
GDP Growth,
2009-2014
Personal Income
Growth, 20092014
29
“…no human wisdom or
knowledge could ever be
sufficient … for the proper
performance of … the duty of
superintending the industry of
private people, and of
directing it towards the
employments most suitable to
the interest of the society.”
-- Adam Smith, The Wealth of
Nations
30
Economic Freedom:
What It Is & Why It
Matters
Dean Stansel
Research Associate Professor
O’Neil Center
for Global Markets and Freedom
www.deanstansel.com
www.oneilcenter.org
31