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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