Download Feb. 25 (Dothan) - 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.oneilcenter.org
www.deanstansel.com
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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).
• www.oneilcenter.org
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Land of the Free?
2000 EFW Rankings
1-Hong Kong
2-United States
3-Switzerland
4-Singapore
5-New Zealand
6-United Kingdom
7-Canada
8-Netherlands
9-Ireland
10-Australia
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Land of the Free?
2000 EFW Rankings
1-Hong Kong
2-United States
3-Switzerland
4-Singapore
5-New Zealand
6-United Kingdom
7-Canada
8-Netherlands
9-Ireland
10-Australia
Current Rankings
1-Hong Kong, 2-Singapore
3-New Zealand
4-Switzerland
5-United Arab Emirates
6-Mauritius, 7-Jordan
8-Ireland, 9-Canada
10-UK & Chile
12-Australia & Georgia
14-Qatar, 15-Taiwan,
16-United States
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1) What is “economic
freedom”?
2) Where do we rank (U.S.,
Alabama, and metro
areas in Alabama)?
3) Why?
4) Why does it matter?
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“It is no crime to be ignorant of
economics, which is, after all, a
specialized discipline and one
that most people consider to be
a ‘dismal science.’ But it is totally
irresponsible to have a loud and
vociferous opinion on economic
subjects while remaining in this
state of ignorance.”
-- Murray Rothbard, Austrian
Economist
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Economic Freedom Project
What is it?
An initiative to help publicize the
findings of the Economic
Freedom of the World report
and the Economic Freedom of
North America report and
economic freedom in general.
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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.”
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5 Components of Economic
Freedom of the World Index
1.
2.
3.
4.
Size of government
Legal system & property rights
Sound money
Freedom to trade
internationally
5. Regulation
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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 5 area
scores
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How Do We Rank?
• U.S. is down to 16th place from
5th in 2008 and 2nd in 2000.
• Available at:
www.freetheworld.com
• Alabama ranks 23rd, down from
22nd the previous year. It ranked
as high as 12th in 2005.
• Available at:
www.freetheworld.com/efna.html
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Other Rankings
• Tax Foundation’s most recent
annual State Business Tax
Climate Index ranks AL 29th
(based on tax rates of the 5
major state and local taxes).
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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.
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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)
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An Economic Freedom
Index of U.S. Metropolitan
Areas
Dean Stansel
Journal of Regional Analysis and Policy, 43,
1 (2013): 3-20.
http://www.jrap-journal.org/
TOP 10 AREAS
1 Naples-Marco Island, FL
2 Fort Walton Beach-Crestview-Destin, FL
3 Manchester-Nashua, NH
4 West Palm Beach-Boca Raton-Boynton Beach, FL
5 Bradenton-Sarasota-Venice, FL
6 Sebastian-Vero Beach, FL
7 Rockingham County-Strafford County, NH
8 Palm Bay-Melbourne-Titusville, FL
9 Sioux Falls, SD
10 Tampa-St. Petersburg-Clearwater, FL
EFI
8.52
8.39
8.37
8.34
8.33
8.33
8.23
8.17
8.11
8.07
BOTTOM 10 AREAS
1 El Centro, CA
2 Visalia-Porterville, CA
3 Merced, CA
4 Kingston, NY
5 Glens Falls, NY
6 Bakersfield, CA
7 New York-White Plains-Wayne, NY-NJ
8 Modesto, CA
9 Fresno, CA
10 Wenatchee-East Wenatchee, WA
EFI
3.32
4.19
4.31
4.48
4.50
4.57
4.60
4.66
4.79
4.88
Summary of Results
•All of top 10 are in states with no
tax on labor income (FL, NH, SD)
•9 of bottom 10 are in California
or New York (and 15 of bottom
20)
AL US
Area
EFI
1
119 Montgomery, AL
7.13
2
174 Huntsville, AL
6.86
3
183 Birmingham-Hoover, AL
6.83
4
210 Gadsden, AL
6.71
5
216 Decatur, AL
6.67
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243 Anniston-Oxford, AL
6.47
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254 Dothan, AL
6.40
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254 Tuscaloosa, AL
6.40
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263 Mobile, AL
6.36
10
284 Auburn-Opelika, AL
6.17
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324 Florence-Muscle Shoals, AL
5.82
Economic Freedom in
Alabama
• Montgomery ranked 119th
out of the 384 metropolitan
areas in the U.S.
• It ranked 1st out of 11 in AL.
• Dothan: 254/384 & 7/11
• Auburn: 284/384 & 10/11
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Why Has Economic
Freedom Declined?
•Federal spending has more
than doubled since 2000 and
tripled since 1990.
•Personal income has only gone
up by about 70% since 2000.
•We have an over-spending
problem, NOT an under-taxing
problem.
Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES
OR DEFICITS
(in millions of dollars)
Total
Year
1990
2000
2004
2008
2012
2016
estimate
Receipts
1,031,958
2,025,191
1,880,114
2,523,991
2,449,988
Surplus
Outlays or Deficit
(−)
1,252,993 -221,036
1,788,950 236,241
2,292,841 -412,727
2,982,544 -458,553
3,536,951 -1,086,963
3,335,502 3,951,307 -615,805
Source: Historical Tables of the Budget, FY2017, Office
of Management and Budget.
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http://www.whitehouse.gov/omb/budget/Historicals
Spending & Deficits at
Post-WW2 High
• Federal spending hit a post-WW2
high of 24.4% of GDP in 2009.
• Federal deficit as a percent of GDP
has also been at its highest level
since WW2.
• It hit 10% in 2009.
• It exceeded 5% four years in a
row, but is now down below 4%.
Source: Historical Tables of the Budget, FY2016,
Office of Management and Budget.
http://www.whitehouse.gov/omb/budget/Histo
ricals
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Entitlement Spending
•Cato Institute found that welfare pays
more than:
•the starting wage for a secretary in
39 states.
•the average first year wage for a
teacher in 11 states.
•an entry-level computer
programmer in the 3 most generous
states.
Obamacare
• AKA, The Unaffordable Care
Act
• Higher taxes
• Higher spending
• Regulatory uncertainty
• Unintended consequences
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Debt as % of GDP at Post-WW2 High
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Tax Freedom Day
• The Tax Foundation
• Was April 24th last year.
• 3 days later than in 2014.
• 14 days later than in 2009.
• If we include deficits, which
require higher future taxes, it
was 14 days later (May 8)
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The President’s $1 Trillion Tax
Hike
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Cost of Tax Compliance
• $37 billion in 2012 preparing
federal individual, business, and
employment tax returns.
• 3.24 billion hours
• The equivalent of 369,858 years
• Source: McCaherty, “The Cost of Tax
Compliance,” Tax Foundation, Sep. 2014.
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• According to the OECD “the
United States has the most
progressive income tax system
among industrialized nations.”
• Richest 10% of households in U.S.
($112,124 or higher) pay 45.1% of
all income taxes
• Next highest is Italy at about 42%.
Only a handful of others are above
35%.
• OECD average is 31.6%.
Source: http://mercatus.org/publication/progressivity-taxes-oecdcountries-mid-2000s
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Source: Dan Mitchell, Cato Institute,
http://danieljmitchell.wordpress.com/
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International Tax
Competitiveness
• The U.S. ranks 32nd out of the 34
OECD countries.
• Highest corporate tax rate
• Double taxation of capital gains
and dividends
• 1 of only 6 with a “worldwide
system of taxation”
• Source: Pomerleau & Lundeen, "2014
International Tax Competitiveness Index," Tax
Foundation, September 15, 2014.
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Regulatory Burden Is High
and Rising
• The Federal Register contains
81,000 pages of regulations.
• It would take more than 2 years
to read through all of it.
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Cost of Federal Regulations
• $2 trillion in 2012
• $9,991 per employee, all industries
• $19,564 per employee in the
manufacturing industry
• $34,671 per employee in the
manufacturing industry (small
businesses, < 50 employees)
• Source: Crain & Crain, “The Cost of Federal Regulation
to the U.S. Economy, Manufacturing & Small Business,”
National Association of Manufacturers, Sep. 2014.
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Sen. George McGovern (D-SD)
• “I also wish that during the years I
was in public office, I had had this
firsthand experience about the
difficulties business people face
every day. That knowledge would
have made me a better U.S.
senator and a more understanding
presidential contender.”
• Source: George Mc Govern, “A Politician's Dream Is
a Businessman's Nightmare,” Wall Street Journal,
6/1/92.
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“And if I spend somebody
else’s money on somebody
else, I’m not concerned
about how much it is, and
I’m not concerned about
what I get. And that’s
government.”
-- Milton Friedman
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Economic Freedom
Why does it matter?
• Hundreds of studies have shown
that areas with more economic
freedom have better outcomes.
• Higher: GDP, GDP growth,
Income of the poorest 10%,
Income share of the poorest
10%...
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Economic Freedom
Why does it matter?
• …More: entrepreneurial activity,
political freedom, civil liberties,
life satisfaction, literacy, life
expectancy, and cleaner
environments
• Lower: unemployment, child
labor, infant mortality rates, and
corruption
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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)
0.05
-0.006
0.04
0.03
0.02
0.01
-0.004
-0.002
0.00
0.000
-0.01
0.002
0.004
0.006
-0.02
-0.03
-0.04
-0.05
-0.06
Average Growth in Economic Freedom at the AllGovernment Level, 2004-2013 (percent) (Deviations
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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%.
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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 Most Free
Economic Freedom Quintiles
Related Research
• Stansel, Dean. “Why Are Some
Cities Growing While Others Are
Shrinking?” Cato Journal, 31, 2
(Spring/Summer 2011), 285-303.
• Stansel, Dean. “Higher Taxes, Less
Growth: The Impact of Tax Burden
on Economic Growth in U.S.
Metropolitan Areas,” Policy Brief,
April 2009, National Foundation for
American Policy, Arlington,
Virginia, www.nfap.com.
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Percentage Change, 1980-2007
Lower Tax Areas Grow Faster
157.3%
160%
140%
120%
107.6%
100%
80%
75.5%
64.4%
60%
40%
20%
40.1%
21.3%
0%
Population
Employment
Real Personal
Income
10 Lowest-Tax Large Metro Areas
10 Highest-Tax Large Metro Areas
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Lower Tax Areas Grow Faster
16%
14.7%
Economic Growth
14%
12%
10%
9.4%
8.6%
8%
6.1%
6%
4%
8.2%
2.6%
2%
0%
Population
Growth, 20002007
Employment
Growth, 20002006
Real Personal
Income Growth,
2000-2006
50 Lowest-Tax Metro Areas
50 Highest-Tax Metro Areas
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State & Local Taxes as a Percentage
of Income, 1977-2002 Average
Lower Tax Areas Grow Faster
14%
13%
12%
Correlation Coefficient: -0.405
11%
10%
9%
8%
7%
-50%
0%
50%
100% 150% 200% 250% 300% 350% 400%
Employment Growth, 1980-2007
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State & Local Taxes as a % of
Income, 1977-2002 Average
High-Growth Areas Have Lower
Taxes
11.0%
11.0%
10.7%
10.6%
10.5%
10.0%
9.5%
9.4%
9.2%
9.3%
9.0%
8.5%
8.0%
Population
Growth, 19802007
Employment
Growth, 19802007
Real Personal
Income
Growth, 19802007
10 Highest-Growth Large Metro Areas
10 Lowest-Growth Large Metro Areas
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1997 State & Local Taxes as a
Percentage of Income
High-Growth Areas Have Lower
Taxes
11.2%
11.2%
11.0%
10.8%
10.8%
10.6%
10.4%
10.4%
10.2%
10.8%
10.3%
10.1%
10.0%
9.8%
9.6%
9.4%
Population
Growth, 20002007
Employment
Growth, 20002006
Real Personal
Income
Growth, 20002006
50 Highest-Growth Metro Areas
50 Lowest-Growth Metro Areas
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“…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
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Source: Dan Mitchell, Cato Institute,
http://danieljmitchell.wordpress.com/
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The Fed & Quantitative Easing
• Towards the end of the last
recession, the Fed began a policy
of “quantitative easing”
• Bought $4.5 trillion in assets from
commercial banks and other
financial institutions
• Economic theory says that should
increase inflation
• Consumer Price Index hasn’t risen
much
56
Where’s the Inflation?
• Dow Jones Industrial Average
has skyrocketed
• More than doubled
• From 7,063 in Feb. 2009
• To an all-time high of 18,133 in
Feb. 2015
• That’s a 17% annual inflation rate
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Consumer Power in Health Care
• Lasik surgery
• Not covered by most health
insurance plans
• Price has fallen dramatically over
the years
• Cosmetic surgery is another
example.
• “Price” of other medical procedures
has risen much faster than inflation
59
Government Intervention in
Higher Education
• Federal student aid topped $169
billion in the 2013–2014 academic
year – an increase of 105 percent
over the past decade.
• In 2014, the $33 billion Pell Grant
program provided grants to 9
million college students, making it
the largest share of the federal
education budget.
60
Government Intervention in
Higher Education (cont.)
• Since 1980, tuition and fees at public and
private universities have grown at least
twice as fast as the rate of inflation.
• 60 percent of bachelor’s degree holders
leave school with more than $26,000 in
student loan debt
• Cumulative student loan debt now
exceeds $1 trillion.
• Source: Lindsey Burke, “4 Key Reforms That
Could Make College More Affordable,” The Daily
Signal, Sep. 15, 2014.
61
62
63
Prescription for Growth
INCREASE
ECONOMIC
FREEDOM
1. Rein-in spending
2. Lower taxes
3. Reduce the regulatory burden
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65
Tax Reform
• Itemized deductions shrunk the
tax base by $1.2 trillion in 2011,
14% of AGI.
• Tax rates could be reduced by
nearly one-fifth if those
loopholes were eliminated.
Source: Stansel & Randazzo, “Unmasking the
Mortgage Interest Deduction,” Reason
Foundation, 2013.
66
Mortgage Interest Deduction
• Largest loophole is the mortgage
interest deduction
• Only about 25% of taxpayers
claim it.
• Consumers on the margin b/w
renting & buying are harmed due
to higher housing prices.
• They are also much less likely to
claim the MID if they DO buy b/c
they tend to have lower income.
67
Regulatory Reform
• Regulatory Improvement Act
• Establish a Regulatory
Improvement Commission
• identify regulations to repeal
• send them to Congress for an up
or down vote as a total package
with no amendments
• Similar to the Base Closure and
Realignment Commission of the
1990’s
68
The Good News…
69
Government Shutdowns
• About 2 years ago “nonessential” federal government
employees were off the job
for well over a week, and...
• Lee County (FL) Soil and
Water District recently voted
to shut itself down.
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Nation’s Leader Rejects
Keynesian Economics,
Acknowledges that Real Jobs
Are Created by the
Private Sector
“We need to put an end to
illusions: it’s not the public sector
that creates jobs. To believe that
injecting billions … [into the
economy] is the key to growth is
an idea of the past.”
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Nation’s Leader …
Acknowledges that Real Jobs
Are Created by the
Private Sector
That quote was from Alexander
Stubb, the Prime Minister of
Finland, not the President of the
United States.
Source:
https://danieljmitchell.wordpress.com/2014/10/
03/nations-leader-rejects-keynesianeconomics-acknowledges-that-real-jobs-arecreated-by-the-private-sector/
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“Capitalism has been the
most effective ideology we
have known in taking people
out of extreme poverty.”
-- Bono
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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.oneilcenter.org
www.deanstansel.com
[email protected]
@DeanStansel
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