Free Markets

Canadian Provinces Suck Slightly Less Than U.S. States at Economic Freedom

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Economic Freedom of North America
Fraser Institute

Canada's growing advantage in economic freedom relative to the Unfortunate States of America doesn't just matter in terms of international bragging rights—it's also dragging down the the relative attractiveness of U.S. states as places to live and do business. Nationally, the United States has slipped in both Fraser Institute and Heritage Foundation assessments of economic freedom. And now the Fraser Institute says that states are being weighed down by federal policy that makes it harder for them to compete with their neighbors north of the border. Unfortunately, Canada is winning this race not with great policy, but by being less bad than than its neighbor.

When the U.S.-based Heritage Foundation publishes its latest Index of Economic Freedom, the authors wrote, "The United States, with an economic freedom score of 76, has lost ground again in the 2013 Index. Its score is 0.3 point lower than last year, with declines in monetary freedom, business freedom, labor freedom, and fiscal freedom."

Likewise, Canada's Fraser Institute, in its most recent Economic Freedom of the World (PDF) report, grimly stated:

Throughout most of period from 1980 to 2000, the United States ranked as the world's third-freest economy, behind Hong Kong and Singapore. As Exhibit 1.5 indicates, the chain-linked summary rating of the United States in 2000 was 8.65, second only to Hong Kong. By 2005, the US rating had slipped to 8.21 and its ranking fallen to 8th. The slide has continued. The United States placed 16th in 2010 and 19th in 2011.

Unfortunately, even as American states vie with one another to attract businesses and investment, they're limited in what they can undo in terms of damage done by Washington, D.C. State governments are largely hemmed-in, and hobbled, by federal policy—with unfortunate repercussions. That becomes clear in Fraser's latest, more locally focused, Economic Freedom of North America report. As the authors pithily point out, "the race is heating up for some U.S. states. Unfortunately, it's a race to last place. According to the report, the federal government's influence over the states is increasing, and the average state score has dropped 0.9 points since 2000. That's particularly bad news when you consider that a one-point increase in economic freedom translated into a 1.4-point increase in the employment growth rate between 2000 and 2005. That's 1.5 million jobs created over five years!"

For readers of Reason, Fraser's definition of economic freedom is unlikely to be controversial. Fundamentally, the report says, "Individuals have economic freedom when (a) property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and (b) they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others."

The report includes two rankings of economic freedom—one just comparing state and provincial policies, and the other incorporating the effects of national legal systems and property rights protections. Since people are subject to all aspects of the environment in which they operate, and not just locally decided rules and regulations, it's that "world-adjusted all-government" score that matters most, and it has a big effect—especially since "gaps have widened between the scores of Canada and the United States in these areas." The result is is that:

[I]n the world-adjusted index the top two jurisdictions are Canadian, with Alberta in first place and Saskatchewan in second. In fact, four of the top seven jurisdictions are Canadian, with the province of Newfoundland & Labrador in sixth and British Columbia in seventh. Delaware, in third spot, is the highest ranked US state, followed by Texas and Nevada. Nonetheless, Canadian jurisdictions, Prince Edward Island and Nova Scotia, still land in the bottom two spots, just behind New Mexico at 58th and West Virginia at 57th.

Before you assume that the nice folks at Fraser are gloating, or that you should pack your bags for a northern relocation, the authors caution that things aren't necessarily getting better north of the border. Instead, "their economic freedom is declining more slowly than in the US states."

So, they have that going for them. For what it's worth.

Congratulations to my Canadian friends for out-scoring the U.S. on economic freedom. I look forward, someday, to racing them to the top rather than the bottom.