Economic Freedom Means Prosperity – A Lesson For States

NCPA/Fraser Study Ranks States From Most Free – Delaware, to Least – West Virginia

DALLAS (January 27, 2004) – At a time when the United States and U.S.-backed international financial institutions are encouraging countries around the world to adopt free market economies, a new study examines how well states in the U.S. fare by that measure. The study, released today by the National Center for Policy Analysis (NCPA) and Canada's Fraser Institute, shows a remarkable diversity among the 50 U.S. states and 10 Canadian provinces.

“It's easier to give advice than follow it,” said NCPA Research Manager Devon Herrick, “but the pay off is significant for those states that promote economic freedom.”

The study ranks all 50 states based on overall “economic freedom.” Colorado , Delaware , South Dakota and Tennessee tie as most free; West Virginia sits alone as least free. This year's rankings represent a relative improvement for Colorado (up from 3 rd ), South Dakota (up from 4 th ) and Tennessee (up from 2 nd ), as they moved up the ranking from last year to join Delaware at the top spot. However, among those tied for the top position only South Dakota 's Economic Freedom Score, which is used to determine the ranking, improved. Both Delaware and Tennessee 's score fell, while Colorado 's was consistent with last year.

The rankings are devised from an economic freedom score that is based on factors such as size of the tax burden, size of government and flexibility of the state's labor market. For example:

  • The tax burden among the states ranges from 8.6 percent of income in New Hampshire to 12.8 percent in Maine.
  • Government spending on goods and services ranges from 8.4 percent of all spending in New Hampshire, to 20 percent in Alaska.
  • Alabama has the most flexible labor market, due in part to lack of a state mandated minimum wage; while Washington has the least flexible labor market with a relatively high minimum wage compared to average income, its high public sector labor force and high level of occupational licensing.

“With few exceptions, economic freedom and prosperity go hand in hand,” said Herrick. “States with low taxes and limited government tend to grow faster than states where the opposite is true.” While economic freedom is not the sole determinant of a state's wealth, the correlation is strong. For example:

  • Per capita output of goods and services in the top ten states averaged more than $2,420 more than the average state.
  • Per capita output of goods and services in the bottom ten averaged more than $2,420 less income per person than the average state.