Canada’s Fraser Institute just released the 2022 Economic Freedom of North America (EFNA) index. The good news: Alabama’s economic freedom increased slightly. The bad news: we still trail three neighboring states.
Economic freedom refers to freedoms to buy, sell, work, and start businesses. A free economy relies on “personal choice and markets to answer basic economic questions such as what is to be produced, how it is to be produced, how much is produced, and for whom is production intended.”
Free markets presumably produce prosperity; measuring how closely economies approach the free market ideal is crucial to testing the markets and prosperity hypothesis.
The state economic freedom index involves 10 component variables aggregated into three areas: government spending, taxation, and labor market freedom. Each component is scored from 0 to 10, with 10 the highest observed amount of freedom and 0 the least.
A state’s score averages the three area scores. The 2022 rankings use data from 2020 due to lags in the compilation and publication of some components.
Alabama’s economic freedom score is 6.41, up slightly from, and ranks 22 nd . The top-rated state is Florida with a score of 7.94 while New York ranks last at 4.25. We rank 32 nd on government spending, 9th on taxation, and 22 nd on labor market freedom.
Our rank is respectable but trails three of our neighbors. Florida, as mentioned, ranks 1st , Tennessee ties for 4th , and Georgia is 8th ; we beat only #37 Mississippi. Competition between states is real, so trailing our neighbors might affect the recruitment of businesses to Alabama.
Choices must be made in constructing any metric, and we should ask if plausible alternative choices might affect our score.
The minimum wage is one component of labor market freedom. Alabama does not have a state minimum wage and prohibits cities from imposing their own. Yet we do not get a score of 10 on this component because the index applies the Federal minimum wage in states without a minimum wage.
Labor market freedom also includes the percentage of unionized workers. The EFNA does not use Right-to-Work status of states. Unions in principle are voluntary organizations, but the government often sets the rules for unionization to favor unions. Our score for this component exceeds the national average but would be better if adjusted for Right-to-Work.
The average score for states increased slightly from 2019, from 6.13 to 6.23. By contrast, Fraser’s Economic Freedom of the World (EFW) reported declines due to the COVID-19 response. Why the difference?
The EFNA compiles two state freedom measures, one including national policies to parallel EFW ratings, and one using state policies. My discussion above refers to the state-focused metric. The EFNA scores including national policies declined since the COVID policies affecting measured economic freedom – trillions in spending, money supply growth, and restrictions on international travel – originated in Washington.
States enacted stay at home orders and closed businesses and schools, but these do not enter the economic freedom index. Yet many regulations were also relaxed during the pandemic, like to-go alcohol sales by restaurants, occupational licensing, and telehealth. The EFNA also misses this deregulation.
The pandemic highlights a weakness in the EFNA, not accounting for state constitutional limits. Alabama has a state income tax, but our constitution limits the maximum rate. This provides greater certainty regarding future policy than in a state with a similar top tax rate and no constitutional cap. Alabama’s constitution also limits the maximum rate and base for the property tax.
America’s founders thought that true freedom meant that government could not infringe freedom. If government can take your property but chooses not to, your property arguably is not yours by right. The Bill of Rights prohibits Congress from trespassing on our rights.
Many Americans were shocked by state business closures and stay-at-home orders. The lack of constitutional limits on emergency powers compromises our property rights and personal freedom. These constitutional infirmities should be addressed before the next pandemic.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.