Michael LaFaive, Mackinac Center for Public Policy
The economies of most Midwestern states have not performed particularly well over the years, as indicated by many objectively measurable categories. The Michigan-based Mackinac Center for Public Policy and Mexico-based Caminos de la Libertad use these categories, as well as data about income, migration and related indicators, to find the best policies for human well-being.
The institutions we represent have worked with the Canada-based Fraser Institute, which has developed economic indexes that attempt to objectively measure the degree to which nations or states and provinces adopt economic policies that are relatively free. The institute then ranks those governments and publishes its findings and raw data. Evidence overwhelmingly demonstrates that more economic freedom is typically correlated with positive outcomes, such as lower unemployment rates and greater personal income.
Late last year the Fraser Institute released its Economic Freedom of North America index, which ranks Mexican and U.S. states — as well as Canadian provinces — by economic freedom. The 2021 index uses data through 2019. When ranking U.S. states, it finds that Minnesota is 38th, Ohio is 35th, Illinois is 32nd, and Wisconsin is 25th. Michigan is 34th, far below its only neighbor that is above the national average, Indiana, which is the 11th most economically free state. New Hampshire was ranked as the most-free among the 50 states while New York was last.
The ENFA also compared Mexican states to each other, with Baja California ranked as the freest. Michoacan de Ocampo was a close second, followed by Jalisco. Campeche was the least free.
Rankings are based on data collected in three major areas: taxation, government spending and labor regulation. Each area has three subcomponents, such as tax revenue from personal income as a percentage of total personal income, government spending as a percentage of personal income and minimum wage. Each state and province receive a score from zero to 10 in each area, with 10 representing the highest degree of freedom and zero standing in for the lowest. The scores from each area are totaled and averaged for an overall score. In order to be able to compare states in different countries, data is included separately on other regulations and national government policies such as legal systems and monetary and trade policy.
When compared to the rest of the continent, the freest Mexican states rank below even the least free U.S. states and Canadian provinces. This is not caused primarily by local or state policies in Mexico. It is caused instead by the burden of federal policies and regulations, as well as a general absence of the rule of law in Mexico. While there is a tradition of federalism in the U.S., or states’ rights, Mexico is a profoundly centralized country, with most policies determined by the federal government in Mexico City. Even taxes are federalized, with 98% of all government revenues coming from federal taxes, compared to 63% in the U.S.
While Mexico’s improvements on economic freedom depend mostly on its federal government, U.S. states, counties and municipalities still hold a very important role in increasing (or lowering) their economic freedom.
Where states and provinces end up in Fraser indexes matters. This is because everything from simple correlations to complex statistical analyses show that economically freer states do better. For example, there is a per-capita income gap of about $50,000 between the least free quartile of Mexican states and the most-free quartile of U.S. states.
More than 150 scholarly studies have used the EFNA index, and the results overwhelmingly show positive links between liberty at the state or provincial level and widely desired outcomes. For instance, a 2011 study found a “significant positive relationship between economic freedom” and growth for the 50 U.S. states. A 2014 study found a positive relationship between economic freedom and higher wages. A 2020 study found that an increase of one percentage point in a government’s labor market regulation score “results in a 2.8 percent increase in the gross in-migration rate.” That is, the freer the labor market, the more people moved in. Migration may be the best single metric for measuring quality of life, especially those that involve fundamental economic concerns such as the desire for the best jobs.
The best state policies remove obstacles and burdens to peaceful and free association. Therefore, elected officials should concentrate on reducing the size and expense of state government, cutting taxes and adopting market favorable labor reforms. Those would be good places to start.
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Michael LaFaive is the senior director of the Morey Fiscal Policy Initiative for the Mackinac Center for Public Policy, where he has worked since 1995.
