John Hood
Contributing columnist
HIS VIEW
North Carolina has one of the freest economies on the continent — a fact that augers well for the future of our state and its (now) 11 million residents.
That’s one of the findings of the latest Economic Freedom of North America index from the Canada-based Fraser Institute. Authored by scholars at Southern Methodist University, West Virginia University, the Universidad de la Libertad in Mexico City, and Puerto Rico’s Instituto de Libertad Económica, the study ranks jurisdictions according to performance on a variety of fiscal and regulatory measures.
Using a continent-wide index that incorporates data from all levels of government, North Carolina ties Utah for seventh place in economic freedom, outpacing not only most American states but all Mexican states and Canadian provinces.
In another index, based only on state and local policies within the U.S, North Carolina ranks ninth, behind (in order) New Hampshire, South Dakota, Florida, Tennessee, Texas, Georgia, Indiana, and Idaho. If we stick our current plan of phasing out North Carolina’s corporate tax by the end of the decade, we will likely move further up these rankings.
Why does that matter? Because there’s a strong relationship between economic freedom and economic wellbeing. Across North America, average per-capita incomes in the freest quartile of jurisdictions are an astounding 21 times higher than incomes in the lowest-ranked quartile. From 2013 to 2022, inflation-adjusted incomes rose by 29% in the freest places while declining 13% in the least-free places.
Because Mexican states dominate the bottom of the list, let’s focus just on variations in economic freedom within our own country. The Fraser Institute team found that the top quartile of American states in economic freedom experienced three times as much job creation and 10 times as much population growth as the least-free states did.
Nor is the evidence for benefits confined to simple correlations. Since the debut of the Fraser index, scholars have used it or its components as variables in some 400 studies published in academic journals, books, and monographs. Most have found a statistically significant positive relationship between economic freedom and economic performance.
A 2021 study in the Journal of Institutional Economics, for example, found that low-income households in Canadian provinces with higher economic-freedom scores had higher rates of income mobility than did their peers in less-free provinces. Another paper, published last year in the American Journal of Economics and Sociology, found that better scores on the tax variable was associated with a lower cost of living.
Now, to say that tax and regulatory reforms foster economic growth is not to say they are the only policies that foster growth. It is wise for states and localities to fund public goods such as highways and schools. The real issue is how to strike the right balance. A 2022 study published in American Business Review found that while increases in physical capital per worker are consistently associated with higher worker output, increases in human capital — measured by years of schooling — only boost worker output in states with a relatively high level of economic freedom.
That is to say, in the 19 states (including North Carolina) with Economic Freedom of North America index scores above 5.91, higher levels of education are associated with higher productivity. Below that score, boosts in schooling have no discernible effect.
How can that be? The study’s authors suggested interstate migration as a possible explanation. “Education makes it more likely for individuals to migrate,” they concluded, “and when they migrate, they are more likely to migrate to economically free states. Thus, increases in education per worker might ultimately lead to less output per worker if educated individuals do not stay in the state.”
Here in North Carolina, we witness such benefits of economic freedom every day. We’re one of the top states for in-migration. Throngs of highly productive and creative people are coming here in search of opportunity — a decision that makes other North Carolinians better off, too. Let’s keep heading in the right direction.
John Hood is a John Locke Foundation board member. His books “Mountain Folk,” “Forest Folk,” and “Water Folk” combine epic fantasy with American history (FolkloreCycle.com).
