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’re still following three neighboring states.
Economic freedom refers to the freedom to buy, sell, work and start businesses. A free economy relies on “personal choices and markets to answer fundamental economic questions such as what to produce, how to produce, how much to produce, and for whom to produce”.
Free markets presumably generate wealth; In order to test the market and prosperity hypothesis, it is crucial to measure how close economies are to the ideal of the free market.
The Government Economic Freedom Index has 10 component variables aggregated into three domains: government spending, taxation, and labor market freedom. Each component is rated from 0 to 10, with 10 being the highest degree of freedom observed and 0 being the lowest.
A state’s score is the average of the three territory scores. The 2022 ranking uses data from 2020 due to delays in the compilation and release of some components.
Alabama’s economic freedom score is slightly above 22nd place at 6.41. The highest-ranked state is Florida with a score of 7.94, while New York comes last with a score of 4.25. We rank 32nd in government spending, 9th in taxation and 22nd in labor freedom.
Our rank is respectable but behind three of our neighbors. As previously mentioned, Florida is #1, Tennessee is #4, and Georgia is #8; we only beat #37 Mississippi. Competition between states is real, so stalking our neighbors could hurt business recruitment in Alabama.
In constructing any metric, choices must be made, and we should ask ourselves whether plausible alternative choices could affect our score.
The minimum wage is part of the labor market freedom. Alabama has no state minimum wage and prohibits cities from imposing their own. However, we do not get a score of 10 for this component because the index applies the federal minimum wage in non-minimum wage states.
Labor market freedom also includes the proportion of unionized workers. EFNA does not use the right-to-work status of states. Unions are essentially voluntary organisations, but the government often sets the rules for union organizing to favor unions. Our score for this component is above the national average, but would be better if adjusted for the right to work.
The average score of the federal states increased slightly compared to 2019 from 6.13 to 6.23. In contrast, Fraser’s Economic Freedom of the World (EFW) reported declines due to the response to COVID-19. Why the difference?
EFNA compiles two state freedom measures, one includes national guidelines for parallel EFW assessments and one uses state guidelines. My discussion above relates to the stateful metric. EFNA results, including national policies, declined as the COVID policies affecting measured economic freedom — trillions in spending, monetary growth and restrictions on international travel — originated in Washington.
States issued stay-at-home orders and closed businesses and schools, but these are not included in the Economic Freedom Index. But many regulations have also been relaxed during the pandemic, such as take-out alcohol sales by restaurants, work permits and telemedicine. EFNA also misses this deregulation.
The pandemic highlights a weakness in EFNA’s failure to honor states’ constitutional boundaries. Alabama has a state income tax, but our constitution limits the maximum rate. This gives more security for future politics than in a state with a similar top tax rate and no constitutional upper limit. The Alabama Constitution also limits the maximum rate and base for property taxes.
America’s founders thought that true liberty meant that government could not violate liberty. If the government can take your property but chooses not to, your property does not legally belong to you. The Bill of Rights prohibits Congress from violating our rights.
Many Americans were shocked by government store closures and home bans. The lack of constitutional limits on emergency powers puts our property rights and personal liberties at risk. These constitutional weaknesses should be addressed before the next pandemic.
Daniel Sutter is the Charles G. Koch Professor of Economics at the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are those of the author and do not necessarily reflect the views of Troy University.