WV Center on Budget and Policy > Blog > Economic Development > “Economic Freedom” Index Fails to Predict Economic Performance

“Economic Freedom” Index Fails to Predict Economic Performance

Last week, an article in the Daily Mail noted that West Virginia once again ranks poorly in an economic index, this time the Economic Freedom of North America 2012 index, created by the Fraser Institute.  According to the study, West Virginia is one of the least economically free states in the country, and that economic freedom increases affluence. The study defines economic freedom in much the same way that ALEC defines competitiveness: low taxes, weak union membership, low or no minimum wage, as well as low levels of government spending including on health care and social security. And while the study claims that its measure of economic freedom increases affluence, its index has completely failed to state economic performance in that past few years, just like ALEC’s index.

Below, I compare each state’s 2006 Economic Freedom Index rank with four different measures of economic growth from 2006 to 2011: total GDP growth, per capita GDP growth, per capita personal income growth, and total nonfarm employment growth. In the charts the state rankings go from left to right on the horizontal axis, while the measures of economic growth from bottom to top on the vertical axis, and each chart is fitted with a trend line and a measure of correlation.

If the Economic Freedom Index is a strong predictor of economic growth, the trend line should slope down from left to right, as states with poorer rankings would have worse economic growth; and the correlation coefficient would be negative, with coefficients closer to -1 than to 0. So let’s take a look at the results:

 

As the charts show, there is virtually no relationship between a state’s Economic Freedom Ranking and subsequent GDP, per capita GDP, and employment growth. Correlations between the state ranking and those three measures of growth are all nearly zero. There is no tendency for better-ranked states to have better economic growth.

And while “economic freedom” is supposed to increase individual affluence, the last chart shows that the 2006 Economic Freedom Index was actually a decent predictor of per capita income growth, but in the opposite direction. That relationship had a positive correlation of 0.27, with states that had less “economic freedom” in 2006 experiencing higher levels of income growth over the next five years.

Once again, there is more evidence that low tax, limited government policies don’t create the economic growth that they promise.

2 Responses to ““Economic Freedom” Index Fails to Predict Economic Performance”

  1. dan doyle says:

    Very nice application of statistics and quantitative graphics, Sean. Thank you. Keep it up.

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