Why Some Economies Struggle As Others Thrive

Americans continue to be on the move. According to North American Moving Services, California and New York were losing residents and had some of the highest rates of outbound moves (based on moving truck rental data) in 2018, while Texas and Florida were among the states with highest rates of inbound moves.

Broadly speaking, Texas and Florida tend to have public policies that support a free market economy, whereas states like New York and California tend to do the opposite. The case can be made that Americans are voting with their feet in favor of economic freedom.

While economic freedom varies across states within the United States, it also varies within states, as my new study from the Reason Foundation shows. For example, among the 52 metropolitan statistical areas with more than 1 million residents, the San Jose, California, MSA, home to many of the tech companies in Silicon Valley, ranked in the middle of the pack (at 27th), but the Los Angeles MSA ranked in the bottom 10 and Riverside, California, ranked last (52nd) in the nation. Similarly, in Tennessee, Nashville scored very well, ranking as the 6th most free metro area, but Memphis was only 20th.

This variation helps explain why some areas within a state can thrive while others struggle. From 2012 to 2016, San Jose’s MSA population grew by 4.4 percent, while Los Angeles’ MSA population grew less than half as fast (2.1 percent). Nashville’s population grew by 8 percent while Memphis’ barely budged (0.2 percent). Overall, the population grew four times faster in the freest areas. The most-free areas were also more prosperous, with per capita personal income 5.7 percent above the MSA average, while the least-free quartile was 4.9 percent below average. That means per capita income was nearly 11 percent higher in the freest areas.

The positive relationship between economic freedom and economic prosperity at the local level is similar to findings at the state and country levels. More than 200 articles by independent researchers have examined this relationship at the state level using the Fraser Institute’s annual Economic Freedom of North America report. Now, the “U.S. Metropolitan Area Economic Freedom Index” uses nine different measures of state and local government policies to produce an overall score for each of the nation’s 382 metropolitan statistical areas. For purposes of rankings, the 52 largest metro areas were examined separately. The five most economically free large areas were Houston; Jacksonville, Florida; Tampa-St. Petersburg, Florida; Richmond, Virginia; and Dallas-Fort Worth. The least-free economies were Riverside, California; Rochester, New York; Buffalo; New York City; Cleveland; and Columbus, Ohio.

In one recent study, economists at West Virginia University and Louisiana State University found that a 10 percent increase in economic freedom was associated with a 5 percent increase in real per capita gross state product (a measure of the total output of the economy per person). At the local level, researchers have found that metro areas with higher economic freedom tend to have greater net in-migration of population, more entrepreneurial activity, higher levels and faster growth of per capita income, faster population growth, higher female labor force participation rates, and better local government bond ratings.

For cities and lawmakers, this means policy and regulatory decisions may have much more impact than they think. Interventions in the economy, such as large increases in government spending, high income tax rates, and minimum wage increase tend to be associated with poorer economies. The opposite policies — slower spending growth, low (or no) income taxes, and fewer labor market interventions — tend to be associated with more prosperous economies.

For struggling local economies, the lesson is clear: policy changes that support a free market economy can help prevent people and businesses from seeking freer pastures elsewhere. But burdensome interventions in the economy may lead to even more people packing their stuff into moving vans and leaving the area.

Dean Stansel is an economist at the O’Neil Center for Global Markets and Freedom in Southern Methodist University’s Cox School of Business and the author of Reason Foundation’s new “U.S. Metropolitan Area Economic Freedom Index.”