CO Ranks 2nd in Economic Freedom
by Ari Armstrong, October 13, 2005
Colorado ranked second in the 2004 "U.S. Economic Freedom Index," a book reviewed by one of its authors at the Denver Press Club on October 12. Lawrence McQuillan, Ph.D., who wrote the book with two other economists, is the director of Business and Economic Studies at the Pacific Research Institute in San Francisco. He discussed his report and its significance with a panel hosted by the Independence Institute.
Lawrence McQuillan, Fred Brown, Rob Reuteman, Dale Meyer, and Lois Tochtrop prepare to discuss the "U.S. Economic Freedom Index." John Andrews, not shown, also joined the panel.
McQuillan said economic freedom is characterized by voluntary exchange, private property rights, and the rule of law. Economic freedom, he explained, means you get to keep what you earn, produce what you want, compete on the market, and spend your money the way you want.
McQuillan and his associates studied a broad range of variables to come up with their rankings. Colorado ranked in the top ten in areas of taxation, welfare, and regulation. Colorado was beat out by Kansas. "Why settle for number-two when you could be number-one?" McQuillan asked the crowd.
Economic freedom is an important factor in people's decisions to move. "People are leaving the more economically oppressive states and going to the freer states," McQuillan noted. He called this phenomenon "live free or move."
What's more, the people who tend to move to economically freer states tend to be the educated, young, and entrepreneurial. Thus, Colorado is "attracting the best and the brightest from other states."
According to the statistics, McQuillan said, every 10 percent improvement in a state's economic-freedom score leads to a half-percent increase in personal income. If Colorado moved to first place and those statistics held, personal income would increase by $245. Invested over a 40-year span and usual interest rates, that would generate a nest-egg of $57,000.
So, even though Colorado is doing better than most other states, it can do better yet. McQuillan said Colorado can make improvements in punitive damages, liability, and right-to-work legislation.
Rob Reuteman, business editor for the Rocky Mountain News, noted that Colorado recently suffered a recession and a slowing in immigration from other states. John Andrews pointed out that the entire country suffered a recession. McQuillan noted that the rankings are relative, so Colorado moved up the rankings partly because other states did worse. He also said that many factors determine where people move, though economic freedom is an important one.
I asked McQuillan whether he accounted for spending on regulations and local spending. He said the report does include information about spending on regulations, but it does not include any information about local taxes or regulations.
When asked about infrastructure, McQuillan made two points. Tolls can fund many roads and bridges, he said. More broadly, limits on spending "force politicians to think creatively" and "make tough decisions" rather than rubber-stamp perpetual spending increases.
Dale Meyer, an economist at the University of Colorado, urged the audience to "give a little caution to this study, and not over-generalize it." He pointed to a "huge percentage of unexplained variance; ...all sorts of other things are going on."
Meyer and John Andrews got into a minor tussle.
Andrews said, "In my lifetime... if there's any one thing that's been settled, it is that market economies perform better than command economies, other things being equal. Market economies create more wealth in the aggregate, and end up distributing it, raising everyone's living standard, although not at an equal rate, better than command economies. If you look back to the '40s, when Hayek wrote Road to Serfdom it appeared that the future was with the command economy. That's now been, I think, entirely settled. Or are you questioning that that's settled?"
Meyer replied, "I'm not even talking about that."After an interjection from Andrews and a chuckle from the audience, Meyer continued, "I'm glad you bring in Hayek, and so forth, because he is Milton Friedman's patron saint... I can drop names too. But I'm saying that this study is correlative, but it is not predictive, it is not cause and effect. I'm saying, be rigorous enough to admit that. Talking about Hayek, and whether that's been proven or not, I don't think it's been proven, but..."
McQuillan granted that his study doesn't track all the factors of economic growth, but he said his study shows that "economic freedom does matter" and "we can look at the effect of economic freedom."