Economic Freedom Key to the “Wealth of Cities”

By Matt Kelly

Economic freedom is the unrestricted ability of people in a country to associate and transact with one another. Measuring economic freedom has become a growing area of academic research. Probably the best known measure is the index constructed for the “Economic Freedom of the World”  annual report on 159 countries published by the Fraser Institute and authored by Florida State University’s James Gwartney, Southern Methodist University’s Robert Lawson, and West Virginia University’s Joshua C. Hall. Other indices compare US states, like Cato’s Freedom in the Fifty States ranking. More recently, Dean Stansel of Southern Methodist University created a measure of economic freedom for US metropolitan statistical areas (MSAs). Stansel’s index ranks many Florida cities among the nation’s freest.

Cities are “our species’ greatest invention,” writes Harvard economist Edward Gleaser in Triumph of the Cities, echoing the claims made by iconic urbanists such as Jane Jacobs. Advances in technology and culture often spring from urban areas, where proximity with others spurs collaboration, increased productivity, and creativity. People increasingly migrate to these cauldrons of commerce in search of opportunity. Nearly 80 percent of Americans, and 54 percent of the world’s population, live in cities.

Gleaser notes that governance is a perennial challenge for cities. Many American localities have enacted policies that diminish economic freedom, as measured by economic freedom indices. Local tax burdens, for example, have risen from around 4 percent in 1950 to nearly 7 percent today. Per capita local government spending rose from 6 percent of GDP in 1950 to over 10 percent in 2010. Growth management laws and more restrictive zoning ordinances have also weakened private property rights, restricted markets, and reduced housing affordability. Other municipal-level policies like taxi licensing, plastic bag bans, rent controls, and minimum wage laws diminish economic opportunity and reduce efficiency.

Stansel’s index of MSA economic freedom uses a ten-point scale and consists of three components: public spending as a share of local personal income, indirect tax revenue and receipts from levies on income and sales, and restrictiveness of labor market regulation. The scores reveal large variations among the 384 American cities in the sample. Naples, Florida, ranks most free with a score of 8.52. El Centro, California, ranks lowest with a score of 3.32. Among the 30 largest MSAs, the five freest metropolitan areas are in Florida and Texas. Tampa tops this list, followed by Houston, Dallas, Miami, and Orlando.

Across a range of outcomes, cities with greater economic freedom performed better than those with less (see Figure 1). Unemployment rates were lower in MSAs with higher scores. Of the 100 largest MSAs, the 20 freest saw employment increase by 17 percent on average between 2001 and 2014, compared with just 4 percent for the bottom 20. Average hourly wages were almost $16 in the top 20 cities, but only $12.40 in the bottom 20. Economic growth in the most free cities outpaced growth in the rest, yet the cost of living was highest in the 20 least free cities. Even income inequality, as measured by wage dispersion among median wages, was lower in cities with more economic freedom. Migration data suggests people are choosing to live in freer cities. Between 1992 and 2011, the 20 least free cities, including New York, Los Angeles, and Detroit, saw cumulative net out-migration of 7.1 million people, while top 20 cities like Atlanta, Dallas, Tampa, and Orlando saw net in-migration of 9 million.

Adam Smith’s The Wealth of Nations offered a simple but insightful explanation of economic prosperity: a political economy of limited government, private property rights, free trade, and markets that allowed for the division of labor. As Stansel’s index demonstrates, the wealth of cities is no different.

About DeVoe Moore Center

The DeVoe L. Moore Center is conducts economic research and policy analysis focused on state and local policy issues and is located in the College of Social Sciences and Public Policy at Florida State University in Tallahassee. As an educational institution the DMC provides professional research experience to undergraduate and master’s students through an extensive program of internships and independent study, preparing them for a future in public policy, economic development, public sector accountability and entrepreneurship.
This entry was posted in Entrepreneurship, income inequality, Politics, Regulation, Tax Policy and tagged , , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s