Economic Freedom Greatest in Middle America, Study Says

Economic Freedom Greatest in Middle America, Study Says
January 1, 2005

If you want to start a business but are not sure where to set up shop, should you head for a vibrant megalopolis like New York City? A nucleus of brainpower and venture capital like Silicon Valley? Or a city of flamboyant creativity like Miami?

Actually, whether you're writing software or whipping up candy bars, chances are you would be better off in Kansas, according to The U.S. Economic Freedom Index: 2004 Report, published by the Pacific Research Institute and Forbes magazine. The report says Kansas is the state with the greatest level of economic freedom in the country, as measured by tax rates, business regulation, the behavior of the courts, and how the government spends its money.

Gauged by these factors, Colorado has the second-greatest level of economic freedom in the country, followed by Virginia, Idaho, and Utah. The states with the least economic freedom, by contrast, are two we often think of as hubs of commerce: California and New York, 49th and 50th respectively.

This means that if you try to bootstrap your fledgling firm in Kansas or Colorado, you will have a serious competitive edge over someone trying to do the same in New York.



Taxes, Regulation Are Key

What should budding capitalists consider when assessing how free they will be to pursue their business dream? Low taxes are an obvious start.

The regulatory environment is also key. Professional licensing requirements, land-use restrictions, and mandated payments to workers' compensation or insurance funds are just some of the rules that can hamstring businesses trying to get off the ground.

For instance, it's no surprise California ranks 49th in economic freedom when you consider it makes by far the most onerous workers' compensation demands in the country. Business owners in the Golden State must pay Sacramento about $6.37 for every $100 of payroll, according to the National Federation of Independent Business. The national average is $2.68.

A third factor in measuring economic freedom is the court system. While citizens must be able to redress grievances in court, in states like Connecticut--48th in economic freedom--civil court awards have gotten out of hand, according to the report, going beyond redressing wrongs to imposing massive punitive damages. States that have introduced legal improvements, like reforming tort law or capping damages, are better places to do business, the report finds.



Wealth Transfers Hurt Economy

Aspiring entrepreneurs should also look at how the state government spends its money. A big public sector is a red flag. If a state has a high number of government workers per citizen, that means not only that it has more tax-funded salaries to pay, but also that it probably has more of a propensity to regulate. Government employees, after all, must have something to do. What better way to stay busy than to create and manage new rules?

Alaska, which ranks 33rd in economic freedom, has 780 government employees for every 10,000 citizens. New Hampshire, which ranks 7th, has only 522.

Finally, high welfare spending also tends to indicate low economic freedom. Is the state spending your money on public goods--parks and roads, for instance? Or is it simply redistributing private assets in the form of food stamps, Social Security, and Medicare? The more a state spends on wealth transfers like these, the worse off business owners are likely to be, the report says.



Good for Entrepreneurs

In addition to being great places to launch businesses, states that are economically free are good places to job hunt or simply to maximize one's own assets: In general, more economic freedom means greater per-capita income.

Most of the biggest personal fortunes of our day were created by firms started in states with a high level of economic freedom.

Microsoft was launched in Albuquerque, New Mexico in 1975. Wal-Mart started in Arkansas. Michael Dell started his computer company in Austin, Texas. Warren Buffet established his first hedge fund in Omaha, Nebraska. Cox Communications was founded in Dayton, Ohio; EchoStar in a Denver, Colorado suburb; SC Johnson in Racine, Wisconsin; and the Mars chocolate empire in Tacoma, Washington, in 1911.

The fortunes created by every one of these companies are in the top 25 of this year's Forbes 400 "richest Americans" list. They illustrate that while California and New York may be the best places to find fame, fortune is an entirely different matter.

Hence, we shouldn't be surprised if the next super-company is spawned in Kansas, or in Virginia, home of America Online, or in Colorado, home of five-year-old Qwest Communications, which has revenues of $18 billion a year.

New business owners have a lot on their agenda. They must research their markets, fund their ventures, and fine-tune their products, just for a start. Nevertheless, they might want to add another item to their to-do lists: move.


Lawrence J. McQuillan, Robert E. McCormick, and Ying Huang are the authors of The U.S. Economic Freedom Index: 2004 Report, published by the Pacific Research Institute and Forbes magazine. The authors can be reached at lmaclellan@pacificresearch.org.


For more information ...

To obtain a copy of The U.S. Economic Freedom Index: 2004 Report, visit http://www.pacificresearch.org.