Investor's Business Daily, November 22, 2004

ISSUES & INSIGHTS

Prosperity: The most economically free state in the country, Kansas, is a red Bush state. A meaningless statistic? The top six are red states, as are 24 of the top 26.

The least economically free states? They are, in descending order, New York, California, Connecticut, Rhode Island, Illinois, Pennsylvania and Minnesota -- blue Kerry states, all.

What to make of these rankings compiled by the Pacific Research Institute's U.S. Economic Freedom Index: 2004 Report?

The first thing is that the majority of voters in the states that cast their ballots to re-elect President Bush would rather their governments have less interference in their economic activity. The states that supported Sen. John Kerry are more comfortable with governments that are more active in the economy.

Which system is better? On the basis of liberty, both personal and political, the freer economies are clearly preferable. But what about economic performance? We think economist George Stigler said it best when he argued that the more options a person has in economic activity -- the free market that we defend -- the greater his potential for prosperity.

How could it be any different? Surely fewer choices mean fewer opportunities, which affect income levels. The researchers who compiled the study found that "a lower economic freedom score (more freedom) is associated with higher income per capita across the U.S. states."

We won't try to argue that per capita income in Kansas is higher than per capita income in California. It's not. California's is roughly $33,000 a year while in Kansas it's a bit more than $29,000.

But per capita income is higher in Colorado, the second-ranked state, than it is California. And Virginia, third on the list, has a per capita income almost identical to that of the Golden State.

It's more than dollars, though. Regulation, taxation, the size of government, spending on public programs -- all part of how economic freedom is defined -- do have an impact on prosperity. Large incomes are offset, for instance, by high taxes.

California is a high-tax state where income is lost to the diminished economic freedom. The authors call this the "oppression tax" and it hits Rhode Island (ranked 47th) the hardest. No. 50 New York is also hit hard, which negatively affects its high per capita income.

What this study of the states is teaching is the same lesson we learned at the international level: The more a government interferes in the economy, the more difficult it is for the economy to prosper.

This lesson is unfortunately lost on too many policy-makers across the world and in state capitals in this country. That's why Rhode Islanders can lose $3,607 (13.17%) of their incomes every year to the oppression tax, Hawaiians $2,963 (11.36%) and New Yorkers $2,441 (7.45%). Somebody just doesn't understand -- or, for political reasons (think blue states) simply refuses to.

We, of course, generalize. A few do get it and as a result, government is trimmed in some places, which brings economic freedom that in turn promotes prosperity. What could be wrong with that?