Index points finger at Kentucky’s economic failure

Nearly 80 percent of American states have more economic freedom than Kentucky – a fact that could prove to hamper the commonwealth’s prospects for economic growth.

The “U.S. Economic Freedom Index: 2008 Report” by the Pacific Research Institute and Forbes magazine reports that only 10 states have less economic freedom than Kentucky. The index, which ranks states using 143 variables organized into five categories, rates our state overall No. 40 among 50.

It ranks states by how much of a threat their governments pose to the economic freedom of businesses and individuals with super-sized bureaucracies and restrictive fiscal, welfare, regulatory and judicial policies. The lower a state’s score, the more economic freedom it offers. A higher score means less economic freedom.

For example, in the “Government-Size Sector,” Kentucky’s bloated state government earned it a score of 32.43, No. 42 of 50. Compare that with Nevada – the smallest state government – which scored 10.71. In fact, only eight states have more obese governments than Kentucky. Kentucky ranked even lower in the “Welfare-Spending Category” with a score of 32.67, good for No. 43, worse than any of Kentucky’s neighboring states.

The report’s writers made welfare spending a category “because we believe it is the most egregious violation of economic freedom: resources are forcibly transferred from one private individual to another without anything given in exchange and no tangible public asset produced.” The index does not evaluate the “merit” of states’ welfare programs. It simply notes that these endeavors are fundamentally coercive because they operate by taxes hoisted on the public.

“Our concern is that they are financed by the involuntary transfer of private assets; therefore, they reduce economic freedom,” states the report’s authors. “The indicators we chose measure how much money is redistributed through direct transfers, and reflect the degree of lost economic freedom.”

The index’s bottom line: The higher Kentucky’s taxes and burdensome regulation, the more activist its judges, the bigger its government and welfare budget, the less economic freedom its residents have.

Credible research suggests Kentucky continues to move in the wrong direction – from No. 29 in the first economic-freedom index in 1999 to No. 39 in the 2004 edition to No. 40 today. But the index also holds some good news, because it shows previously low-performing states can turn their negative economic tides.

For example, since the 2004 economic freedom index, South Dakota moved up from No. 15 to No. 1.

“The Mount Rushmore State’s” granite heroes – George Washington, Thomas Jefferson, Theodore Roosevelt and Abraham Lincoln – would smile at the state’s new stance: no taxes on corporate income, personal income, personal property, business inventory or inheritances. South Dakota also gets credit for offering the best business climate in the nation for entrepreneurs, reported the Small Business Survival Foundation.

Companies and ingenious entrepreneurs love this beautiful state and are opening new plants there because South Dakota’s policymakers have been courageous enough to get rid of onerous tax and regulatory policies. In doing so, they have fanned the flames of an economic revival through most of the upper Midwest.

It also comes as no surprise that states with the best economic- freedom rankings also enjoy higher migration.

In the executive summary of the “Economic Freedom Index,” Lawrence J. McQuillan notes that net migration for the 20 economically freest states between 2003 and 2007 was 27.36 people per 1,000. These Americans, as economist Charles Tiebout describes it, are “voting with their feet.”

Kentucky leaders maintain they want the same. On his Web site home page, Gov. Steve Beshear urges enacting policies so that Kentuckians enjoy “a future where our children don’t need to move away to find good-paying jobs.”

However, such growth does not occur by chance. And it’s not happening in Kentucky. McQuillan states that the migration rate for the 20-most economically oppressed states – those at the bottom of the freedom index – was only 1.17 per 1,000.

Such slow growth signifies too many investors, workers, entrepreneurs and business owners vote “No” to Kentucky. If Frankfort’s policymakers want to see that change, they can.

They could begin by heeding the advice of Arthur Laffer, a member of President Ronald Reagan’s Economic Policy Advisory Board, who wrote in the foreword of the “Economic Freedom Index” that higher migration rates for economically free states “confirms that states that cut their marginal tax rates, enact right-to-work legislation, and limit frivolous jury awards see an influx of capital, people and businesses.”

If Beshear is serious about providing attractive opportunities for young Kentuckians, he should exercise bold leadership needed to pave the way toward ridding our commonwealth of oppressive regulatory, judicial and welfare policies and shrink the size of its government.

Perhaps then Kentucky will be known for more than just poverty, bourbon and a horse race in May.

— Jim Waters is the director of policy and communications for the Bluegrass Institute, Kentucky’s free-market think tank. You can reach him at [email protected]. You can read previously published columns at

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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