The Republicans held their convention in St. Paul this summer, but the real news from the Upper Midwest is the region’s renaissance in economic freedom, led by South Dakota.
The Mount Rushmore State is number one among all 50 states in economic freedom, according to the recently released 2008 U.S. Economic Freedom Index from the Pacific Research Institute, which measures how friendly or unfriendly each state’s government policies are toward free enterprise and consumer choice. That represents a huge jump from the 2004 report, in which South Dakota ranked 15 out of 50 states. Other states in the region are also on the rise.
Minnesota shot up 18 places, from a lowly 44 to much stronger 26. Illinois moved up 19 places, from a dismal 46 to 27. Wisconsin was 38 in economic freedom in 2004, but now ranks 18, a rise of 20 places.
The regional exception is Michigan, which dropped from a weak 34 in 2004 to a dismal 43 in 2008. Iowa places 22, down slightly from 16 in 2004. Indiana fell from 14 to 23.
The economic freedom rankings derive from a comprehensive evaluation in each state of fiscal, judicial, and regulatory indicators such as tax rates, state spending, occupational licensing, environmental rules, income redistribution, tort reform, and prevailing-wage laws, to name a few. A state’s tax policy looms large.
Frontrunner South Dakota, for example, enjoys no corporate income tax, no personal income tax, no personal property tax, no business inventory tax, and no inheritance tax. South Dakota has the lowest cost of doing business, according to the Milken Institute. Overall, states in the Great Plains and Rocky Mountains tend to be the most economically free. Northeastern states tend to be most economically oppressed.
Americans vote with their feet and strong economic freedom draws workers and businesses. According to United Van Lines, South Dakota was seventh in inbound migration in 2007. In other words, a lot of people are moving there. Michigan could take a cue from that movement.
For every one-place improvement in a state’s Index ranking, the state’s net migration per 1,000 people typically increases about one person. This means that for Michigan, the top outbound state, a one-spot improvement in economic freedom ranking would result in a net increase of about 10,000 people to the state. Those represent much-needed workers, consumers, investors, and entrepreneurs.
In 2005, per-capita income in the 15 most economically free states grew 31 percent faster than in the 15 states with the lowest levels of economic freedom. Also in 2005, the 15 most free states saw their general fund tax revenues grow at a rate more than 6 percent higher than the 15 states with the least economic freedom.
In other words, economic freedom is not an academic exercise or a zero-sum game. It benefits workers, businesses, and governments alike.
Voters in battleground states this year such as Indiana, Iowa, Michigan, and Wisconsin might take note of that reality.
People in California (ranked 47) and New York (ranked dead last at 50 since 1999) might consider the Upper Midwest “flyover territory,” but while those coastal states remain bogged down with high taxes and onerous regulations, South Dakota soars.
The Upper Midwest has become a kind of enterprise zone.
Lawrence J. McQuillan is director of Business and Economic Studies at the Pacific Research Institute. Michael T. Maloney and Eric Daniels are professors at Clemson University.