By R.W. Hafer, Professor of Economics and Director,
Center for Economics and the Environment, Lindenwood University
Missouri is the 16th most economically-free state in the union according to the just released 2019 edition of the Economic Freedom of North America. The report is published by Fraser Institute, an independent, non-partisan Canadian public policy think tank. New Hampshire ranked as the most economically free state, with New York at the bottom of the list.
The Fraser Institute’s economic freedom measure is a barometer of restrictions on individual economic decision-making imposed by state and local governments. More restrictions interfere with personal choices, such as what or how much to produce, and reduces economic freedom.
According to Fred McMahon, a co-author of the report and the Walker Research Chair in Economic Freedom at the Institute, “When governments allow markets to decide what’s produced, how it is produced and how much is produced, citizens enjoy much greater levels of economic freedom.”
Missouri’s current ranking uses data from 2017, the most recent year of available comparable numbers. This ranking places it behind neighboring states Kansas and Nebraska, but ahead of Arkansas, Illinois, and Iowa.
A significant body of research finds that states (and countries) with higher levels of economic freedom tend to experience faster economic growth, greater entrepreneurial activity, and more prosperity. How is it, then, that Missouri’s economy is and has been for many years one of the slowest-growing economies in the nation?
To answer this question we need to consider two possible explanations. First, is Missouri’s overall ranking telling the complete story?
The overall ranking is comprised of three measures. One measures various aspects of state government spending as a percentage of income. Another assesses the burden of state taxes, such as income, payroll, property, and sales taxes. The third component considers how free a state’s labor markets are. States with high union density, a high ratio of government to total employment in the state, and higher minimum wage (relative to per capita income) are states with less economic freedom in its labor markets: Individuals in such states are less free to make employment decisions.
In the 2019 report, Missouri actually fares quite well in the first two areas. In terms of government spending and taxation, Missouri maintains its 16th place ranking. When it comes to labor market freedom, however, Missouri slips quite a few notches, coming in at 24th.
In an analysis of Missouri’s labor market conducted for the Hammond Institute, Dean Stansel, a co-author of the Fraser report and a Senior Research Fellow in SMU’s Cox School of Business, found that the level of freedom in Missouri’s labor market trails most neighboring states. Burdensome restrictions like the state’s minimum wage, occupational licensing, and state tax laws that negatively affect incentives to work put Missouri workers at a comparative disadvantage and tend to slow economic growth.
The other possible explanation is to note that economic freedom in Missouri has eroded over time. The state’s overall ranking was as high as 11th, most recently in 2013. Not only has our overall ranking dropped, it declined for every component, most notably in the area of labor market freedom.
Deteriorating economic freedom coincides with Missouri’s economic growth lagging the national average. Gross domestic product adjusted for inflation (real GDP) in Missouri increased at an annual rate of less than one percent over the past 20 years, much slower than the 2.3 percent rate for the United States. A recent study finds that Missouri’s ability to create jobs over this period also lags the nation, and most of its neighbors.
Economic freedom in Missouri is moving in the wrong direction. Given the link between positive economic outcomes and economic policies that promote market outcomes, we must not be complacent. More work needs to be done to keep the economic freedoms we have and to eliminate government restrictions that hinder economic prosperity.