Virginia Metros Rank High in Economic Freedom

EFIby James A. Bacon

The political class is all excited (or agitated, as the case may be) by the Republican takeover of Congress in Washington, D.C., but life continues as usual here in the boondocks. The pocketbook issues that propelled the Republicans to power nationally dominate politics at the state and local level as well. Everyone is asking the same questions: How do we get our lethargic economies moving again? How do we create more jobs? How do we raise incomes?

Normally, to ask the question in a political context is to provide a political answer. To stimulate job creation, government should do X, Y or Z. However, while government is indispensable for providing core services such as education and transportation, one can argue that too much government can crowd out the private-sector activity that engenders growth.

Last year Dean B. Stansel, with Florida Gulf Coast University, put that idea to the test. He created an Economic Freedom Index (EFI) for U.S. metropolitan areas that ranked metro regions by ten measures of government taxation, employment and transfer payments as well as factors such as the minimum wage and union density. The results on a one to ten scale ranged from Naples, Florida (8.52), to El Centro, California (3.32). The results for Virginia Metropolitan Statistical Areas can be seen in the chart above.

If you put much stock in this index, the news is very good for Virginia metros — every metro ranked in the top third nationally in economic freedom, and most ranked in the top quartile. Remarkably, the People’s Republic of Charlottesville scored the No. 10 spot nationally!

Stansel argues that his measures of economic freedom do correlate with jobs and income. The connection with jobs is strongest with correlation coefficient of 0.416, which means that the EFI explains almost 42% of the variation in unemployment between metros. There is a meaningful, though weaker, correlation between economic freedom and incomes: a coefficient of 0.164, explaining 16% of the variation.

(Stansel freely concedes that his EFI is a work in progress. By my reckoning, the index ignores at least one critical aspect of economic freedom: Governments vary widely in the degree to which they regulate land use. The effects of land use upon the cost of government, the quality of life and the environment can be profound. Admittedly, finding uniform statistics that measure the intensity of land use controls and regulations may be a problem.)

On average freer metropolitan areas appear to fare better economically than less-free regions. But the EFI leaves a lot unexplained. The flip side of the coin is that other factors explain 58% of the variation in unemployment and 84% of the variation in income. The regional industry mix is probably the most important factor of all; regional economic fortunes ebb and flow with economic tides over which local government and civic leaders have no control. But the quality and availability of education, I would conjecture, is a factor, as is the adequacy of transportation infrastructure and other government-provided amenities.

I would argue that the optimal regional policy mix would entail (1) government that focused on a few core functions and excelled at providing them, (2) a strong educational system, (3) an adequately funded (but not overfunded) transportation system, and (4) an array of public amenities from recreational parks to bike lanes that help attract and retain young, educated workers.

But others might disagree. Gee, it would be nice if someone compiled a national database that would allow us to run regression analyses on variables that might influence the creation of prosperous, livable and sustainable regions. Maybe that person will share his or her data with Bacon’s Rebellion one day!

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7 responses to “Virginia Metros Rank High in Economic Freedom”

  1. First thing I wondered was how similar his criteria was to the Heritage Index.

    So here is their criteria:

    Q.3. How do you measure economic freedom?
    We measure economic freedom based on 10 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom:

    Rule of Law (property rights, freedom from corruption);
    Limited Government (fiscal freedom, government spending);
    Regulatory Efficiency (business freedom, labor freedom, monetary freedom); and
    Open Markets (trade freedom, investment freedom, financial freedom)

    so maybe at first folks might think they are different but in you think about it – they’re not –

    some things might be the SAME across the entire US – as compared to other countries measured at the country level.

    but what Jim and this fellow are arguing is that there are differences at the urban level ( although I think except for Va, most urban areas are part of counties).

    so I wonder – how US cities rate against other country cities.

    but more than that – I think it’s pretty complex because each factor probably has different weighting and some factors will influence others.

    for instance – corruption and rule of law can trump other things.

    finally – if an index is real – then it can predict economic results instead of trying to explain what they don’t.

  2. Tysons Engineer Avatar
    Tysons Engineer

    @Larry – the last bit is the most important aspect of all of this. Economic freedom is such a bogus metric it is laughable that anyone would take it seriously. If those areas are such economic boom zones, where’s the economy. After all, it is the economy stupid. The reality is, business doesn’t care about anything except for function and demand. If there are certain criteria that truly drag a business down in cost they will move, but not at the expense of losing out on the demand side.

    GOP sees things in zero sum fashion. Simple question for business folks, if you are a company who would make 400 dollars (per unit of service or product) at socialist economic depressed zone 1 but 500 dollars (per unit) in economically free zone 2 you’d think, oh, well let’s go to zone 2. But if the demand in zone 2 is 1/3rd of the demand in zone 1, well mister you are about to go out of business really quickly.

    Its not all about cost, no business is this obsessed about just the tax/cost. See Kansas which I assume is the greatest of all economic free areas considering they just got rid of income tax and slashed a dozen other taxes. Businesses are getting more profit, but its not creating any new customers, so its great for the top of the company, but its crap for the company itself.

  3. Tysons Engineer Avatar
    Tysons Engineer

    I’ve gotta start creating phony indices and get a piece of this action btw. I’ll call mine the pleasantness index, it will be a metric based on such concrete and tangible components as how neat an area is, friendliness per capita, and business vibe … for business vibe please see my other index, the business vibe index.

    1. what I’d like to see ins a simple index that shows specific “restrictive” policies vs economic effect.

      We keep playing this game that “unspecificed” regulations and restricts “hurt” the economy – even when the economy is doing good.. then it’s said that it could do every better without the restrictions.

      this sort of goes along the general narrative from Conservatives that a lot of regulation is wrong, bad, etc.. but seldom do we see a prima facie case especially with regard to comparing and ranking.

      at some point you get to almost bizarre calculations like a “happy” index if there are x number of cumquats per capita or some such.

    2. LifeOnTheFallLine Avatar

      I’m sorry, but without smiles per square foot your pleasantness index cannot be taken seriously.

  4. Peter Galuszka Avatar
    Peter Galuszka

    Analysis is very lousy goosey.

  5. LifeOnTheFallLine Avatar

    Speaking of economic freedom, did you see the city attempting to jerk Hardywood Brewery around on back taxes it told them they didn’t owe at the time?

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