Economic Freedom: What It Is & Why It Matters Dean Stansel Research Associate Professor O’Neil Center for Global Markets and Freedom

O'Neil Center for Global Markets & Freedom The O'Neil Center was established in 2008 by William J. "Bill" O'Neil (BBA, '55) and his wife Fay C. O'Neil to study the impact of competitive market forces on freedom and prosperity in the global economy. O'Neil is an American entrepreneur, stockbroker, and writer, who founded the business newspaper Investor's Business Daily and the stock brokerage firm William O'Neil & Co., Inc. He bought a seat on the NYSE at age 30 (the youngest at that time ever to do so). 2

Land of the Free? 2000 EFW Rankings 1-Hong Kong 2-United States 3-Switzerland 4-Singapore 5-New Zealand 6-United Kingdom 7-Canada 8-Netherlands 9-Ireland 10-Australia 3

Land of the Free? 2000 EFW RankingsCurrent Rankings 1-Hong Kong 1-Hong Kong, 2-Singapore 2-United States 3-New Zealand 3-Switzerland4-Switzerland 4-Singapore5-United Arab Emirates 5-New Zealand6-Mauritius, 7-Jordan 6-United Kingdom8-Ireland, 9-Canada 7-Canada10-UK & Chile 8-Netherlands12-Australia & Georgia 9-Ireland 14-Qatar, 15-Taiwan, 10-Australia 16-United States 4

1)What is “economic freedom”? 2)Where do we rank (U.S., Alabama, and metro areas in Alabama)? 3)Why? 4)Why does it matter? 5

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” -- Murray Rothbard, Austrian Economist 6

Economic Freedom Project What is it? An initiative to help publicize the findings of the Economic Freedom of the World report and the Economic Freedom of North America report and economic freedom in general. 7

What Is Economic Freedom? “Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others.” 8

5 Components of Economic Freedom of the World Index 1.Size of government 2.Legal system & property rights 3.Sound money 4.Freedom to trade internationally 5.Regulation 9

Calculations Each variable given value b/w 0 and 10 score = ((Max-Obs)/(Max-Min))*10 Each variable equally weighted within each area Each area equally weighted Overall score is average of 5 area scores 10

How Do We Rank? U.S. is down to 16 th place from 5 th in 2008 and 2 nd in Available at: Alabama ranks 23 rd, down from 22 nd the previous year. It ranked as high as 12 th in Available at:

Other Rankings Tax Foundation’s most recent annual State Business Tax Climate Index ranks AL 29 th (based on tax rates of the 5 major state and local taxes). 12

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Economic Freedom of North America (EFNA) Fraser Institute’s ranking of the U.S. states and Canadian provinces. First published in The 2015 report was the 11 th edition. Included Mexican states for 2 nd time. I have been the primary author of the last three editions. 15

EFNA Impact In 2014, got 513 media mentions; exceeded previous high by 79% Has been cited in over 130 academic journal articles and policy papers. Compared to other state indices: Has been produced the longest Is the only one updated annually Has the most years of data (33) 16

An Economic Freedom Index of U.S. Metropolitan Areas Dean Stansel Journal of Regional Analysis and Policy, 43, 1 (2013):

Summary of Results All of top 10 are in states with no tax on labor income (FL, NH, SD) 9 of bottom 10 are in California or New York (and 15 of bottom 20)

Economic Freedom in Alabama Montgomery ranked 119 th out of the 384 metropolitan areas in the U.S. It ranked 1 st out of 11 in AL. Dothan: 254/384 & 7/11 Auburn: 284/384 & 10/11 22

Why Has Economic Freedom Declined? Federal spending has more than doubled since 2000 and tripled since Personal income has only gone up by about 70% since We have an over-spending problem, NOT an under-taxing problem.

24 Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (in millions of dollars) Year Total ReceiptsOutlays Surplus or Deficit (−) 19901,031,9581,252, , ,025,1911,788,950236, ,880,1142,292, , ,523,9912,982, , ,449,9883,536,951-1,086, estimate3,335,5023,951, ,805 Source: Historical Tables of the Budget, FY2017, Office of Management and Budget.

Spending & Deficits at Post-WW2 High Federal spending hit a post-WW2 high of 24.4% of GDP in Federal deficit as a percent of GDP has also been at its highest level since WW2. It hit 10% in It exceeded 5% four years in a row, but is now down below 4%. Source: Historical Tables of the Budget, FY2016, Office of Management and Budget. ricals 25

Entitlement Spending Cato Institute found that welfare pays more than: the starting wage for a secretary in 39 states. the average first year wage for a teacher in 11 states. an entry-level computer programmer in the 3 most generous states.

Obamacare AKA, The Unaffordable Care Act Higher taxes Higher spending Regulatory uncertainty Unintended consequences 27

Debt as % of GDP at Post-WW2 High 28

Tax Freedom Day The Tax Foundation Was April 24 th last year. 3 days later than in days later than in If we include deficits, which require higher future taxes, it was 14 days later (May 8) 29

The President’s $1 Trillion Tax Hike 30

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Cost of Tax Compliance $37 billion in 2012 preparing federal individual, business, and employment tax returns billion hours The equivalent of 369,858 years Source: McCaherty, “The Cost of Tax Compliance,” Tax Foundation, Sep

According to the OECD “the United States has the most progressive income tax system among industrialized nations.” Richest 10% of households in U.S. ($112,124 or higher) pay 45.1% of all income taxes Next highest is Italy at about 42%. Only a handful of others are above 35%. OECD average is 31.6%. Source: countries-mid-2000shttp://mercatus.org/publication/progressivity-taxes-oecd- countries-mid-2000s 33

Source: Dan Mitchell, Cato Institute,

International Tax Competitiveness The U.S. ranks 32 nd out of the 34 OECD countries. Highest corporate tax rate Double taxation of capital gains and dividends 1 of only 6 with a “worldwide system of taxation” Source: Pomerleau & Lundeen, "2014 International Tax Competitiveness Index," Tax Foundation, September 15,

Regulatory Burden Is High and Rising The Federal Register contains 81,000 pages of regulations. It would take more than 2 years to read through all of it. 36

Cost of Federal Regulations $2 trillion in 2012 $9,991 per employee, all industries $19,564 per employee in the manufacturing industry $34,671 per employee in the manufacturing industry (small businesses, < 50 employees) Source: Crain & Crain, “The Cost of Federal Regulation to the U.S. Economy, Manufacturing & Small Business,” National Association of Manufacturers, Sep

Sen. George McGovern (D-SD) “ I also wish that during the years I was in public office, I had had this firsthand experience about the difficulties business people face every day. That knowledge would have made me a better U.S. senator and a more understanding presidential contender. ” Source: George Mc Govern, “A Politician's Dream Is a Businessman's Nightmare,” Wall Street Journal, 6/1/92. 38

“And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government.” -- Milton Friedman 39

Economic Freedom Why does it matter? Hundreds of studies have shown that areas with more economic freedom have better outcomes. Higher: GDP, GDP growth, Income of the poorest 10%, Income share of the poorest 10%... 40

Economic Freedom Why does it matter? …More: entrepreneurial activity, political freedom, civil liberties, life satisfaction, literacy, life expectancy, and cleaner environments Lower: unemployment, child labor, infant mortality rates, and corruption 41

Per Capita Income Is Much Higher in Nations with Higher Economic Freedom Sources: The Fraser ; The World Bank, World Development Indicators, 2015 Sources: The Fraser Institute; The World Bank, World Development Indicators, 2015 Most Free ……………. Least Free

Per Capita Income Is Much Higher in States with Higher Economic FreedomMost Free ……………. Least Free

44 Per Capita State Income Growth Is Positively Correlated with Economic Freedom

Higher Population Growth The 25% of states considered most free had, population growth of 5.4% over the last five years, compared to less than half that (2.6%) in the bottom 25%. 45

Unemployment Is Much Lower in Metro Areas with Higher Economic Freedom

Related Research Stansel, Dean. “Why Are Some Cities Growing While Others Are Shrinking?” Cato Journal, 31, 2 (Spring/Summer 2011), Stansel, Dean. “Higher Taxes, Less Growth: The Impact of Tax Burden on Economic Growth in U.S. Metropolitan Areas,” Policy Brief, April 2009, National Foundation for American Policy, Arlington, Virginia, 47

Lower Tax Areas Grow Faster 48

Lower Tax Areas Grow Faster 49

Lower Tax Areas Grow Faster 50

High-Growth Areas Have Lower Taxes 51

High-Growth Areas Have Lower Taxes 52

“…no human wisdom or knowledge could ever be sufficient … for the proper performance of … the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.” -- Adam Smith, The Wealth of Nations 53

Source: Dan Mitchell, Cato Institute,

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The Fed & Quantitative Easing Towards the end of the last recession, the Fed began a policy of “quantitative easing” Bought $4.5 trillion in assets from commercial banks and other financial institutions Economic theory says that should increase inflation Consumer Price Index hasn’t risen much 56

Where’s the Inflation? Dow Jones Industrial Average has skyrocketed More than doubled From 7,063 in Feb To an all-time high of 18,133 in Feb That’s a 17% annual inflation rate 57

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Consumer Power in Health Care Lasik surgery Not covered by most health insurance plans Price has fallen dramatically over the years Cosmetic surgery is another example. “Price” of other medical procedures has risen much faster than inflation 59

Government Intervention in Higher Education Federal student aid topped $169 billion in the 2013–2014 academic year – an increase of 105 percent over the past decade. In 2014, the $33 billion Pell Grant program provided grants to 9 million college students, making it the largest share of the federal education budget. 60

Government Intervention in Higher Education (cont.) Since 1980, tuition and fees at public and private universities have grown at least twice as fast as the rate of inflation. 60 percent of bachelor’s degree holders leave school with more than $26,000 in student loan debt Cumulative student loan debt now exceeds $1 trillion. Source: Lindsey Burke, “4 Key Reforms That Could Make College More Affordable,” The Daily Signal, Sep. 15,

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Prescription for Growth INCREASE ECONOMIC FREEDOM 1.Rein-in spending 2.Lower taxes 3.Reduce the regulatory burden 64

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Tax Reform Itemized deductions shrunk the tax base by $1.2 trillion in 2011, 14% of AGI. Tax rates could be reduced by nearly one-fifth if those loopholes were eliminated. Source: Stansel & Randazzo, “Unmasking the Mortgage Interest Deduction,” Reason Foundation,

Mortgage Interest Deduction Largest loophole is the mortgage interest deduction Only about 25% of taxpayers claim it. Consumers on the margin b/w renting & buying are harmed due to higher housing prices. They are also much less likely to claim the MID if they DO buy b/c they tend to have lower income. 67

Regulatory Reform Regulatory Improvement Act Establish a Regulatory Improvement Commission identify regulations to repeal send them to Congress for an up or down vote as a total package with no amendments Similar to the Base Closure and Realignment Commission of the 1990’s 68

The Good News… 69

Government Shutdowns About 2 years ago “non- essential” federal government employees were off the job for well over a week, and... Lee County (FL) Soil and Water District recently voted to shut itself down. 70

Nation’s Leader Rejects Keynesian Economics, Acknowledges that Real Jobs Are Created by the Private Sector “We need to put an end to illusions: it’s not the public sector that creates jobs. To believe that injecting billions … [into the economy] is the key to growth is an idea of the past.” 71

Nation’s Leader … Acknowledges that Real Jobs Are Created by the Private Sector That quote was from Alexander Stubb, the Prime Minister of Finland, not the President of the United States. Source: 03/nations-leader-rejects-keynesian- economics-acknowledges-that-real-jobs-are- created-by-the-private-sector/ 03/nations-leader-rejects-keynesian- economics-acknowledges-that-real-jobs-are- created-by-the-private-sector/ 72

“Capitalism has been the most effective ideology we have known in taking people out of extreme poverty.” -- Bono 73

Economic Freedom: What It Is & Why It Matters Dean Stansel Research Associate Professor O’Neil Center for Global Markets and Freedom