Economic Freedom: What It Is & Why It Matters Dean Stansel Research Associate Professor O’Neil Center for Global Markets and Freedom www.oneilcenter.org www.deanstansel.com

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). www.oneilcenter.org

Personal Freedom Matters Too Christina West was pulled over for possible DUI in Tallahassee in August 2013.  She apparently touched one of the officers and he loses his temper and reacts violently. The video shows one officer slamming Christina West's head into the back of a TPD vehicle before she is forcefully taken to the ground. The woman, who suffered a broken orbital bone in her face and other injuries, can be heard screaming in pain as the officers subdue her.

Personal Freedom Matters Too

Prison Population Grows 25 Times Faster than Population

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

Land of the Free? 2000 EFW Rankings Current Rankings 1-Hong Kong 1-Hong Kong, 2-Singapore 2-United States 3-New Zealand 3-Switzerland 4-Switzerland 4-Singapore 5-Canada, Georgia, 5-New Zealand Ireland, Mauritius, 6-United Kingdom United Arab Emirates 7-Canada 10-Australia & UK 8-Netherlands 12-Qatar, 13-Chile 9-Ireland 14-Jordan, 15-Lithuania, 10-Australia 16-United States

What is “economic freedom”? Where do we rank (U.S., Georgia, and metro areas in Georgia)? Why do we rank there? Why does it matter?

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.”

5 Components of Economic Freedom of the World Index Size of government Legal system & property rights Sound money Freedom to trade internationally Regulation

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

How Do We Rank? U.S. is down to 16th place from 5th in 2008 and 2nd in 2000. Available at: www.freetheworld.com

“Economic Freedom in the United States, 1980 to the Present”* 1980-2000: rank remained about the same – score grew, reflecting global trends Since 2000: Global scores have continued to increase; U.S. and OECD scores have fallen *Chapter 6 in Economic Freedom of the World (2016).

Why the US Declined Declines occurred in all five areas of the index, but are largest in two areas: Area 2: Legal System and Property Rights Area 4: Freedom to Trade Internationally

Declines in Areas 1-3 Area 1: Size of Government Reagan-era tax cuts Marginal personal income tax rate rose twice in 1990s; corporate income tax rates and payroll tax rates were also increased Great recession increased government spending on transfer programs, and overall government spending Area 2: Legal System and Property Rights Increased use of eminent domain and civil asset forfeiture Militarization of the police Patriot Act and post-9/11 “war on terror” Area 3: Sound Money Expansionary monetary policy

Declines in Areas 4 & 5 Area 4: Freedom to Trade Internationally Increase in non-tariff trade barriers Restrictions on foreign investment Increased controls on movement of capital & people Area 5: Regulation Sarbanes-Oxley Act of 2002 raised compliance costs for publicly traded firms Dodd-Frank Act of 2010 imposed hundreds of new rules on financial markets Obamacare: burdensome and uncertain

What’s Happened to the Economy? Real Gross Private Domestic Investment 1980 to 2000, when economic freedom in the United States was on the rise, increased 5.4 percent per year Since 2000, when economic freedom has been declining: has grown more than three times slower, only 1.7 percent per year Growth in Real Gross Domestic Product 1980-2000: 3.4% per yer Since 2000: 1.8% per year

What’s Happened to the Economy? Growth in Real Per Capita Disposable Income 1980-2000: averaged 2.3% per year Since 2000: 1.3% per year Growth in Real Per Capita Personal Consumption Expenditures 1980-2000: 2.6% per year Though the official unemployment rate in January was 4.8%, the real rate is closer to 10%.

How Does Georgia Rank? Georgia ranks 7th, up from 14th the previous year. This is the highest rank the state has achieved over the life of the dataset. Available at: www.freetheworld.com/efna.html

Other Rankings Freedom in the 50 States ranks GA 12th for economic freedom, 22nd for overall freedom. The overall score includes both personal and economic freedom components. Tax Foundation’s most recent annual State Business Tax Climate Index ranks GA only 36th (based on tax rates of the 5 major state and local taxes).

Georgia’s Tax Burden Georgia ranks only 42nd for its individual income tax burden (where 1st means lowest taxes). Georgia’s ranks 33rd for sales tax. Empirically, the income tax rate has been found to cause an “unnecessary drag on economic activity” Source: Walczak, Drenkard, and Henchman “2017 State Business Tax Climate Index,” Tax Foundation, 2016.

Economic Freedom of North America (EFNA) Fraser Institute’s ranking of the U.S. states and Canadian provinces. First published in 2002. The 2016 report was the 12th edition. Included Mexican states for 3rd time. I have been the primary author of the last four editions.

EFNA Impact Has been cited in over 230 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)

Index of U.S. Metropolitan Areas An Economic Freedom Index of U.S. Metropolitan Areas Dean Stansel Journal of Regional Analysis and Policy, 43, 1 (2013): 3-20. http://www.jrap-journal.org/

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) 17 of top 20

Economic Freedom in Georgia Atlanta-Sandy Springs- Marietta ranked 60th out of the 384 metropolitan areas in the U.S. It ranked 1st out of 14 in GA. Athens-Clarke County: 112/384 overall & 5/14 in the state Savannah: 118/384 overall & 7/14 in the state

Why Has Economic Freedom Declined? Federal spending has more than doubled since 2000 and more than tripled since 1990. Personal income has only gone up by about 85% since 2000. We have an over-spending problem, NOT an under-taxing problem. 17 of top 20

Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS (in millions of dollars) Year Total Receipts Outlays Surplus or Deficit (−) 1990 1,031,958 1,252,993 -221,036 2000 2,025,191 1,788,950 236,241 2004 1,880,114 2,292,841 -412,727 2008 2,523,991 2,982,544 -458,553 2012 2,449,988 3,536,951 -1,086,963 2016 est 2017 est 3,335,502 3,643,742 3,951,307 4,147,224 -615,805 -503,482 Source: Historical Tables of the Budget, FY2017, Office of Management and Budget. http://www.whitehouse.gov/omb/budget/Historicals

Spending & Deficits at Post-WW2 High Federal spending hit a post-WW2 high of 24.4% of GDP in 2009. Federal deficit as a percent of GDP has also been at its highest level since WW2. It hit 10% in 2009. It exceeded 5% four years in a row between 2009 and 2012, but is now down below 4%. Source: Historical Tables of the Budget, FY2017, Office of Management and Budget. http://www.whitehouse.gov/omb/budget/Historicals

Debt as % of GDP at Post-WW2 High Our debt as a percentage of GDP is now higher than at any point except World War II.

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. 17 of top 20

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

Tax Freedom Day The Tax Foundation April 24th last year. 11 days later than in 2009. Spend more on taxes than on food, clothing, & housing combined. If we include deficits, which require higher future taxes, it would be 16 days later (May 10)

President Obama’s $1 Trillion Tax Hike

Cost of Tax Compliance $37 billion in 2012 preparing federal individual, business, and employment tax returns. 3.24 billion hours The equivalent of 369,858 years Source: McCaherty, “The Cost of Tax Compliance,” Tax Foundation, Sep. 2014.

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: http://mercatus.org/publication/progressivity-taxes-oecd-countries-mid-2000s

45% Source: Dan Mitchell, Cato Institute, http://danieljmitchell.wordpress.com/

International Tax Competitiveness The U.S. ranks 31st out of the 35 OECD countries. Highest corporate tax rate (39%) Double taxation of capital gains and dividends 1 of only 6 with a “worldwide system of taxation” Source: Pomerleau, "International Tax Competitiveness Index 2016," Tax Foundation, October 5, 2016.

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.

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. 2014.

Cost of Regulation (cont.) For every bureaucrat at a regulatory agency, 100 jobs are destroyed in the economy’s productive sector. A World Bank study determined that moving from heavy regulation to light regulation “can increase a country’s average annual GDP per capita growth by 2.3 percentage points.” Source: Dan Mitchell, Cato Institute, https://danieljmitchell.wordpress.com/2016/04/21/regulation-nation/

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.

“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

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%...

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

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

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

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%.

Unemployment Is Much Lower in Metro Areas with Higher Economic Freedom

“…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

Source: Dan Mitchell, Cato Institute, http://danieljmitchell.wordpress.com/

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

Where’s the Inflation? Dow Jones Industrial Average has skyrocketed More than doubled From 7,063 in Feb. 2009 To an all-time high of 18,133 in Feb. 2015 That’s a 17% annual inflation rate

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

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.

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, 2014.

Prescription for Growth INCREASE ECONOMIC FREEDOM Rein-in spending Lower taxes Reduce the regulatory burden

Federal 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, 2013.

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.

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

The Good News…

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.

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.”

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: https://danieljmitchell.wordpress.com/2014/10/ 03/nations-leader-rejects-keynesian- economics-acknowledges-that-real-jobs-are- created-by-the-private-sector/

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

Economic Freedom: What It Is & Why It Matters Dean Stansel Research Associate Professor O’Neil Center for Global Markets and Freedom www.oneilcenter.org www.deanstansel.com dstansel@smu.edu @DeanStansel