Growth-enhancing economic freedom

Abstract

Purpose We explore how economic freedom measurements can be used to guide policy. Design/methodology/approach We propose a method for creating a growth-enhancing economic freedom index, which allows for nonlinearities and interaction effects between the components to economic freedom. We use this method to illustrate that US states differ in which policy area generates the greatest gains. Findings To validate the method presented, we apply our index to state bond markets. Financial market participants have the incentive to properly evaluate states’ policies. If our measurement is useful, then it should correlate with bond ratings. Consistent with this hypothesis, we present evidence that state bond ratings are strongly correlated with our growth-enhancing economic freedom index. Originality/value It has been well-established that economic freedom is associated with good economic outcomes. Economic freedom is comprised of numerous dimensions. Thus, the marginal benefit of improving policy in one area can be expected to depend on the amount of freedom in the other dimensions. Which policy improvement is most impactful depends on the entire menu of current policies and, therefore, differs between states. Our new method can then be used as a guide to determining for a particular state which policies can be expected to impact economic well-being the most.

Right-to-Work Laws as Economic Freedom: Their Role in Influencing the Geographic Pattern of Manufacturing Jobs, Incomes, and Finances

“…In other words, manufacturing activity that was once highly concentrated in the Great lakes, Northeast, and Mideast has now largely converged, with there being relatively little difference in concentration among the eight BEA regions. These findings confirm the significance associated with economic freedom measures observed by Murphy (2020) and Ghosh and McCannon (2017) and are compatible with Gallaway and Cebula (1973), Reed (2003), and Vedder (2010). They are also compatible with Stansel and McMahon (2013), where it is hypothesized that greater labor market freedom reduces labor market transactions costs and thereby promotes more employment, enhanced efficiency, and greater economic growth.…”