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Virginia Metros Rank High in Economic Freedom

Bacon JPJ 11-13-14.docx

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!

Richmond-150

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 withBacon’s Rebellion one day!

(This article first ran in Bacon’s Rebellion on November 6, 2014)

 
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