Freedom in the 50 States

Although we believe that a composite freedom index that includes both economic and personal freedoms is most valuable and best represents the actual state of freedom in the states, readers may wish to compare and contrast the states solely on their overall economic freedom, particularly for the purposes of empirical analysis of income growth. We invite researchers to use the economic freedom variable as a tool for investigating income growth and related phenomena. Economic freedom is calculated as the sum of the fiscal and regulatory policy indexes.

We validate our economic freedom index by correlating it with state scores for taxes and regulations as rated by chief executives of for-profit companies for Chief Executive magazine.¹ We use the average Chief Executive scores for 2013 and 2014 for all 50 states. The correlation between our economic freedom index and chief executives’ ratings is 0.74, indicating an extremely strong relationship between what we measure as economic freedom and what entrepreneurs are concerned about when it comes to state policy.²

Republican-leaning and “purple” states dominate the top of the list, while Democratic-leaning states tend toward the bottom. This result is consistent with what we should expect from the policy ideology of the two parties at the state level. Some of the top states are among the fastest growers in the country, while most of the bottom states are losing residents to the rest of the United States. California, Hawaii, and New York are all more than two-thirds of a standard deviation (across all policies) worse than average on economic freedom alone.

Figure 1 shows the evolution of state average economic freedom over time, excluding federalized policies. Economic freedom declined in the early 2000s, recovered briefly, took another hit in 2009, and then grew to new heights by 2019 before declining during the COVID-19 pandemic. The upswing was consistent with what regulatory freedom figures show: rapidly improving state fiscal policies between 2011 and 2019 and a less consistent but still large average improvement in regulatory policy until 2016, followed by a big decline. Median, not just mean, economic freedom has declined as well, from 0.12 in 2019 to 0.07 in 2022, driven largely by fiscal policy. We worry that the recent downward plunge could be a sign of a future trend toward greater interventionism in the economy—and a greater barrier to economic recovery in the aftermath of the COVID-19 pandemic.