Contrasting State Cross Border Business Health Compared to a Freedom Index

A recent discussion I was in with other alumni of Case Western Reserve University about the sorry state of Cleveland, which was just recently chosen by Forbes Magazine as the most miserable city in America, caused me to consider some of the effects on Cleveland of being in a state with a bad business climate.  Of course, the city of Cleveland does much to cause its own problems and can be said very reasonably to have a bad influence on the politics of the whole state of Ohio.  This case also caused me to think about the strange underdevelopment of southern New Jersey.  Then today, I read an article on the strong business performance of Northern Virginia compared to Washington, D.C. and the Maryland suburbs of Washington, D.C.  What explains these differences?

There are major differences in the ability to do business based on regional factors such as location, geography, population density, transportation, and other factors besides political factors.  This makes it hard to fully compare doing business in South Dakota with doing it in New Jersey or Maryland.  But, if one is a business owner or prospective owner, there is often a fair equivalency in many of these other factors if you are deciding whether to establish your business in Northern Virginia or in the Maryland suburbs of Washington, D.C.  Similarly, it is very reasonable to consider putting your business in southeast Pennsylvania, Delaware, or Southern New Jersey.  Once again, one can choose Ohio, or one of Michigan, Indiana, Kentucky, or Pennsylvania for many types of businesses.  Specifically, if one is considering the Cleveland, Ohio area, it is easy also to consider Pennsylvania.

I want to explore how far political freedom can be correlated with these remarkable differences in economic and business performance.  William P. Ruger and Jason Sorens have published Freedom in the 50 States: An Index of Personal and Economic Freedom through the Mercatus Center of George Mason University, dated February 2009, which I previously discussed in a post here.  They rated and ranked the states for economic freedom and then again for personal freedom and provide an overall freedom ranking.  They correlate the degree of freedom with rates of internal net migration.  People, at least those willing to move, find freedom attractive.  Economic growth rates may also be suspected to be dependent upon economic freedom, and at least secondarily upon personal freedom as well.  Start-up companies commonly need to be able to attract bright, hardworking professionals.  It is reasonable to expect that many of them value personal freedom.

Consider the issue of the growth of Northern Virginia versus the Washington suburbs of Maryland.  In 1970, Northern Virginia accounted for 27.0% of the Gross Regional Product, with Suburban Maryland having a 34.5% share, and D.C. a 37.5% share.  In 2009, D.C.'s share had shrunk drastically to 22%, while Suburban Maryland had shrunk slightly to 32%.  Northern Virginia rose startlingly to 46% of the Gross Regional Product.  In absolute terms, all three sub-regions grew their gross product, but clearly the rate of growth in Northern Virginia greatly outstripped that of the Suburban Maryland and D.C. areas.

How did Virginia compare to Maryland in the freedom indices?  Virginia was ranked 13th on the Economic Freedom Index, while Maryland was ranked 34.  Virginia was ranked number 9 on the personal freedom index, while Maryland was ranked 50th.  For overall freedom, Virginia was ranked number 9 and Maryland was ranked number 46.  While other factors can be critical in starting a new business, many businesses will have a fairly balanced choice between Virginia and Maryland for other reasons and will then choose more economic and personal freedom.  D.C. is not ranked, but it is almost certainly worse than Maryland for freedom, so its more greatly fallen share of the Gross Regional Product is surely to be expected.  These freedoms are not just luxuries being chosen.  In many cases, they are the difference between business success and failure.

I have a friend who lives in Southern New Jersey and he has told me many stories of the poverty there, the miserable schools, and the very high local unemployment rates.  This was true prior to the recession.  Of course such a situation can make an area already look unattractive to a business.  But, there is plenty of relatively undeveloped land in Southern New Jersey and locations close to Philadelphia and densely populated Delaware areas.  It is also in the middle of the mid-Atlantic area.  Why is this area so highly undeveloped when Northern New Jersey has a high degree of development?

Well, if we look at Northern New Jersey and compare freedom there to that in New York, we find that New Jersey does relatively well, because New York is miserable.  On the Economic Freedom Index, New Jersey is 46, while New York is 50.  Both are awful, but New Jersey is at least competitive and even better.  On the Personal Freedom Index, New Jersey rates a 45 ranking, while New York is 48.  On the Overall Freedom Index New Jersey is 49 and New York is 50.  So Northern New Jersey can compete for businesses with New York.

But, Southern New Jersey has to compete with Pennsylvania and Delaware for businesses.  One has to expect that the fact that health insurance, as mandated by the respective states, being twice as expensive in New Jersey compared to Pennsylvania, for instance, might have some impact on how businesses will fare in the respective areas.  The Economic Freedom Index takes into account many other factors as well.  Comparing New Jersey to Pennsylvania and Delaware, we find that PA is 19, DE is 24, and NJ is a lowly 46.  On the Personal Freedom Index, PA is 29, DE is 36, and NJ is 45.  The Overall Freedom Index says PA is 20, DE is 26, and again we have our lowly NJ at 49.  The inducement here is clearly to choose Pennsylvania for your new business, or maybe Delaware.  But, Southern New Jersey looks like a hard choice to justify.

Cleveland is not quite so strongly affected by conditions in a state which is really close to it.  But still, many businesses might reasonably say that they have reason to be in the Eastern Mid-West and then choose a state to be in.  This will affect Cleveland.  Of these states, the nearest is Pennsylvania.  But, Michigan, Indiana, Kentucky, and West Virginia also border Ohio.  Let me list the states, their Economic Freedom Index ranking, their Personal Freedom Index ranking, and their Overall Freedom Index ranking:

PA, 19, 29, 20
WV, 40, 17, 33
KY, 33, 26, 32
IN, 16, 19, 13
MI, 15, 20, 14
OH, 32, 46, 38

On Overall Freedom, Ohio is dead last in its local region.  It is particularly poor with respect to Indiana, Michigan, and Pennsylvania.  It is hardly a wonder that Ohio is having a hard time economically.  This, in turn, hurts Cleveland.  To be sure, the fact that it is very hard to start a business in Cleveland is an outstanding reason for it to be a basket case.  John Stossel recently pointed out that a Cleveland official recently boasted that they helped a company set up a business in Cleveland in a mere 18 months.  In comparison, a company was started in Houston in one day.  Cleveland has 22 zoning categories, while Houston has none.  Cleveland has a penchant for electing kooks as mayor.  Dennis Kucinich was one of the worst.  Dennis the Menace is blatantly opposed to the profit motive.  He is now in the House of Representatives and for a long while opposed ObamaCare because it was not a single-payer program.  He caved after a ride with Obama in Air Force One.  [Did Obama threaten to throw him out the door at altitude?  Dennis should have held true to his convictions.]

The Progressives view freedom as the archaic and quaint coin to be paid for the aid of the needy.  Or so they say.  They do have an uncanny penchant for making the politically-connected wealthy much more wealthy and even those who are only politically connected wealthy.  But, history tells us that man's condition was little improved for eons until capitalism and the free market system began its rapid development in the 1800s.  Comparative studies today of the countries around the world show huge advantages in overall prosperity and the prosperity of the poor in nations for those nations with higher degrees of freedom.  The little study above also shows that there is some considerable reason to believe that even the differences between adjacent states in the United States are very important for the economic development of states and regions in those states.

Trading freedom for redistributionist schemes is a fool's errand.  The average wealth and income will fall, as will the median wealth and income, as will the wealth and income of the poor.  No one wins, except those who are consumed by envy and must level everyone to poverty to slake the thirst of that lowly envy.  Frankly, every state should be in a keen competition with the states near it to provide its citizens with more freedom than those neighboring states do.  Of course, the politicians would hate to see such a competition be widely recognized as important by the People.  They do everything they can to avoid letting us know about this, including insisting that the government-run schools not teach students about this source of American Exceptionalism.  We are prosperous because we are free.  As we lose our freedom, we will lose our prosperity.