Southern California’s Lack of Economic Freedom
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Southern California’s Lack of Economic Freedom

Californians are on the move. A free market economy can help slow the exodus of people and businesses seeking freer pastures elsewhere.

Californians continue to be on the move. According to North American Moving Services, California lost residents and had some of the highest rates of outbound moves in 2018. In contrast, Texas and Florida were among the states with the highest rates of people moving in.

Broadly speaking, Texas and Florida tend to have public policies that support a free market economy, whereas states like California tend to do the opposite. The case can be made that residents seem to be voting with their feet in favor of economic freedom.

My new Reason Foundation report, the “U.S. Metropolitan Area Economic Freedom Index,” finds that amongst the 52 metropolitan statistical areas (MSAs) with over a million residents, the San Jose MSA, home to many of the tech companies in Silicon Valley, was the best-ranked area in California. San Jose finished in the middle of the pack (at 27th) nationally, while Southern California’s cities ranked poorly on economic freedom. The Los Angeles-Long Beach-Anaheim MSA ranked in the bottom 10 (43rd), the San Diego-Carlsbad MSA ranked 38th, and the Riverside-San Bernardino-Ontario MSA ranked last (52nd) among large metro areas.

This variation within California helps explain why some areas within a state can thrive while others struggle. From 2012 to 2016, San Jose’s MSA population grew by 4.4 percent, while Los Angeles’ MSA population grew less than half as fast (2.1 percent). Overall, the population grew four times faster in the freest areas. The most-free areas were also more prosperous, with per capita personal income 5.7 percent above the MSA average, while the least-free quartile was 4.9 percent below average. That means per capita income was nearly 11 percent higher in the freest areas.

The positive relationship between economic freedom and economic prosperity at the local level is similar to findings at the state and country levels. Over 200 articles by independent researchers have examined this relationship at the state level using the Fraser Institute’s annual Economic Freedom of North America report. Now, the “U.S. Metropolitan Area Economic Freedom Index” uses nine different measures of state and local government policies to produce an overall score for each of the nation’s 382 metropolitan statistical areas. For purposes of rankings, the 52 largest were examined separately.

Texas and Florida dominated the top of the rankings — The five most-free large metro areas were Houston, Jacksonville, Tampa-St. Petersburg, Richmond, and Dallas-Fort Worth. California and New York brought up the rear — the bottom five were Riverside, Rochester, Buffalo, New York City, and Cleveland.

In one recent study, economists at West Virginia University and Louisiana State University found that a 10 percent increase in economic freedom was associated with a 5 percent increase in real per capita gross state product (a measure of the total output of the economy per person). At the local level, researchers have found that metro areas with higher economic freedom tend to have greater net in-migration of population, more entrepreneurial activity, higher levels and faster growth of per capita income, faster population growth, higher female labor force participation rates, and better local government bond ratings.

For lawmakers, this means policy and regulatory decisions may have much more impact than they think. Interventions in the economy, such as exorbitant increases in government spending, high income tax rates, and minimum wage increases tend to be associated with poorer economies. The opposite policies – slower spending growth, low (or no) income taxes, and fewer labor market interventions – tend to be associated with more prosperous economies.

For struggling local economies, the lesson is clear: policy changes that support a free market economy can help slow the exodus of people and businesses seeking freer pastures elsewhere. But burdensome interventions in the economy may lead to even more people packing their stuff into moving vans and leaving the area.

This column was first published in the Orange County Register.