Executive Summary

economic freedom prosperity Pennsylvania

Tearing Down Barriers to Prosperity: How More Economic Freedom Can Reduce Poverty and Boost Prosperity in Pennsylvania

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Key Findings

  • Economic freedom, specifically lower government spending, strongly and consistently offers both increases in prosperity and reductions in poverty.
  • States that gained economic freedom from 2010 to 2019 tend to have lower levels of poverty and higher levels of prosperity. 
  • In Pennsylvania specifically, a one-point improvement in the Economic Freedom of North America (EFNA) Index score over five years is associated with a 2.08 percentage point increase in employment and a $2,338 increase in per capita income.
  • In Pennsylvania, a one-point improvement in the EFNA Index score over five years is associated with a decrease in poverty rates resulting in up to 176,970 fewer Pennsylvanians in poverty.

Executive Summary

It’s well established that states with more economic freedom have higher median incomes in the aggregate, but what is the relationship between low-income individuals and relative economic freedom?[1]

This report looks at pre-pandemic trends between 2010 and 2019. The findings show Pennsylvania improved more than a full point on the Economic Freedom of North America (EFNA) Index, from a score of 5.50 to 6.56.[2] Measured poverty also fell.

  • The Official Poverty Measure (OPM) fell from 13.4 to 11.9 percent.
  • The Supplemental Poverty Measure (SPM) fell from 13.8 to 13.0 percent.[3]

To better understand the relationship between economic freedom and prosperity, this report includes regressions looking at the impact of an increase in the Fraser Institute’s EFNA Index on the OPM, the SPM, employment, and per capita income.

The EFNA Index considers a state to be more economically free if it meets these criteria: lower levels of government spending, lower tax burdens, and lower levels of labor market regulation.

The models look at the relationship between poverty, prosperity and three individual components of economic freedom that make up the EFNA Index. Government spending freedom (or lower government spending), not tax freedom or labor market freedom, had the most consistent relationship with both our metrics of poverty and metrics of prosperity.

The report includes multiple models for robustness purposes, but the five-year lagged models are particularly striking. According to these models:

  • A one-point change in the EFNA index score over a five-year period is associated with a 1.41 percentage point decrease in the OPM and a 1.83 percentage point decrease in the SPM in the following year.
    • If applied to the latest available five-year period (2017-2021), a 1.41 percentage point decrease in the official poverty rates equates to 176,970 fewer Pennsylvanians in poverty[4]
    • The largest contributor to lower poverty rates is the government spending component of economic freedom. Over five years it is associated with a 0.58 percentage point decrease in the OPM and a 1.31 percentage point decrease in the SPM.
  • A one-point improvement in the EFNA index score over five years is also associated with a 2.08 percentage point improvement in employment, and a $2,338 increase in per capita income.
    • If applied to the latest available five-year period (2018-2022), a 2.08 percent improvement in employment translates to an additional 125,573 employed Pennsylvanians.[5]
    • Once again, the largest contributor to higher employment and increased income is the government spending component. Over five years this component is associated with a 1.14 percentage point increase in state employment and an increase in per capita income of $1,829.

Conclusion

Government’s focus on the alleviation of poverty, not promotion of prosperity is backwards. Programs focused on poverty alleviation are often riddled with damaging unintended consequences.

These findings suggest that policies that deliver on both these fronts should outweigh any policy which strictly deals with poverty. As this report shows empirically, economic freedom does both things.

In fact, spending more resources on anti-poverty programs could prove counter-productive if these programs remove choice, reduce individual spending freedom, or reduce other economic freedoms that create the conditions for prosperity.

Anti-poverty efforts should be retooled to identify and create the conditions for prosperity. Given more economic freedom, we can trust people to make good decisions for themselves and their families.

[1]Thomas A. Garrett and Russell M. Rhine. “Economic Freedom and Employment Growth in US States,” Federal Reserve Bank of St. Louis Working PaperNo. 2010-006A, March 3, 2010, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1564262.

[2]Dean Stansel, José Torra, and Fred McMahon, “Economic Freedom of North America: 2021 Annual Report,” Fraser Institute, 2021, https://www.fraserinstitute.org/sites/default/files/economic-freedom-north-america-2021.pdf.

[3]United States Census Bureau, American Community Survey 2019 Supplemental Poverty Measure, 1-year Estimates, https://www2.census.gov/programs-surveys/supplemental-poverty-measure/tables/time-series/SPM-Table1.pdf. The OPM shows income before taxes and government benefits; but the SPM also includes income from government benefits, subtracts other expenses like child support and medical expenses, as well as adjusts for geographic differences in cost of living.

[4]United States Census Bureau, American Community Survey 2021 5-year Estimates, https://data.census.gov/table?q=ACS+5+Year+Poverty+Rate+in+Pennsylvania&tid=ACSST5Y2021.S1701.

[5]U.S. Bureau of Labor Statistics, “State and Metro Area Employment and Earnings December 2022,” accessed January 2023, https://www.bls.gov/news.release/metro.toc.htm.