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Archive for Tuesday, November 30, 2004

Economic ranking oversells state

November 30, 2004

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In May, business magazine Forbes proclaimed Kansas as the state with the greatest amount of economic freedom.

Sadly, that is false.

Based on a review of the just-released complete report (2004 U.S. Economic Freedom Index), on which the magazine based its pronouncement, and a review of the report's techniques, Kansas should rank no better than middle of the pack.

According to the report: "If people are moving from one state to another, other things equal, we assert that this is a market-based response to differences in freedom. ... In the end, our index offers the clear advantage that it is evaluated in the marketplace by where people decide to live."

But here's the disconnect: the report ranks Kansas first in economic freedom even though, over the time period studied, it lost a net of almost 8,000 people, a net migration rate of 3.2. Nevada, on the other hand, ranks 12th in economic freedom, according to the report, and gained a net of almost 234,000 people, a net migration rate of plus-151.5, more than double the rate of the next closest state, Arizona (ranked 11th). Rhode Island is the statistical mirror image of Kansas with an economic freedom rank of 47th and a net migration rate of plus-3.4.

The maddening thing about these results is that economic freedom does matter -- it matters a lot.

Economic research consistently shows that economic freedom drives prosperity, especially in the international context. Freedom may be an ideal in its own right, but, as a practical matter, economic freedom begets opportunity and prosperity. Opportunity and prosperity, more than anything else, motivate people to migrate.

Somehow, the analysts at the respected San Francisco-based Pacific Research Institute (PRI), who worked in partnership with Forbes, fell into the trap of letting their computers think for them. The report brags about shuffling 143 different variables into 48 different indexes and describes how the analysts used computers to run sophisticated statistical techniques until the machines found a "best" solution to the fluctuation of a single variable: net population migration among 50 states between 1995 and 2000.

This research method is the analytical equivalent of throwing mud at a wall until you're satisfied with how much has stuck -- and calling the results art.

The idea of measuring economic freedom by studying population migration has merit, but the results obtained in the PRI-Forbes report ultimately do not support this idea.

I need only one variable instead of dozens to statistically explain almost half of the net interstate migration from 1995 to 2000. That variable is the economic growth that each state experienced five years earlier, 1990 to 1995. The story is simple: People see where the action is and make plans to get there.

Where does Kansas rank in terms of economic growth from 1990 to 1995? Thirty-seventh -- about where it has ranked (on average) for the past quarter century. Where does Nevada rank? First. Arizona ranks fourth, and Rhode Island ranks 45th.

Kansas is a wonderful place to live. Yet it typically ranks as average or below according to most business climate indexes. In reality, that also is where the PRI-Forbes Index should rank our state. That can change with effort. Kansans should strive to become the most economically free state in the nation -- and earn the crown that we falsely wore. We will all prosper as a result. Rich Karlgaard, the publisher of Forbes, tells us why in his foreword to the report: "Entrepreneurs risk big as it is. They must be given the chance to grow their enterprises without excessive hurdles, worries and uncertainties."




Arthur P. Hall is executive director of the Center for Applied Economics at the Kansas University School of Business.

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