Economic Freedom? Not in Rhode Island.

To kick off a two-year planning process, the RI Economic Development Corporation under Governor Lincoln Chafee is seeking a contractor to, among other things, “analyze existing business climate reviews from the past three years, such as the Tax Foundation’s State Business Tax Climate Index, Beacon Hill Institute’s State Competitiveness Rankings, and Forbes Best States for Business to determine the reasons for Rhode Island’s performance in these studies.”

Read a little more closely, and one gets the impression that the idea is to find factors that Rhode Island could leverage without making substantial changes to the tax and regulatory policy that restrict the ability of Rhode Islanders to make their own paths in the economy:

The State intends to grow its business environment in a way that maintains high standards for development that equitably serves all our residents, protects the environment and builds on our assets. This analysis will help the State determine which indicators to improve, emphasizing those that further our standards of equitable growth as well as nurture our business environment.

You’ll recall that Rhode Island does best on the Beacon Hill index, which attempts to capture what some might call the “mushier” considerations.

Not so mushy is Rhode Island’s performance on the 2012 iteration of the Fraser Institute’s “Economic Freedom of North America” report. The map on the cover of the linked PDF shows “least free” states and provinces in dark red. It’s difficult to see, but in the middle of Massachusetts’ and Connecticut’s middle-of-the-road green is a little red dot called “Rhode Island.”

Authors Avilia Bueno, Nathan Ashby, and Fred McMahon reviewed economic policies across Canada and the United States, with and without those imposed at the national level, according to the following areas:

  1. Size of Government
    1. General consumption expenditures by government as a percentage of GDP
    2. Transfers and subsidies as a percentage of GDP
    3. Social Security payments as a percentage of GDP
  2. Takings and Discriminatory Taxation
    1. Total tax revenue as a percentage of GDP
    2. Top marginal income tax rate and the income threshold at which it applies
    3. Indirect tax revenue as a percentage of GDP
    4. Sales taxes collected as a percentage of GDP
  3. Regulation
    1. Labor market freedom, including minimum wage legislation, government employment as a percentage of total state/provincial employment, and union density
    2. Regulation of credit markets
    3. Business regulations
  4. Legal System and Property Rights
    1. Judicial independence
    2. Impartial courts
    3. Protection of property rights
    4. Military interference in rule of law and politics
    5. Integrity of the legal system
    6. Legal enforcement of contracts
    7. Regulatory restrictions on the sale of real property
    8. Reliability of police
    9. Business costs of crime

Those “world-adjusted” criteria put Rhode Island as the 12th worst area in North America and the 9th worst U.S. state for economic freedom.  Remove the effects of federal government policy, and Rhode Island falls to 6th worst area and 3rd worst U.S. state.

According to the report:

A 1.00% increase in the growth rate of economic freedom at the subnational [i.e., state] level will induce an increase of 0.74% in the growth rate of per-capita GDP for U.S. states.

If that’s accurate, then matching Massachusetts would accelerate economic growth in Rhode Island by 13.5%, and matching Connecticut would accelerate it 14.8%.  It doesn’t go too far out on a limb to suggest that such economic booms bring a whole lot of quality of life.