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Business

How Freedom Is Important to the Texas Economy

Taking a closer look at the state's model for success.
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Texas politicians and pundits like to boast about an economy that’s become a juggernaut of job creation and a magnet for migrants, both corporate and individual. We owe it all, they say, to The Texas Model, a short-hand for the state’s pro-free market policies, including low taxes and light regulation.

The Texas Model has a nice ring to it, but it needs a more precise exposition. Economic freedom scores, published by the Fraser Institute, measure where each state stands between the poles of free markets and government control. The index looks at 10 components in three categories—size of government, taxes, and labor market regulation.

Not surprisingly, the data show Texas near the top in economic freedom, ranking fourth—a hair behind South Dakota, Tennessee, and Delaware. In terms of per-capita output growth, job creation, unemployment, and in-migration, economic studies find that states with high economic freedom perform better than states with low scores. 

Being economically free today pays off—but so does a state’s freedom legacy. Many decisions that businesses and people make—where to relocate, how much to invest, how much education to get, whether to expand production, and whether to hire workers—are made with an eye toward the long run. So, states with a solid legacy of economic freedom can expect to outperform those without such a legacy. In effect, the former have a larger freedom capital stock.

Like physical capital, freedom capital takes time to build and, if properly maintained, endures for years. We calculate it as the declining weighted average of each state’s economic freedom scores going back to 1980.

Texas (see dark blue dot on chart) has high levels of current economic freedom and freedom capital, suggesting a consistency that’s indeed worthy of being touted as an economic model for other states. At the other end, New York is low on both measures of economic freedom, providing a model of a different sort. 

In between, many states have freedom capital above current economic freedom (above the diagonal line). They aren’t maintaining their economic freedom, which is not a good signal for their economic prospects.