BOHANON & CUROTT: Indiana used good-government basics for ‘economic freedom’

August 31, 2018

Economic Analysis by Cecil Bohanon & Nick CurottFifteen years ago, Indiana had a tired economy and its state government was facing bankruptcy. There was a looming threat of economic decline, job loss and mass migration out of the state. So, what changed? Indiana dramatically improved its government institutions. It lowered the individual income tax, corporate tax, property tax and financial-institutions tax, and eliminated the inventory and inheritance tax. At the same time, Indiana became more frugal with its spending and streamlined much of its regulation.

It reminds us of Adam Smith’s recipe for economic development: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.” Smith saw good government as essential to a prosperous market economy. He also noted the heavy hand of government regulation could “thwart” this process. Smith was an early advocate of economic freedom.

Modern economists have developed measures of freedom they use to evaluate states. The libertarian-leaning Cato Institute recently issued its 2018 report, which ranks states by their overall freedom. Interestingly, Indiana ranks No. 3, outranked only by No. 2 New Hampshire and No. 1 Florida. More important, Indiana’s ranking has moved up from No. 13 since the first edition of the Cato freedom index in 2009.

So how do the gurus at Cato measure freedom? They tell us, “We score all 50 states on over 200 policies encompassing fiscal policy, regulatory policy, and personal freedom. We weight public policies according to the estimated costs that government restrictions on freedom impose on their victims.”

A closer look reveals about one-third of the weights are assigned to the state’s tax and spending policies and about one-third to its regulatory policies, which corresponds nicely to Smith’s “easy taxes and tolerable administration of justice.” The final third of the weights are assigned to measures of personal freedom, which aren’t explicitly mentioned in Smith’s maxim.

What is sacred about Cato folks’ weights? Nothing. And they are the first to admit it. Anyone can go to the Cato website and reconfigure the weights to see how that changes the rankings.

Bohanon and Curott did just that. For example, we set all the “personal freedom” components to zero. In this “economics only” formulation, Indiana fell to fifth. A little worse, but still good. Go see for yourself at freedominthe50states.org/personalize.•


Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.



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