New Hampshire Is Top State For Economic Freedom

New Hampshire ranks first in the most recent edition of the Fraser Institute’s Economic Freedom of North America (EFNA) index. Florida and Tennessee round out the top three. More economic freedom is associated with more income growth and more population growth, so we should expect the economies of New Hampshire, Florida, and Tennessee to continue to thrive.

New Hampshire overtook Florida for this year’s top spot, while Tennessee moved up two spots to replace South Dakota at number three. The complete top ten is shown in the figure below. Because economic data are often released with a lag, the 2023 ranking uses data from 2021.

Dozens of studies confirm that countries and states with more economic freedom have stronger economic growth than areas with less economic freedom. As shown in the figure below from the Fraser report, states that experienced more growth in their economic freedom score from 2012 to 2021 also experienced more income per capita growth over the same period. The mechanism driving this empirical reality is simple: Restrictions on economic freedom prevent people from making mutually beneficial transactions.

People who freely engage in transactions with others, such as purchasing something from a food truck or Amazon AMZN , expect to be made better off. Otherwise, they would not voluntarily trade their hard-earned money for that taco or new jacket. Consumers who can choose who they do business with incentivize sellers to improve their products, lower their costs, and create entirely new products to attract customers. The freedom to choose fosters competition among buyers and sellers, and this competition drives innovation and economic growth. Without economic freedom, competition is diminished, innovation slows, and economic growth fizzles.

To measure the degree of restrictions on economic freedom, the EFNA report uses data from three areas: government spending, taxes, and regulation. Government spending data helps measure the degree to which government controls resources. More government spending crowds out private-sector economic activity where most innovation occurs, which hinders economic growth. Similarly, higher taxes leave fewer resources in the hands of consumers whose purchasing and saving decisions incentivize competition and innovation. Finally, regulation is another way governments limit private-sector activity, and too much regulation stifles creativity, experimentation, and entrepreneurship.

This year’s number one state, New Hampshire, performed especially well in area one, government spending. Relative to other states, New Hampshire’s state government does not spend much while still providing adequate services for taxpayers. Meanwhile, California’s government spending score is half of New Hampshire’s (3.57 vs. 8.74) and the Golden State’s overall rank is 48^th, tied with Vermont and just below last-place New York. This is not surprising since California is known for having one of the most bloated state governments in America, a place where even a simple thing like building a public restroom costs nearly $2 million.

Economic freedom is a crucial driver of economic growth. States such as New Hampshire and Florida that foster economic freedom by spending money prudently, keeping taxes low, and minimizing regulation empower their citizens to make their own choices which in turn generates the competition that drives innovation. States such as California and New York that stifle economic freedom by spending foolishly, levying heavy taxes, and choking businesses with regulation undermine competition and innovation. The data are clear: More economic freedom is the path to prosperity.