Alaska lags behind on new 'economic freedom' rankings

Posted: Sunday, November 21, 2004

With a draft document of the Kenai Economic Development Strategy recently unveiled, city officials, along with their colleagues in borough and state government, might want to compare notes with a newly released study by the Pacific Research Institute.

The study, released last week, is a ranking of economic freedom in all 50 states. Published in association with Forbes magazine, the index scores states on 143 variables, including tax rates, state spending, occupational licensing, environmental regulations, income redistribution, right-to-work and prevailing wage laws, tort laws and the number of government agencies.

Based on those factors, Kansas ranks as the nation's most economically free spot. New York has the distinction of ranking No. 50. Alaska rates only 33rd.

That should be disturbing news to policymakers at all levels of government around the state, who seem to do a lot of talking about economic growth and development. The study may help reveal obstacles to growth and prosperity.

The study's authors say Kansas earned the top ranking largely because of its respect for property rights. They went on to note that Colorado ranks second because it has the fewest regulatory barriers. Overall, states in the Great Plains and the Rocky Mountain region tend to be the most hospitable to business and are the most economically free.

The study defines "economic freedom" as "the right of individuals to pursue their interests through voluntary exchange of private property under rule of law. This freedom forms the foundation of market economies. Subject to a minimal level of government to provide safety and a stable legal foundation, legislative or judicial acts that inhibit this right reduce economic freedom. Government acts that advance this right increase economic freedom."

That's important to individuals and states for this reason: "The best places to start a business or find a new job are in states with the fewest regulatory roadblocks and fiscal obstacles, everything else considered," say the study authors.

Some study points that are worth noting:

"There is a direct correlation between economic freedom and migration. Americans are moving to the states that are the most hospitable in terms of business climate, tax policy and a host of other factors."

There also is a direct correlation between a state's economic freedom and the prosperity of its citizens. The most economically free states also have the highest per capita incomes.

"States that encourage free enterprise and consumer choice will have a brighter economic future than those that create obstacles," notes the study.

If all states ranked as free as Kansas, the annual income of average working Americans would increase 4.42 percent, putting an additional $87,541 into their pockets over their 40-year working lives.

"Cities and regions that attract smart people will have a leg up. But cities also will need to be competitive on costs, taxes and regulations, and not be seen as havens for frivolous litigation. Entrepreneurs risk big as it is. They must be given the chance to grow their enterprises without excessive hurdles, worries and uncertainties," notes the study.

Cities and regions with universities, especially those with strong science and engineering departments, are in a good position.

Grand civic plans tend to squander money and energy, writes Rich Karlgaard, publisher of Forbes, in the study's forward. "You cannot will these kinds of moon shot successes to happen. What states and cities can do is create the conditions for success. ... I always advise cities to forget million-dollar bets on a single industry, and instead make a thousand $1,000 bets on bright entrepreneurs who need cheap rent."

Karlgaard provides insight into how to know if an area is thriving based on what he calls the entrepreneurial Cocktail Party Test. "Here's how it works. You gather 200 friends and acquaintances in a room ... and you clink a glass. The room goes silent. You announce: 'I've just quit my job! I'm starting a company!' Watch the reaction.

"In some communities, people will burst into applause. In others, people will stare at their shoelaces, check their watch and go home. Thriving communities applaud the bold risk taker."

The question Alaska and its communities must ask: Do we encourage risk takers or send them packing to Kansas?

As Kenai, other cities on the Kenai Peninsula, the borough and the state work to expand their economies, they need to recognize they face stiff competition. Every other community and state is working to do the same. The key is to capitalize on assets that other places don't have: lots of land, a small population, natural beauty like no other place in the world, clean air, clean water and an abundance of other natural resources.

An economic strategy that recognizes individual prosperity, a healthy business climate and a quality of life that includes excellent schools, good roads, safe communities and a clean environment go hand in hand and is a must if Alaska is going to move ahead in this 21st century.

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