Less government; more contentment
Economists, psychologists and sociologists have long been fascinated by what promotes our well-being. Well-being is a multi-faceted concept: It encompasses subjective feelings of happiness; it changes over time; and it is influenced by a variety of forces, both personal and external.
There is much research into measuring well-being and determining just what causes it to vary across groups and change over time. Based on a number of studies using multi-national data sets, the results indicate that, at least from the economics side of the research agenda, well-being increases with improved economic conditions. But it isn’t just income. Other factors influencing well-being are education, better health and even religiosity.
There also is evidence that superior social institutions, such as rule of law, property rights and democratic political processes, increase well-being. The difficulty is just how does one achieve improvements in such institutions? We simply cannot snap our fingers and improve education or property rights in countries like Iran. But the foundation for why we should is clearly there.
Recently some researchers have turned their attention to these relationships at the state level.
In 2010, three psychologists published an index of well-being for the 50 states in the psychology journal Intelligence. Their measure uses a number of “sub-domains” to create a measure of well-being. These sub-domains include income, crime, health, education, religiosity and general intelligence.
The idea is to be as inclusive as possible without being redundant. Although obviously some are related, each factor was found to have independent effects on well-being. Even if you are not in the 1 percent, being healthy and educated is likely to enhance your well-being.
What is missing from the list of possible causes of well-being are the potential effects of economic and social institutions. To fill this void, Ari Belasen and I asked the question “Does economic freedom affect well-being?” Our research indicates that the answer is yes, it does.
To measure states’ economic freedom, we use the popular index published by the Fraser Institute. How is economic freedom measured? Higher levels of economic freedom are associated with less government. That is, less government spending as a percent of state GDP; lower tax revenue as a percent of state GDP; and more open labor markets (less government employment and lower rates of unionization). Based on a scale of one to 10, the “freer” is a state, the closer the score is to 10.
We find that there is a positive, significant correlation between the level of well-being and the previous change in economic freedom. On average, states that experienced increases in economic freedom over the past decade also realized higher levels of well-being.
This suggests that those states that reduced the role of government freed up resources that ultimately led to higher levels of well-being.
An important outcome of our research is that this relation is not uniform across states. Our results show that states in the Northeast, most of which cluster toward the top of the well-being ranking, would suffer by an increase in economic freedom. Why? It is because, on average, these states are characterized by governments that play a more predominant role in their economies. In contrast, for the states in the rest of the country, improving economic freedom more often than not improves well-being to a significant degree.
The research based on international and now state-level data indicates that improving economic freedom — checking the scope and take of government — enhances well-being. While there remains much work to be done, such results should fuel the continued debate over the appropriate role of government in the economy.