Metro areas with more competing cities are more economically free

Much has been written about the benefits of economic freedom. It’s associated with “higher investment rates, more rapid economic growth, higher income levels, and a more rapid reduction in poverty rates.”

However, the vast majority of work done on this subject has focused on national or state governments, leaving an analytical void at the local level. Recently, economists Adam Millsap, Bradley Hobbs and Dean Stansel bridged this gap by producing Local Governments and Economic Freedom for the Mercatus Center at George Mason University.

Having developed a sophisticated measure of economic freedom at the metropolitan-area level, the study’s authors test whether higher numbers of competing jurisdictions in these areas are positively associated with higher levels of economic freedom. The intuition driving this test is that people and businesses are mobile, giving them more latitude to select where they would rather live, work and pay taxes. A higher number of cities and towns sharing a housing and labour market means more competition to attract businesses and residents, leading to lower taxes and more efficient local government. At least that’s the theory.

In practise, Millsap, Hobbs and Stansel find that in most of the United States this holds true, especially in key areas such as labour-market freedom. They also find it’s more prevalent in the more densely populated Northeast and Midwest, and less so in the sparsely populated West (where municipalities are fewer and geographically larger), or the traditionally more racially-segregated South (where mobility between municipalities might be more difficult). Nevertheless, they find that the overall trend stands.

So what do these findings mean for the more than 25 million Canadians living in metropolitan areas?

In short, this research implies that an important way to reap the benefits of economic freedom is decentralized local government. However, from widespread municipal amalgamations in Ontario and Quebec in the past two decades, to current movements in favour of amalgamation in Victoria or more centralized regional governance in Calgary and Edmonton, there’s strong evidence that many do not yet grasp the importance of decentralization.

Economic freedom is a cornerstone of free and prosperous societies. What national, state and provincial governments can do to increase economic freedom has been clear for decades. Now, thanks to ground-breaking research, a roadmap is emerging for citizens and municipal policymakers. The first lesson is simple—decentralized local government means more economically free communities.