Jadyn Naylor, Michael Jensen, and Kevin Duncan, Utah State University
From 2007-2008 the United States and the rest of the world suffered the largest economic downturn since the Great Depression, a period which has been termed the “Great Recession”. This occurred when, as a result of the subprime mortgage crisis, residential and business investment declined, leading to the collapse of several major financial institutions and significant disruption in the flow of credit to businesses and consumers. The contraction of GDP growth and record unemployment that followed inspired congress to pass TARP in 2008, authorizing the US government to purchase $700 billion worth of “troubled” assets. In 2009 President Obama passed the American Recovery and Reinvestment Act to boost demand for goods and services and create jobs. On top of these legislative measures, the Federal Reserve lowered the federal funds rate to nearly zero, to increase liquidity, and gave banks $7.7 trillion in emergency loans to promote market trust. These responses have been said to reflect the federal government’s faith in Keynesian economic theories, theories which encourage government manipulation of currency and interest rates to counteract fluctuations in the economy. Trust in markets to correct themselves is all but nonexistent at the federal level. Whether or not this distrust is justified is the subject of our research. Previous research has found that economic freedom is positively correlated with increases in wealth, education, health, and political freedom. With our research we hope to determine if and how economic freedom affects the speed and robustness with which an economy recovers from economic downturns. Because the United States government is based upon the ideas of federalism, economic policies vary from state to state. We will use this property to our advantage for our research, comparing each state’s level of economic freedom to various measures of that state’s economic health. These data will be analyzed before, during, and after the recession. Our hypothesis is that states with higher economic freedom rankings recovered from the financial crisis of 2007 and 2008 more quickly than states with lower economic freedom scores. To determine the level of economic freedom in each state, we will be using the Economic Freedom of North America ratings published by the Fraser Institute each year. The Fraser Institute measures the extent to which the policies in each state promote or limit economic freedom based on the state’s size of government, tax code, and labor market restrictions. The Fraser Institute does this at both a sub-government level and an all-government level, giving each state two rankings. We will be testing our hypothesis against both rankings. Our methodology is to compare these rankings to several economic variables: Real GDP, percentage unemployment, and number of jobs created per capita. We will be using periodic measurements of these data across time, from 2006 – 2013. In examining the relationship between these variables and the Fraser Institute’s economic freedom rankings we expect to determine whether there is any correlation, at the state level, between economic freedom and quality of economic recovery, and if there is, to determine the nature of the correlation.