Market Power

Musings by an academic economist on the power of markets and the power over markets.

Friday, November 26, 2004

Economic Freedom Index Part Trois

I’ve talked about the Pacific Research Institute’s Economic Freedom Index (EFI) in earlier posts. The folks at the PRI calculated the index to examine economic freedom between states as opposed to earlier studies that examined economic freedom between countries. We can also use this to examine economic freedom within cities.Metropolitan areas that straddle state lines provide a nice group to examine the EFI. People can move within these areas without having to uproot themselves from friends and family. Therefore, they can take advantage of economic freedom without the costs of migration to more distant lands. I expect that portions of metro areas that are in states with a lower economic freedom index (more highly-ranked) have more economic freedom and would have higher rates of net migration and income growth. I couldn’t find net migration data for this quick study, but I assume that the birth and death rates within metro areas would be fairly similar across state lines. So I use population growth rates as a proxy for net migration.

I gathered population and personal income data from the BEA’s Regional Economic Information System for each county within the Kansas City and St. Louis metropolitan areas. I gathered the county list for each metropolitan area from the 2003 Statistical Abstract of Missouri. Kansas City straddles the Missouri and Kansas border and, according to the 2004 index, both states rank in the top 10 in economic freedom. I calculated the growth rate of personal income and the growth rate of population between 1998 and 2002. According to the 1999 EFI, both states ranked lower (13th and 10th respectively), but were still closely and highly-ranked. So there may be a bit more population growth and personal income growth in the Kansas portion of the KC metro area, but not stark differences. A couple of figures bear that out.

Population growth is higher in the Kansas portion of KC than in the Missouri portion – twice as high. If you take out Wyandotte County in Kansas (contains Kansas City, Kansas) and Jackson County in Missouri (contains Kansas City, Missouri), the population growth rates for the remaining counties were 8.7% in Kansas and 7.4% in Missouri – not as much of a difference.

Personal income growth is slightly higher in the Kansas portion of the KC metro, but the differences aren't really stark. Take out Wyandotte County in Kansas and Jackson County in Missouri, and the remaining counties in Missouri have a higher personal income growth rate (24%) than the remaining counties in Kansas (22.4%).

The stark contrast comes when looking at the SL metro area. Missouri ranked 10th in the EFI and Illinois ranked 46th. In 1999, Missouri ranked 13th and Illinois ranked 36th.

Population growth in the Illinois portion is just under 1%, in the Missouri portion as a whole it is around 2%. Both rates are lower than the population growth rates for the Kansas and Missouri portions of the Kansas City Metro area. But taking out St. Louis City (which shrunk by 4.8% in population) and St. Louis County (which had a 0.0% growth rate) in Missouri, it is around 8.5% . Three Missouri counties (out of 9) had population growth rates above 10%. In contrast, no Illinois county had a population growth rate above 9% and only one out of 8 had a growth rate above 1.5% (Monroe, south of East St. Louis).

For the Illinois and Missouri portions as a whole, personal income growth was similar. But after taking out St. Louis City and St. Louis County, personal income growth in the remaining Missouri counties of the St. Louis metro area was over 25% from 1998-2002. Overall, only two of 8 Illinois counties had personal income growth rates above 20% (Monroe County lead the way with a 21.8% growth rate) while 6 of 9 Missouri counties had personal income growth rates above 20% (4 had growth rates of 27.9% or higher – the highest being Warren County at 29.7%). St. Louis County had the lowest personal income growth rate of the Missouri counties at 11.8%. It is also the county with the highest level of personal income of the Missouri counties (over 4 times as large as the next-highest level). That’s the primary reason why, overall, the Missouri and Illinois growth rates are similar.

I have family in Kansas City and a good friend of mine from my college years lives in KC, so I get there quite a bit. When I do go there, I visit restaurants and bars on both sides of the state line. I don’t have any family in St. Louis, so I did not go there nearly as often. When I did, I never went across the Mississippi River. When I was in graduate school at the University of Missouri, friends of mine would often go to St. Louis for entertainment. When they wanted decadent entertainment, they would go to “the east side” – East St. Louis – to visit the strip clubs. Other than that, they rarely traveled across the Mississippi River. I bet the factors driving the Economic Freedom Index go a long ways in explaining why they have little reason to travel across the river to the east side.