Including U.S. State Government Regulation in the Economic Freedom of North America Index

The paper examines the Economic Freedom Index of North America (EFNA) and its ability to predict income in U.S. states. We show that including state government regulatory spending, using U.S. Census Bureau data on "Protective Inspection and Regulation, NEC" as the measure of regulation, improves the predictive power of our models. We conduct a number of robustness checks and construct a factor analysis model to show that the regulation spending variable contributes information that is currently not included in the EFNA. We argue that since regulation adds to the predictive power of EFNA, and is a theoretically essential component of economic freedom, it should be considered alongside the EFNA.