Indices are used to represent a complex array of facts or data in a single measure. In economics, indices are often used to track prices or values of products and commodities like the Consumer Price Index and the Big Mac Index. In other social sciences, indices often try to compare the different policies of countries or states.
However, few exist detailing policies or comparing cities at the local level. The few that do, like the “Best Places to Live” rankings, tend to have a narrow set of data points. Our composite index seeks to provide the first true comparison of local level policies within Tennessee by looking at a cross section of quantitative policies and indicators to offer a snapshot of freedom at the local level.
The composite index includes over 70 different data points comprising 25 metrics across four broad categories. Each metric was normalized using standard deviation and statistical z-scores. Z-scores represent how different a certain city’s policies are from the average of all other cities on a certain topic by measuring how many standard deviations from the mean a certain value is. A positive z-score represents above average (more free) and a negative value is below average (less free). While many indices use robust z-scores (using the median instead of the mean), this limits the effect of outliers. When many cities utilize common codes or policies, highlighting those outliers is preferable.
The z-scores were then combined for each of the four categories. Each data point was equally weighted within each category and metric. Most data points were either numerical values like a tax rate, fee, or debt amount. Others were transformed into ordinal, interval, or ratio based score. For ordinal scores that measure a policy on a numerical scale, the higher number is associated with the more favorable policy of more freedom. For example, does a city own a golf course that competes with the private sector? No = 1, Yes = 0.
The categories were then equally weighted, each making up one fourth of the total index score. Thus, a city’s total score consists of four equally weighted component composite indices. This methodology has been used in similar composite indices like the Cato Institute’s “Freedom in the 50 States” and the Libertas Institute’s “Utah’s Freest Cities,” and meets the standards outlined in the Handbook on Construction Composite Indicators: Methodology and User Guide.