U.S. Economic Freedom: Retreat Becomes Rout
A Decade-Long Plunge from No. 2 to No. 19
Measurement is often the crucial step in understanding—and gaining control—of a complex phenomenon. For example, we debate—endlessly, it seems—the state of economic freedom in America. But the Fraser Institute, a Canadian think tank, gives us the crucial ability to go beyond that. Since 1996, with a project inspired by the late Milton Friedman, the Institute has published an extraordinarily sophisticated report that measures the economic freedom of every country in the world—and tracks the rise or decline of freedom in each country—so that we can talk about how much, in what areas, and to what effect.
Their report, released yesterday, is Economic Freedom of the World in 2010. Let me give you the bottom line for the United States of America—which we have called, and rightly so, a “beacon to the world” when it comes to economic freedom and the prosperity it makes possible. In the words of the report:
The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a substantial decline in economic freedom during the past decade. From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980 to 2000, the chain-linked EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010. The chain-linked ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 and 19th in 2010… [“Chain-linked” simply refers to a method that ensures the study, when measuring changes over time, is comparing apples to apples].
America’s decline over just one decade was from the third most economically free in the world to the eighteenth. What does this mean, in practice? The report measures economic freedom in five broad areas: size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation. Within these categories, however, this painstaking report measures 42 variables. Or, as the Institute puts it in still broader terms, economic freedom is made up of four key ingredients: personal choice, voluntary exchange, freedom to compete, and security of privately owned property.
This is what we are talking about losing, at a rate the Institute calls “precipitous,” since the beginning of the new century in 2000. (You may or may not be consoled to know that over the past two years average eocnomic freedom in the world at large increased very slightly.) The United States is among the four countries in the world with the largest decline in economic freedom since 2000. The others are Venezuela, Argentina, and Iceland. We now trail even Bahrain, the United Arab Emirates, Estonia, Taiwan, and Qatar.
The rating of United States economic freedom has declined in four of the five broad areas listed above. The only area where the United States held its own, until 2010, was access to sound money (not to say that the situation was good, only that it was no worse than in 2000, since the “quantitative easing” by the Fed was just beginning, then).
What is actually happening within these categories? Let's look at one in which the U.S. experienced the sharpest decline: “Legal System and Protection of Property Rights.” Among the specific losses of freedom most notably were the increased use of eminent domain to transfer private property for the benefit of politically backed projects, ramifications of the wars on terror and drugs, and violation of the rights of bondholders in the bailout of the automotive companies.
If you are among those who feel that economic freedom is over-rated and perhaps even undesirable (Mr. Obama might fall into this category, for example), realize that scholarly studies show that a one point decline in economic freedom hits long-term economic growth, reducing it between 1.0 and 1.5 percentage points annually. The Fraser report says: “This implies that, unless policies undermining economic freedom are reversed, the future annual growth of the US economy will be half its historic average of 3%.”
You could spend many profitable hours with this report, and economic researchers and scholars do just that, launching study after study based on the report’s data—and especially the invaluable longitudinal, cumulative data. A few conclusions of these studies may suggest the importance of the Economic Freedom of the World Report:
- All studies have shown that countries with policies most consistent with economic freedom have higher investments rates, more rapid economic growth, higher income levels, and a higher reduction in poverty rates.
- In the top one-quarter of countries with most economic freedom, the average income of the poorest 10 percent of the population was about $11,400; in the bottom quartile it was about $1,200. The report adds that the average income of the poorest 10 percent of people in the economically freest countries is more than twice the average income in the least free countries.
- Life expectancy is about 80 years in the top quartile of countries by economic freedom; in the bottom quartile, it is 62 years.
- Political and civil liberties correlate very closely with the economic freedom of a country.
These are bare summaries of conclusions based on data and research that you can review in depth in the Fraser report here: http://www.freetheworld.com/2012/EFW2012-complete.pdf.
The inestimable contribution of the Fraser Insitute report is to add to the case for economic freedom an element of careful measurement of the destructiveness of policies (supposedly well-motivated) that curtail economic freedom and the literally life-giving benevolence of policies that leave us free to choose, compete, trade, keep, and enjoy the rewards of our work.
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