The United States is rapidly losing its status as one of the freest economies in the world. Economic freedom has decreased in the United States substantially since 2000 and lately its ranking among countries is plunging downward even faster. This spells trouble since economic freedom promotes growth and a higher standard of living.
Economists James Gwartney, Robert Lawson, and Joshua Hall publish an economic freedom of the world report annually. Their latest report, released this week, shows that the United States, which was ranked the second freest economy in 2000, now ranks 18th. Economic freedom increased from 1980 to 2000 in the United States while it was generally ranked behind Hong Kong and Singapore as the third freest economy in the world. Today it ranks behind European welfare states like Finland and Denmark, and places traditionally more hostile to economic freedom like Qatar.
The declines in freedom have occurred because the federal government has grown larger and more intrusive. It has been a non-partisan affair. Approximately two thirds of the decline in economic freedom occurred during Bush's presidency. But pace of decline doubled during the first two years of Obama's presidency. In fact, the new index is based off of data from 2010. If the rate of decline has remained unchanged over the last two years the United States has already fallen to 40th and ranks behind places like Romania, Sweden, and Panama. Unfortunately the data needed to investigate that is not available yet.
The decrease in economic freedom has occurred in most areas of the U.S. economy. The protection of private property rights showed the greatest decline. The decline is likely the result of the increased use of eminent domain, the ramping up of the wars on drugs and terror, and the increasingly uncertain business environment where it is unclear who the government will bail out and who will be allowed to breech contracts. The growth in the size of government and the increased scope, and administrative burden of, regulation have also decreased our economic freedom. Inflation adjusted government spending has grown by more than 50 percent since President Clinton left office.
Ironically, in this decade of loose monetary policy that fueled a housing bubble and repeated "quantitative easing" in response to the recession, the only portion of the index that doesn't show a decrease in freedom is our access to sound money. This is largely because the loose monetary policy hasn't yet translated into price inflation. When it does our economic freedom rankings will plunge further.
This decline in economic freedom is important because an overwhelming scholarly literature shows higher economic freedom leads to better standards of living on almost any margin people care about. A decrease in freedom of the magnitude the U.S. has experienced is generally associated with a decrease in long-term economic growth of between 1 and 1.5 percentage points. This decrease will cut our historic average of roughly 3 percent growth in half.
Economic freedom is good for the poor as well as the rich. Income inequality is unrelated to economic freedom -- the poorest 10 percent of the population earns 2.75 percent of the income in the most free countries and 2.56 percent in the least free. Freedom does matter a great deal for how well the poor live though. In the freest countries that are ranked in the top quarter of the index the poorest 10 percent of the population earns more than $11,000 annually while in the next freest quarter of the index they earn only $3,400.
Freer countries have higher incomes, longer life expectancies, lower infant mortality rates, greater literacy, and more civil and political liberties. Our loss of economic freedom jeopardizes all of these standards of living.
The decrease in economic freedom experienced thus far doesn't mean that the U.S. is about to turn into a poor third world country. But it does imply low or stagnant growth that slows our improvement in living standards.
The United States needs to drastically shrink the size and scope of the government in our economy in order to reclaim a spot among the freest countries in the world. Unfortunately, that doesn't appear to be on the agenda of either presidential candidate. I guess that shouldn't be a surprise since it was the big government branch of both political parties that decreased our freedoms over the past dozen years.
Benjamin Powell, Ph.D. is a Senior Fellow at the Independent Institute and Associate Professor of Economics at Suffolk University.
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