Economic Freedom of the World: We’re #18!

Lynne Kiesling

This year’s Economic Freedom of the World report is released today, and the US has dropped to #18, its lowest ranking ever. From the press release:

The United States, long considered a champion of economic freedom among large industrial nations, dropped to its lowest position ever in to the Fraser Institute’s annual Economic Freedom of the World report. This year, the U.S. plunged to 18th, a sharp decline from the second overall position it held in 2000. Much of this decline is a result of high spending on the part of the U.S. government.

Hong Kong again topped the rankings, followed by Singapore, New Zealand, and
Switzerland. Australia and Canada tied for fifth overall among the144 countries and
territories in the Economic Freedom of the World: 2012 Annual Report. “The United States, like many nations, embraced heavy-handed regulation and extensive over-spending in response to the global recession and debt crises. Consequently, its level of economic freedom has dropped,” said Fred McMahon, Fraser Institute vice-president of international policy research.

The report’s authors, James Gwartney, Robert Lawson, and Joshua Hall, have a column in today’s Philadelphia Enquirer summarizing the results of their research, and why economic freedom is such an essential input for prosperity:

Economic freedom means people are free to choose, trade, compete, invest, and have the fruits of their labor protected against aggressors within a legal framework of equal treatment and minimal interference from government. The link between economic freedom and long-term prosperity is overwhelming: freer economies invest more, grow more rapidly, and achieve higher income levels than those that are less free.

The United States, long considered a bastion of economic freedom, has become less free during the past decade. This decline is across the board. Increases in government spending, record deficits, violation of property rights, more onerous regulation of business, and wars on terrorism and drugs have all contributed to the erosion of economic freedom in America.

Sobering, right? But where’s their data?

During the past decade, the U.S. rating fell nearly a full point on our 0-to-10 point scale, from 8.65 in 2000 to 7.70 in 2010. While it is difficult to pinpoint all the reasons for this decline, the increased use of eminent domain, the ramifications of the wars on terrorism and drugs, and the violation of the property rights of bondholders in the bailout of automobile companies have all clearly weakened private property and the rule of law tradition of the United States.

Our empirical work indicates that a one-point change in a country’s EFW rating is associated with a 1.0 to 1.5 percentage point change in the long-term annual growth rate, all else equal. It is worth noting that U.S. growth averaged 2.3 percent in the 1980s and 2.2 percent during the 1990s, but it fell to an annual rate of only 0.7 percent during 2000-2010. Without a reversal of undermining economic freedom, the future economic growth of the United States will be weak for many years to come.

Which suggests that in an election year, our political candidates will focus on the connection between economic freedom and the conditions for prosperity? OK, maybe not.

During this election season, the two major political parties will attempt to convince voters that their policies are dramatically different. But the EFW data indicate that the U.S. decline in economic freedom began during the presidency of George W. Bush and has continued under President Obama. Subsidies, grants, and other forms of political favoritism directed toward well-organized interests providing large political contributions have become the primary business of both parties, undermining economic freedom and retarding economic growth.

Unless American voters and the politicians they elect reverse course, our future will be one of stagnation, dependency, broken promises, and increased political corruption.