The United States is most free country in the world, right? Well, not exactly.
For the past 18 years, the Index of Economic Freedom, published by the Heritage Foundation and Wall Street Journal, has measured the degree of economic freedom in all 184 nations around the world. Each country is evaluated and scored in ten different categories covering the openness of markets, the intrusiveness of government, regulatory efficiency, and the rule of law. Now admittedly, this criteria is heavily predicated on supply-side economic policy (think “Reaganomics”), but that is precisely the point.
Each year the statistical data shows a strong positive relationship between economic freedom and prosperity. Countries with greater economic freedom have a higher GDP per capita, more dynamic growth, and less poverty. The bottom line is that free-markets, lower taxes, less regulation, property rights, and free trade mean a better quality of life for everyone.
The idea goes back to 1776 and Adam Smith. In “The Wealth of Nations,” Smith inquired as to why some 18th century societies were more prosperous than others. His explanation began with the division of labor.
At the local level, people developed trades which allowed them to specialize in one craft, produce a surplus, and then sell that surplus to other members of the community. Because of the increased efficiency that came with specialization, the price of goods and services dropped, benefitting the entire population.
Applied at a macro level, entire nations began to specialize and trade freely with one another, allowing consumers in both countries to mutually benefit from lower prices. Nations that imposed tariffs on imported goods could not reap these benefits.
The underlying force driving the success of these markets was Smith’s famous idea of the “invisible hand.” In the free-market, self-interested individuals compete with each other in order to obtain the greatest returns for themselves and their families. This competition offers greater opportunities and choices for individuals, and ultimately a higher standard of living for everyone in society. “The Wealth of Nations” became the blueprint for modern capitalism and influenced the likes of Alexander Hamilton, James Madison, and Thomas Jefferson.
The United States has been and continues to be one of the most prosperous nations in the world. Unfortunately, it looks as if that while much of the world is chasing us, we are regressing.
When the Index was first published in 1995, the United States had a total score of 76.7 out of 100 and was ranked fourth in the world. By 2008, the United States had increased its score to 81.0 and was still ranked fifth, but in the past few years our score has been steadily declining. We have now fallen to tenth in 2012 with a score of 76.3, ranked behind countries such as Hong Kong (1), Australia (3), Switzerland (5), Canada (6), Chile (7), and Ireland (9).
Why is our economic freedom declining? The Index of course cites our growing national debt, increased government spending, and high marginal tax rates as major areas of concern, but it also attributes our decline to several other factors.
First, the increased regulatory burden on U.S. businesses since 2009 has raised compliance costs and created an uncertain business climate. As a result of legislation like ObamaCare and the Dodd-Frank financial reforms, which have given the federal government vast discretion to promulgate harmful regulations, U.S. businesses have been forced to incur news costs at the whim of un-elected and unaccountable federal bureaucrats. The Index estimates that new regulations cost U.S. businesses $38 billion annually.
Another major factor cited by the Index is the corruption that stems from crony capitalism and economic-rent seeking, undermining the rule of law and the effectiveness of markets. Giving special tax breaks, earmarks, loans, and bailouts to certain businesses and industries is a bipartisan problem that has plagued Washington for years, and it is only getting worse. Adam Smith’s invisible hand cannot work when government forces it one way or the other.
The United States is a country blessed with great wealth, natural resources, and human capital. We have everything necessary to climb back up the Index of Economic Freedom if we will simply return to the principles of 1776 and allow the free-market to work. The question is whether voters and politicians alike have the fortitude to let it happen.