Losing Economic Freedom on Both Sides of the Aisle

By Robert A. Lawson, Special for  USDR

The government bailouts of American financial institutions and automakers during recent financial crisis angered the American left, leading to months of Occupy Wall Street protests. About the same time, the Affordable Care Act’s practical nationalization of the health care insurance industry was a major factor energizing the Tea Party movement. While both the Occupy Wall Street and Tea Party groups are on opposite ends of the political spectrum, their complaints are eerily similar: the government is favoring the big wigs at the expense of regular  people.

The recently released Economic Freedom of the World: 2015 Annual Report (EFW), published by Canada’s Fraser Institute and authored by myself along with James Gwartney (Florida State University) and Joshua Hall (West Virginia University), provides a basis for evaluating these grievances. Since 1996, the EFW report has published an economic freedom index that assigns a score measuring the extent to which a nation’s policies and institutions are consistent with limited government, private property rights, and rule of law.  Based on over 40 quantifiable indicators, the EFW index has become one of the most important ways for scholars to track the institutional and policy environment in countries around the  globe.

First, the good news: Economic freedom continues to rise around the world. Using a 0-10 point scale, the world average has climbed from 5.31 in 1980 to 6.74 by 2000. This was the era that included the fall of Soviet Communism, tax cuts and privatizations, improved monetary stability, and freer trade  rules.

Second, the bad news: Economic freedom is falling in many high-income countries, including especially the United States, since 2000. The average rating for the original OECD (i.e., high-income) nations has fallen by 0.26 points since 2000. Nowhere has the reversal of the rising trend in the economic freedom been more evident than in the United  States.

From 1970 to 2000, the United States ranked as the world’s freest OECD nation (generally the third freest economy overall behind only Hong Kong and Singapore). The EFW rating of the United States in 2000 was 8.65. By 2005, the US rating had slipped to 8.22. The slide has continued. The current 7.73 EFW rating of the United States is more than nine-tenths of a point lower than the 2000 rating. Thus, the decline in economic freedom in the United States has been more than three times greater than the average decline found in the OECD. Correspondingly, the US rank as fallen to 16th in the world behind countries like Canada, Jordan, and  Chile.

The 0.9-point decline in the EFW rating on the 10-point scale may not sound like much, but our scholarly work on this topic indicates that a one-point decline in the EFW rating is associated with a reduction in the long-term growth of GDP of between 1.0 and 1.5 percentage points annually. This implies that, unless policies undermining economic freedom are reversed, the future annual growth of the US economy will be only about half its historic average of  3%.

What accounts for the US decline? While the US ratings and rankings have fallen in all areas of the EFW index, the reductions have been largest in the Legal System and Protection of Property Rights, Freedom to Trade Internationally, and Regulation areas. The plunge in the legal system area has been particularly alarming. In 2000, The United States garnered an impressive 9.23, but by 2013 the US rating in this area had plummeted to 6.95. While it is difficult to pinpoint the precise reasons for this decline, it is clear that the increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs including the militarization of our police forces, the regulatory overreach associated with laws like the Affordable Care Act, Sarbannes-Oxley, and Dodd-Frank, and the violation of the property rights of bondholders in the auto-bailout case have weakened the US tradition of rule of law. These factors surely contributed to the sharp decline in the legal system  area.

What can be done to correct these problems? Sadly, fixing a political culture of cronyism is a lot harder than, say, negotiating a lower tariff rate with Mexico or reducing marginal tax rates. These latter policies can be changed by a simple act of Congress. How can we fix a system where politicians can dole our favors to banks, automakers, insurance companies, sports teams, etc., etc., etc. without any checks on their authority? How can we undo the memory of the bailouts of 2009-2010? I wish I had an answer for these questions. Part of the answer, I believe, involves having sound data like that provided by the EFW index that can act as a canary in the mine to warn us of the dangers we face. Another part of the answer is for citizens, on both the left and the right of the policy divide, to come together to demand an end to the favoritism that has become endemic in  Washington.

 

Robert A. Lawson holds the Jerome M. Fullinwider Endowed Centennial Chair in Economic Freedom and is Director of the O’Neil Center for Global Markets and Freedom at the Cox School of Business at Southern Methodist University. He is an original co-author of the Economic Freedom of the World annual  reports.

All opinions expressed on USDR are those of the author and not necessarily those of US Daily Review.