Lesson in Economic Freedom: America Thrives When She’s Free

We live in a world where some countries enjoy a comfortable-- many would say lavish-- standard of living while other countries are mired in poverty.  So what sets these ‘have’ countries apart from the ‘have-nots’?  Is it that the developing countries are hindered by a scarcity of natural resources?  Or, could the economic success of a country lie in the specific policy’s employed by its government?  I would argue that economic success lies directly in an abstract, but powerful, concept called freedom.

Let me begin by defining a foundation upon which I can begin my discussion.  In an economically free society, individuals are free to work, produce, consume and invest in any way they please.  That freedom is both protected by the state and unconstrained by the state.  And, importantly, the people are also free to keep the bulk of the property they earn -- the fruits of their labor.  In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.

For the past 16 years, the Wall Street Journal and the Heritage Foundation have published a study of the relationship between economic freedom and prosperity.  (Index of Economic Freedom).  The Index takes a variety of factors into account, including tax rates, the ease of opening a business, intellectual property rights, transparency/efficiency of the judicial system and level of corruption, to name just a few.

Studies in the Index of Economic Freedom demonstrate important relationships between economic freedom and job creation, per capita income, economic growth rates, human development, democracy, the elimination of poverty, and environmental protection.

As you can see from the below chart, there is a direct correlation between the economic freedom of a country and the prosperity it enjoys.  The 2008 index shows the United states in the “Free” category:

2010 finds the United States falling out of the top category of economically free countries, and even places her second in the North American region behind Canada.  This year’s score of 78, though high by global standards, is 2.7 points lower than last year, and bumps it to a second tier country of freedom.  The 2010 index is based on data covering the period from July 2008 to June 2009.

As the authors of the Index conclude, economies rated "free" or "mostly free" in the 2010 Index enjoy incomes that are more than three times the average levels in all other countries and more than 10 times higher than the incomes of "repressed economies."  Prosperity, the authors note, leads to higher literacy rates, access to education and longer life-expectancy.

In short, specific policy decisions positively or adversely affect an economy and the quality of life of its citizens.

Since the second half of 2008, the world economy has been undergoing a period of uncertainty and slowing economic growth.  While some have proclaimed the death of capitalism, the free market system has been incredibly resilient during 2009 and is now showing signs of an upturn.  Policy choices made during this critical juncture of the global recovery will undoubtedly shape the growth trajectory for the world economy in the years ahead.  Policy decisions made by global economic leaders will have have a profound effect on the world economy.

Many of the countries whose scores have dropped have responded to the economic crisis with policy moves that, whether intended or not, add up to a fundamental assault on the economic freedom of the people the represent.  The United States, for example, policies have included more intrusive regulations, government takeovers of businesses, government subsidies and bailouts of private firms, tax increases, and protectionist measures to reduce trade.  As a result, the Untied States Economic Freedom Index will surely continue to fall.  As the study shows, it will have an impact on America’s prosperity.

To score a higher Index,  a government can adopt free-market policies which create an environment that fosters economic growth and increases opportunities for all citizens.  Further, the government can reduce the tax burden, thus allowing its citizens to keep more of their hard-earned money and allow them to choose for themselves how, when and where to spend it.

The policies that result in a higher Freedom Index challenge the core beliefs of statists and populists on the left, who insist that certain countries are simply destined to remain in poverty because of the legacies of colonialism (or whatever their current excuse is).  If that were true, Hong Kong and Singapore obviously would not fare well at all, as both were once colonies in the British Empire.  The Index tells us a different story.

Economic freedom is crucial to increasing prosperity and creating jobs in the United States.  The tact of increasing government regulation, increasing taxes, coupled with the current uncertainty in the markets, discourage investment -- the key factor in creating jobs. 

The solution to creating more jobs and restoring economic growth lies with entrepreneurs and established businesses, not with government policy-makers.  The public sector has not and cannot  match the vitality of the private sector in promoting economic growth.  History has shown this to be true time and time again.  Governments, even those that promise change, are primarily agents of the status quo.  Real change happens when those outside the mainstream have the freedom and the resources to try new things.   Sapping the resources of these innovators will do nothing but slow the economic recovery and delay getting Americans back to work.

It’s clear that this administration will not enact policies that will work to increase our economic freedom index.  We can only hope that the 2010 election will provide a Congress with the power to prevent its further decline.