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Wednesday, September 1, 2004

Where in the World Can You Find Economic Freedom?

Late 2003 saw the release of the most recent editions of two publications that rank the nations of the world according to their degrees of economic freedom. The Fraser Institute, located in British Columbia, put out the eighth edition of its Economic Freedom of the World and the Heritage Foundation and Wall Street Journal published the tenth in their Index of Economic Freedom series. Much can be learned about the meaning and importance of economic freedom from both publications. I must, however, register a terminological complaint: Even if the citizens of the United States are less economically controlled than the citizens of most other countries, that does not mean Americans are “free.”

In Fraser’s survey, the United States (tied with New Zealand, Great Britain, and Switzerland) remained the third freest economy in the world, behind Hong Kong and Singapore. But in the Heritage/Wall Street Journal study, the United States slipped from third to tenth! Three nations—Luxembourg, New Zealand, and Ireland—all moved ahead of the United States.

Where this country scores least well in these analyses is in the government’s fiscal burden. While the United States is exceptionally strong in such areas as monetary stability and property rights, its fiscal-burden scores are much weaker. Thus if government officials here were interested in increasing economic freedom, the place to start would be with a reduction of the vast federal budget. Unfortunately, the gigantic spending spree of President Bush and the 108th Congress will probably cause the United States to lose ground in subsequent editions of both publications. (In this regard, see Veronique de Rugy, “The Republican Spending Explosion,” Cato Institute Briefing Papers No. 87, March 3, 2004, www.cato. org/pubs/briefs/bp-087es.html.)

Most Americans take their high standard of living for granted and never contemplate the conditions that make it possible. Sport utility vehicles and Palm Pilots . . . DVD players and Nike shoes . . . fresh orange juice and robotic vacuum cleaners . . . townhouses and jewelry. We are able to enjoy a fantastic assortment of goods and services that make life longer, easier, and more pleasant. But what conditions make it possible for us to produce and purchase them? Or, to look at it another way, why is it that the inhabitants of countries like Zimbabwe, Uzbekistan, or Cuba cannot purchase such things? Ask your typical American if there is some connection between prosperity and economic freedom and you’ll get a shrug and an answer like, “Maybe . . . I guess so.”

The most valuable part of these two reports is that they make it unmistakably clear that national standards of living depend on economic freedom. Nations with high scores on economic freedom invariably have higher average incomes than nations with low scores. Furthermore, nations that increase their scores (such as Estonia, once a repressed part of the Soviet Union, but now one of the freest countries) see corresponding increases in their people’s living standards. Conversely, nations that decrease economic freedom (such as Venezuela, a once relatively free country now suffering under a quasi-Marxist military dictatorship) see their living standards fall. We aren’t just talking correlation here; we’re talking causation. The Fraser study sums it up this way: “[S]maller government, rule of law, sound money, and general economic freedom will almost certainly guarantee wealth for its citizens. People left alone will generally prosper.”

“Prosperity” does not just mean that people can buy sophisticated gadgets. It is far more elemental. Economic Freedom of the World notes that in “unfree” nations life expectancy is only 55 years; in “free” nations it is over 77 years. In “unfree” nations only half the people on average have access to improved sanitation facilities, while in “free” nations 99 percent do. Escape from the Hobbesian world, where life is poor, solitary, nasty, brutish, and short, depends on economic freedom.

Knowledge Gap

Our typical American might at this point nod and say, “Yes, I get it.” But then if you asked what economic freedom consists of, you’d probably get a long silence. Both publications give the reader the knowledge needed to fill the gap, detailing the analysis that went into the scoring. The Index of Economic Freedom employs 50 variables that fall into these categories: trade policy, the fiscal burden, intervention in the economy, monetary policy, capital flows and foreign investment, banking and finance, wages and prices, property rights, regulation, and informal market activity. Economic Freedom of the World works with 38 variables under these headings: the size of government—expenditures and taxes; legal structure and the security of property rights; access to sound money; freedom to exchange with foreigners; and regulation of credit, labor, and business.

The point that the perceptive reader will grasp, but perhaps should be made more explicit, is that economic freedom isn’t like a light switch—either on or off. Instead, it is composed of numerous moral choices, a few of which call for government to do certain things (protect property rights, for example) and not to do quite a few others (dictate wages and prices, impose barriers to starting new businesses, interfere with trade, tax people heavily, and so on).

“So that means that we have less economic freedom because of our Social Security system, our minimum wage laws, our income tax rates, licensing requirements, import tariffs, and many other such laws and programs,” the perceptive reader will realize. Right! Most of the hallmarks of American economic and social policy during the twentieth century are incompatible with economic freedom. A vast number of the policies that most Americans unthinkingly accept and approve are losses of economic freedom. A full list would be nearly impossible, but I wish that the studies said more plainly that most government expenditures, programs, and regulations make us less free.

It’s too bad that neither study discusses in detail the reasons why the United States gets the far-from-perfect scores that it does. That would be a valuable companion document.

Economic Freedom of the World scores the United States 8.2 on a ten-point scale for size of government. What’s behind that number? How much government spending—which necessarily means forcibly taking away money that would otherwise go into personal spending—would have to be cut for the United States to get a 10? If the implication of getting a 8.2 is that government here is overspending by 18 percent, that seems far too low to me.

Both reports group nations into broad categories—free, mostly free, mostly unfree, and repressed—based on their scores. As noted, in Economic Freedom of the World the United States is ranked third and in the Index of Economic Freedom it is ranked tenth. That puts us near the top of the category of “free” nations. But let’s hold off on any celebrations.

Freedom in America

The problem is that to a great extent, Americans are not free. We have to put up with economic restraints and commands from the state that would have had our forebears up in arms. Unfortunately, it may bolster the forces of governmental expansion to be able to point to our “free” designation and say, “Look, with all of our laws and programs, we’re still a free country.” Truly bold big-government advocates might even claim that we’re “free” because of our vast assortment of laws and regulations and therefore we should have more. How about the added “freedom” that would come from completely socialized medicine?

A more accurate way of stating the matter would be to say that Americans are less regulated and controlled than people in most other countries. “Free” implies an absolute state, an absence of governmental control. All that we can really say from these reports is that Americans are comparatively less repressed than most other people. Someone who is allowed to walk around inside a prison isn’t free just because other prisoners are tightly shackled to the walls.

Consider the matter of taxation. Thanks to our income tax, Americans spend much of the year working for government. Tax Freedom Day, as calculated by the Tax Foundation, is April 19, an improvement over recent years, but still too late. (See html.) So the average citizen works from January 1 until April 19 just to pay his taxes, and only after that is he earning money to spend according to his own desires. (That’s for the average citizen. Those in the highest federal and state tax brackets work even longer to satisfy the demands of the politicians.) We don’t really own our labor—government has staked out a prior claim to a large percentage of anything we earn. Taxation is worse in many other nations, but that doesn’t make us free.

What about our property rights? In a “free” country each person’s property would be protected by law against theft or destruction. In both studies, the United States receives high scores when it comes to property rights, but see how much that impresses an individual who has lost property under the aggressive application of civil-asset forfeiture laws. It is possible for a person to face confiscation of his bank account, house, car, cash, and anything else just because a law-enforcement official suspects he may be involved in the sale of drugs or other crimes. Numerous appalling cases are detailed in Randall Fitzgerald’s recent book, Mugged by the State. In a truly free country the police are not allowed to steal property to pad their budgets and make hapless citizens go through difficult and costly legal hoops if they want to get it back, even if declared innocent of any wrongdoing. Maybe such governmental rip-offs are more prevalent in other countries, but that doesn’t mean we are “free.”

Americans living in 2004 are much less free than Americans living in 1904. Government not only confiscates far more of our income in taxes than it used to, but its laws and regulations have spread into most facets of life. In labor markets, product markets, housing markets, and credit markets Americans now face voluminous, sometimes conflicting regulations from federal, state, and local authorities telling them what they must and must not do. Just to cite two egregious examples, our crusades for environmental purity and multicultural diversity have spawned huge bureaucracies with the temperaments of junkyard dogs, eager to tear into anyone who has in some way displeased them.

The United States used to be a free country, but it isn’t any more. As Paul Craig Roberts writes: “It is a paradox that a country that has abandoned freedom and re-enserfed its population sees itself as role model for the world.”

  • George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.