Economic Freedom

Okay … The Heritage Foundation has released its rankings of the freest economies in the world. 161 countries compared on 50 different variables divided into 10 broad categories:

§ Trade policy,
§ Fiscal burden of government,
§ Government intervention in the economy,
§ Monetary policy,
§ Capital flows and foreign investment,
§ Banking and finance,
§ Wages and prices,
§ Property rights,
§ Regulation, and
§ Informal market activity.

The higher the score in any section, the higher the level of government interference and, therefore, the less freedom in the economy, and the findings of this study are straightforward: The countries with the most economic freedom also have higher rates of long-term economic growth and are more prosperous than are those with less economic freedom.

So … why am I bringing all this up? Well …. I bring it up because of a disturbing trend. The Heritage Foundation first released this report in 1995 (with data collected in 1994) at which time the United States was listed as the 5th freest economy in the world. Five years later the 2000 report placed the US Tied for 5th with Luxembourg. The last five years, however, have seen a dramatic change in the list … the 2005 report lists the US as tied for the 12th freest economy in the world with Switzerland.

Out of the top 10 in 5 years … well let’s look at the specifics of the fall. In 2001 the report placed us in a tie for 6th with Luxembourg. 2002 placed us in a 5 way tie for 4th with Luxembourg, Estonia, Ireland, and The Netherlands. In 2003 we fell back to a tie for 6th with Denmark and Estonia, and in 2004 we fell back to 10th all by our selves.

Now … let’s look at the current report a little more …

United States (2005)
Rank 12th
Overall Score 1.85

§ Trade policy – 2.0
§ Fiscal burden of government – 4.0
§ Government intervention in the economy – 2.0
§ Monetary policy – 1.0
§ Capital flows and foreign investment – 2.0
§ Banking and finance – 1.0
§ Wages and prices – 2.0
§ Property rights – 1.0
§ Regulation – 2.0
§ Informal market activity – 1.5

[Scale is 1.0 – 5.0 with higher numbers meaning higher government influence and lower freedom and for a full explanation of the variables under each specific section I recommend reading the report itself at http://www.heritage.org/research/features/index/]

Okay … Trade Policy – 2.0 … I understand that a certain amount of government regulation in the dealing with foreign countries it likely needed and probably helpful to a degree. Capital Flow and foreign investment – 2.0 … as part of this again deals with foreign involvement in the economy some rules may need to be put in place by the government for the good of the economy. I will say that I think that we in the US have a tad too much government regulation in these areas … maybe we should look at our policies in these specific areas and work toward lowering our score to 1.5 or so….

Government intervention in the economy – 2.0 … First off … what does this category specifically measure? Well … “This factor measures government’s direct use of scarce resources for its own purposes and government’s control over resources through ownership. The measure comprises both government consumption and government production.” They also list as sub factors, “Government consumption as a % of economy, Government ownership of businesses or industry, Share of government revenue from state owned enterprises or properties, and Economic output by the government”

Essentially, this measures how much of the economy is directly controlled by the government in one form or another … This is a number that needs to come down. Government control of the marketplace is harmful to the free growth of the economy. This amounts to price fixing, government control of supply, and is the direct path to a government control of industry.

Wages and Prices – 2.0 … This is government, through laws and regulations controlling the wages and selling prices within the marketplace. These are minimum wage laws, laws that limit maximum price mark-up, etc. And is essentially the government sticking its paws where they don’t belong. A working wage is an agreement between an employer and an employee … the government should not have any business in this. If I am willing to work for $2.00 an hour someone should be allowed to hire me for that and not have the government come down on them for paying me under the minimum wage … minimum wage laws often hurt the people they are most intended to help by encouraging people to hire ‘under the table’ labor or taking the jobs to other economic markets.

Regulation – 2.0 … this is government regulation of industry through any of a number of laws. A law that requires companies with more than 10 employees to give health care to their employees, for an example. While these are often passed with the best of intentions they need to be looked at carefully … because they can seriously impact the economic growth and hurt the overall economy in the long run … The example above will cause small businesses to evaluate their need to have 10 employees and can lead to job loss, or pay cuts for those employees to pay for the newly required health coverage.

But what’s telling is the biggie …. Fiscal burden of government – 4.0 …. 4?! This category can be summed up in 1 word …. Taxes. Be it personal income tax, corporate income tax (btw – corporations don’t pay tax … they collect tax by passing the cost along to the consumer … when embedded taxes are taken into account most individuals in the US pay in the neighborhood of 30-60% of their income to the government), property tax, etc. On a scale of 1-5, 5 being highest (and worst) the US scores a 4. Higher taxes mean more money removed from the economy and therefore less money remaining to allow economic growth ….

Tax reform people … we need it … for a lot of reasons … but I’ll leave that rant for another day.

You want to know what is wrong with our economy … well there it is … summed up nicely … government regulation and taxation … fix that and there is little to nothing that will stop the growth of this economy.