Maximum “Economic Freedom”: No Cure for Our Economic Ills

John Miller

We are the party of maximum economic freedom and the prosperity freedom makes possible. … Our vision of an opportunity society stands in stark contrast to the current Administration’s policies that … [have] created a culture of dependency, bloated government, and massive debt.
—2012 Republican Platform, “We Believe in America”
Unless policies undermining economic freedom are reversed, the future annual growth of the U.S. economy will be only about half its historic average of 3%.
—James Gwartney, Robert Lawson, and Joshua Hall, Economic Freedom of the World: 2015 Annual Report, The Fraser Institute

The Republican Party no doubt will once again in 2016 claim that it is the “party of maximum economic freedom” and that the presidential election will once again offer a choice between free enterprise, an opportunity society, and prosperity versus “a culture of dependency, bloated government, and massive debt.”

Just in case the boilerplate of their platform is not enough to convince you that maximum “economic freedom” is the key to prosperity, two free-market think tanks, the Canada-based Fraser Institute and the Washington, D.C.-based Cato Institute, have the numbers to prove it—or so they say.he Republican Party no doubt will once again in 2016 claim that it is the “party of maximum economic freedom” and that the presidential election will once again offer a choice between free enterprise, an opportunity society, and prosperity versus “a culture of dependency, bloated government, and massive debt.”

Their Economic Freedom Index of the World (EFW), its latest edition published just this fall, purports to show that economic freedom in the United States is on the decline, and as economic freedom has plummeted, economic growth has slowed, inequality has worsened, and political rights and civil liberties have been curtailed. The same, according to the EFW report, holds true for countries across the globe—those that are “more free” economically enjoy better economic outcomes and more civil liberties and political rights.

But even a quick glance at the EFW country rankings makes clear that there is something seriously amiss with its numbers.

That Can’t Be Right—and It Isn’t

The EFW provides an objective-looking list that ranks 157 countries and territories from the “most free” (Hong Kong and Singapore) to the “least free” (The Republic of the Congo and Venezuela). Their assessment of economic freedom uses 24 separate measures to score each country on five major areas: the size of government, the legal system and property rights, sound money, freedom to trade internationally, and regulation.

So what’s wrong with the numbers? To begin with, the rankings seem to have little to do with political freedom. Consider the two city-states, Hong Kong and Singapore, which have repeatedly topped their list of free countries. Freedom House, which the Wall Street Journal has called “the Michelin Guide to democracy’s development,” classifies Hong Kong and Singapore as only “partially free.” Freedom House, however, classifies some 89 other countries, almost half of the countries in its rankings, as “free.” Hong Kong receives low marks from Freedom House for its restrictions on press freedom and freedom of assembly, especially limiting protests, and for the Chinese government’s limits on the candidates who can be nominated for Hong Kong’s executive elections. Likewise, the organization reports that Singapore’s press is “not free,” while the Internet is only “partially free” there. Also, in Singapore, rights to demonstrate are limited; films, TV, and the like are censored; and preventive detention is legal.

In addition to its rankings, the EFW report comes with accompanying charts. They purport to show that the “most free” quartile of the countries in their rankings average higher levels of per capita income, faster economic growth rates, less inequality, longer life expectancies, and more political rights and civil liberties than the other three “less free” quartiles of countries.

But these correlations are too facile to be credible. For instance, instead of arranging countries by their EFW ranking, let’s group them by their score on just one of the five major areas of the index, the size of government. Because the EFW size-of-government index never recognizes that government programs such as Social Security have improved the life chances of citizens and enlarged the choices available to them, countries with the smallest government and lowest tax rates score the highest on “freedom.” If the correlations between the EFW and prosperity, well-being, and political freedom have meaning, then the countries with the smallest governments should be associated with better outcomes than those being crushed by an outsized public sector.

But that’s not case. The economies of the EFW’s ten best-scoring countries on size of government (from first to tenth: Hong Kong, Bangladesh, Honduras, Madagascar, the Philippines, Nepal, Haiti, Guatemala, Nicaragua, and Pakistan), on average, did grow more quickly than those of the ten countries that did worst by that measure (from 148th to 157th: Finland, Algeria, Netherlands, Denmark, Belgium, France, Timor-Leste, the Republic of Congo, Burundi, and Finland). But the average income per capita for the EFW’s worst ten countries was more than four times as great as for the EFW’s best ten countries on the government-size measure. Also, the overall levels of income inequality (according to the standard measure, the Gini coefficient) were lower and the income share of the poorest 10% of the population was larger. In addition, the average lifespans in the countries the EFW ranked worst were three years longer than for those living in the countries the EFW ranked best. Finally, according to Freedom House, political rights and civil liberties are greater in the countries with the largest-size governments than in those with the smallest-size governments.

If the goal is a more prosperous nation with greater equality, longer lifespans, and more political rights and civil liberties, then a proper reading of EFW is that quite a large government is called for. That’s hardly the message the EFW is intending to send, and one more likely to appear on the Bernie Sanders website than in the Republican Party platform.

Stagnation and “Unfreedom”

The EFW report also claims to show that that deteriorating economic freedom is at the heart of U.S. economic stagnation and worsening inequality. Since 2000, the United States has fallen in the EFW rankings from third to sixteenth. In addition, the drop in the U.S. economic freedom score was more than three times that of the OECD average score. (The Organisation for Economic Cooperation and Development (OECD) includes most high-income countries.) “Unless policies undermining economic freedom are reversed,” warns the EFW report, “the future annual growth of the U.S. economy will be only about half its historic average of 3%.”

But before you dust off your copy of Ayn Rand’s Atlas Shrugged and join some “maximum economic freedom” movement, consider this: As the U.S. EFW score dropped three times faster than that of the average OECD country, the U.S. economy grew more quickly (1.6% a year) than the OECD average (1.4% a year) from 2000 to 2014. Last year, the U.S. economy grew at an annual rate of 2.4%—considerably above the OECD average of 1.8%, but still well below its 3.0% historical average. But the specific factors driving the decline of the U.S. EFW rating don’t support the case that deteriorating economic freedom is what lies behind continued economic stagnation in the United States.

Since 2000, the U.S. ratings have fallen in all five areas of the EFW index. For instance, the U.S. size of government score got worse as government spending, consumption, and transfers increased, especially in the wake of the Great Recession. The U.S. score on “sound money” also slipped after the Great Recession, as the Federal Reserve (the “Fed”) pushed interest rates to near zero by accelerating the growth of the money supply. But the additional government spending, though falling far short of what was needed, did more to revive economic growth than to inhibit it. Likewise, without the Fed’s lax monetary policy, the less-than-robust economic growth since the Great Recession would have been yet more feeble.

But the largest declines in the U.S. EFW score came in three other areas: the legal system and the protection of property rights, freedom to trade internationally, and regulation. The EFW report allows that several factors could lie behind the drop in the U.S. scores in these areas, including some serious infringements on civil liberties.

But the EFW report goes on to ask if Sarbanes-Oxley (a 2002 law that seeks to improve corporate accounting practices and to make CEOs responsible for their corporations’ profit reports), or the Affordable Care Act (which expands healthcare coverage), or Dodd-Frank (which attempts to curb some of the worst practices of a reckless financial industry), or the auto-industry bailout (that revived a failing industry and saved millions of jobs) “could be seen as a threat to property rights.” The fact that the EFW report would single out those government interventions makes clear that what counts in their index is the economic freedom of only a tiny segment of the U.S. population, not that of workers, consumers, or even, in some cases, stockholders.

Despite its objective appearance, the EFW fails to make the case that a lack of economic freedom is the root cause of our economic ills, or that its brand of maximum “economic freedom” will cure them. Rather the EFW stands in the way of policies that might resolve our economic problems and improve the life chances of most people, as it protects the economic freedom and prerogatives of elites.

John Miller is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.

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