SATURDAY, SEPTEMBER 22, 2012
Striving to Breathe Free
By GENE EPSTEIN
Economic freedom in the world is near an all-time high, but in the U.S. it's been on the wane, according to the Fraser Institute. What went wrong and what went right.
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Good news about the world; relatively bad news about the U.S.
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The world index of economic freedom, calculated as an average for more than 100 countries, reached a peak in 2007, and through 2010 it remains near its all-time high. But while the U.S. is still ranked above the world average, the 10-year trend is down. From a 2000 peak of 8.65 it has been in free fall, reaching a 2010 low of 7.70, not far above its 1970 level of 7.60.
The economic freedom index, as calculated by the British Columbia-based Fraser Institute, has a theoretical maximum of 10. Hong Kong, consistently No. 1, scored 8.90 in 2010, according to data released last week.
The five components of the freedom index are size of government; the legal system and security of property rights; sound money; freedom to trade internationally; and the level of regulation of credit, labor and business. All five are weighted equally.
A range of academic research has shown a connection between a country's increase in economic freedom and its rate of economic growth. Accordingly, in each of the three decades from 1970 through 2000, U.S. growth averaged more than 3% a year, when economic freedom was rising. From 2000 through 2010, when economic freedom was falling, growth ran less than 2%, even if we factor out the hit to growth from the '08-'09 recession.
The U.S. has the dubious distinction of suffering one of the biggest declines since 2000, along with countries that include Argentina, Iceland, and Venezuela. An approximately similar level of economic freedom that in 1970 put the U.S. third in world ranking, behind only Hong Kong and Singapore, leaves it 19th in the world as of 2010. That's down from second in 1995 and eighth in 2000 (see chart). Countries the U.S. now trails in economic freedom include Australia, Canada, Chile, Denmark, Finland, New Zealand, Switzerland, and the United Kingdom.
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The biggest gainers since 2000 include such African nations as Ghana, Malawi, and Rwanda, and formerly Communist Albania, Bulgaria, Poland, and Romania. China is still ranked in the lower half of nations. But the world's most populous country has still made a great leap forward in economic freedom since 1980, reaching a peak in 2010. Hundreds of millions of Chinese have climbed out of poverty over this same period.
That's because economic freedom is not about the privileges of the few, but the opportunities of the many. In terms of income distribution, the share of income going to the poorest 10% bears no statistical relation to whether a country is less free or more free.
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But the incomes of the poorest 10% are exponentially higher in freer countries than in the less free. China's income inequality is greater than it was 40 years ago, but ordinary citizens live far better today.
Similarly, the immigrants who came to the U.S. a century ago could hardly know or care whether this country had a more unequal distribution of income than the one they were leaving, any more than immigrants to the U.S. care about such things today.
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IT'S NOT SURPRISING THAT the countries in the European Union whose economic freedom has lost ground over the past 10 years include the troubled economies of Portugal, Ireland, Italy, Greece, and Spain. But of the five, Ireland now ranks somewhat higher than the U.S., mainly because it does better in terms of security of property rights and freedom to trade internationally.
Denmark and Finland also edge out the U.S. in economic freedom, and Sweden and Norway rank in the top quartile, contrary to their image as socialist. While all four Scandinavian countries score low in terms of size of government, all score relatively high on the other four components of economic freedom.
What about trends in the U.S.? From 1970 through 2000, all five components of the freedom index rose; since 2000, all five have declined, with special weakness in the effectiveness of the legal system and property rights. One example Fraser analysts cite is the violation of the property rights of bondholders in the bailout of General Motors.
The rise in economic freedom from 1970 through 2000 was a bipartisan effort; the decline since 2000 has been equally bipartisan. Whatever the new mix of power in Washington after November, let's hope the furtherance of economic freedom is high on the list of priorities.
.
.
The world index of economic freedom, calculated as an average for more than 100 countries, reached a peak in 2007, and through 2010 it remains near its all-time high. But while the U.S. is still ranked above the world average, the 10-year trend is down. From a 2000 peak of 8.65 it has been in free fall, reaching a 2010 low of 7.70, not far above its 1970 level of 7.60.
The economic freedom index, as calculated by the British Columbia-based Fraser Institute, has a theoretical maximum of 10. Hong Kong, consistently No. 1, scored 8.90 in 2010, according to data released last week.
The five components of the freedom index are size of government; the legal system and security of property rights; sound money; freedom to trade internationally; and the level of regulation of credit, labor and business. All five are weighted equally.
A range of academic research has shown a connection between a country's increase in economic freedom and its rate of economic growth. Accordingly, in each of the three decades from 1970 through 2000, U.S. growth averaged more than 3% a year, when economic freedom was rising. From 2000 through 2010, when economic freedom was falling, growth ran less than 2%, even if we factor out the hit to growth from the '08-'09 recession.
The U.S. has the dubious distinction of suffering one of the biggest declines since 2000, along with countries that include Argentina, Iceland, and Venezuela. An approximately similar level of economic freedom that in 1970 put the U.S. third in world ranking, behind only Hong Kong and Singapore, leaves it 19th in the world as of 2010. That's down from second in 1995 and eighth in 2000 (see chart). Countries the U.S. now trails in economic freedom include Australia, Canada, Chile, Denmark, Finland, New Zealand, Switzerland, and the United Kingdom.
.
The biggest gainers since 2000 include such African nations as Ghana, Malawi, and Rwanda, and formerly Communist Albania, Bulgaria, Poland, and Romania. China is still ranked in the lower half of nations. But the world's most populous country has still made a great leap forward in economic freedom since 1980, reaching a peak in 2010. Hundreds of millions of Chinese have climbed out of poverty over this same period.
That's because economic freedom is not about the privileges of the few, but the opportunities of the many. In terms of income distribution, the share of income going to the poorest 10% bears no statistical relation to whether a country is less free or more free.
.
But the incomes of the poorest 10% are exponentially higher in freer countries than in the less free. China's income inequality is greater than it was 40 years ago, but ordinary citizens live far better today.
Similarly, the immigrants who came to the U.S. a century ago could hardly know or care whether this country had a more unequal distribution of income than the one they were leaving, any more than immigrants to the U.S. care about such things today.
.
IT'S NOT SURPRISING THAT the countries in the European Union whose economic freedom has lost ground over the past 10 years include the troubled economies of Portugal, Ireland, Italy, Greece, and Spain. But of the five, Ireland now ranks somewhat higher than the U.S., mainly because it does better in terms of security of property rights and freedom to trade internationally.
Denmark and Finland also edge out the U.S. in economic freedom, and Sweden and Norway rank in the top quartile, contrary to their image as socialist. While all four Scandinavian countries score low in terms of size of government, all score relatively high on the other four components of economic freedom.
What about trends in the U.S.? From 1970 through 2000, all five components of the freedom index rose; since 2000, all five have declined, with special weakness in the effectiveness of the legal system and property rights. One example Fraser analysts cite is the violation of the property rights of bondholders in the bailout of General Motors.
The rise in economic freedom from 1970 through 2000 was a bipartisan effort; the decline since 2000 has been equally bipartisan. Whatever the new mix of power in Washington after November, let's hope the furtherance of economic freedom is high on the list of priorities.
.
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