Despite the apparent confusion of assorted elected officials, no mystery exists as to how economic growth is generated, whether at home in the United States or in other nations around the globe.
Unfortunately, as two recent major studies show, the United States is losing ground when it comes to the key source of growth.
Economic development is not about, as some politicians and more than a few of my fellow economists assert, government draining resources form the private sector in order to spend on assorted programs, from food stamps to infrastructure. After all, if that were the case, then the Soviet Union would still be around, serving as the globe’s economic model.
Quite simply, economic growth occurs when freedom prevails. That is, when individuals are free to invent, innovate, improve and invest.
That occurs when free enterprise and free markets reign, with government limited to providing necessary foundations, such as the rule of law, property rights, sound money, a limited size of government, no barriers to trade at home and internationally, low taxes, and non-burdensome regulations.
For the longest time, the United States was the model of economic freedom. Others across the world have sought to replicate, or envied our formidable, adaptable, entrepreneurial economic engine.
Unfortunately, this has changed in recent years, as reported in two global measures of economic freedom.
The “2012 Index of Economic Freedom,” published by The Heritage Foundation and The Wall Street Journal, scores and ranks nations according to four broad areas: rule of law, limited government, regulatory efficiency, and open markets. The United States came in number 10. Now, considering that there are 179 nations ranked, that’s pretty darn good.
But we also must consider that as recently as 2007, the United States was ranked fourth in the world. Our score on the index has fallen for five straight years.
The authors summed up our recent woes this way: “Although the foundations of economic freedom remain strong, recent government interventions have eroded limits on government, and public spending by all levels of government now exceeds one-third of total domestic output. The regulatory burden on business continues to increase rapidly, and heightened uncertainty further increases regulations’ negative impact. Fading confidence in the government’s determination to promote or even sustain open markets has discouraged entrepreneurship and dynamic investment within the private sector.”
That’s a spot-on description of the problems that the United States has created for itself during the past five years.
The story for the United States is even worse according to the second study — the “Economic Freedom of the World: 2012 Annual Report” — from The Fraser Institute. This study gauges nations according to five broad areas (similar to the above report): size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation.
The downward trend for the United States has been even more drastic on this measure. As noted in the Fraser Institute index: “The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a remarkable plunge in economic freedom during the past decade.” Among 144 countries, the United States fell from the second freest economy in the world in 2000 to the 19th in 2010.
In fact, the United States dropped in each major category from 2000 to 2010, going from 34th to 61st on the size of government; ninth to 33rd on legal system and property rights; second to seventh on sound money; 22nd to 42nd on freedom to trade internationally; and second to 17th on regulation.
The authors of the “Economic Freedom of the World: 2012 Annual Report” also pointed out: “By 2010, the United States had also fallen behind Finland and Denmark, two European welfare states. Moreover, it now trails Bahrain, the United Arab Emirates, Estonia, Taiwan, and Qatar, countries that are not usually perceived of as bastions of economic freedom. The United States has now reached a point where even small additional decreases in the rating will cause large ranking changes because there are so many more countries clustered in this range of the index.”
Given the continuation and expansion of policies that work against economic freedom since 2010, it’s likely that the United States already has moved further down this ranking of economic freedom among nations.
It should surprise no one, therefore, that the United States. has experienced economic growth rates well below our historical average during the past decade-plus. Consider that from 1950 to 2000, real annual U.S. GDP growth averaged 3.6 percent. Meanwhile, from 2001 to 2011, real annual growth averaged only 1.6 percent. And during the past five years, real growth came in at a meager annual average of 0.5 percent.
Assorted factors have come into play in derailing economic growth over the past decade, and in particular, during the past four or five years. But, in fact, they all tie back to a decline in economic freedom, including misguided government housing programs that came home to roost, vast increases in regulation, an unprecedented expansion in government spending, monetary policy unmoored from price stability, and actual and threatened tax increases.
Do you want faster economic growth, and with it higher incomes and a healthier job market? Then the answer is clear: the decline in U.S. economic freedom must not only be halted, but completely reversed.
— Raymond J. Keating, chief economist, Small Business & Entrepreneurship Council.