Follow by Email

Saturday, December 11, 2010

U.S. Falling in the Global Index of Economic Freedom

During my 20-year tenure as a foreign correspondent for the Chicago Tribune, I spent a lot of my time reporting on the economic conditions of the countries I covered. In the 1970s, 1980s and 1990s many of these were so-called "managed economies," in which strong central governments controlled such things as property rights, labor, investments, monetary policy, trade, etc.

The objective was to manage economic growth, redistribute wealth and generally protect the nation from the pressures of global trade and competitiveness.

Unfortunately, as we have seen, managed economies are doomed to failure. Why? Because for the most part they undermine and often discourage things such as individual incentive, creativity, and entrepreneurship.

About 16 years ago the Washington-based Heritage Foundation began issuing something called the Index of Economic Freedom. Today the index looks at 183 nations and ranks 179 of them with an economic freedom score based on 10 measures of economic openness, regulatory efficiency, the rule of law and competitiveness.

The Heritage Foundation defines economic freedom as the right of every human being to control his or her own labor and property.

Says the Foundation: "In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself."

Sounds like the U.S. should be at the top of that list doesn't it?

Unfortunately that is not the case. In fact the U.S. ranks 8th in the world among the freest economies. Ahead of the U.S. in first place is Hong Kong, followed by Singapore, Australia, New Zealand, Ireland, Switzerland and Canada. Only those top seven are considered "free" by the Index. The U.S. ranks as "mostly free."

Should we be surprised? No, not when you consider how the Obama administration has behaved in the past two years. It has inserted itself into just about every facet of American economic life in the name of "saving" the economy.

First, there was the huge stimulus spending package, coupled with government bailouts and takeovers of financial firms and auto makers. More recently we have seen the proposed nationalization of health care and an energy cap and trade program that are a distinct departure from the traditional American goals of economic and political freedom.

Interestingly, the rest of the world is not following the U.S. lead in these policies. Indeed, most of the nations have already experimented with managed economies and wealth redistribution and found them wanting not only in terms of cost, but in results.

Yet, here is the U.S. pursuing many of the failed policies other nations have already tried and rejected. As a result, the U.S. has dropped two places in the Index and now trails Canada. What's worse, it has dropped out of the "Free" category and for the first time has entered the "Mostly Free" category.

In pulling together its data, the Foundation found that increased government spending did not improve economic crisis performance. In fact, that policy has made those nations weaker.

The Index is created by examining 10 components of economic freedom. It assigns a grade to each ranging from 0 to 100, where 100 represents the maximum freedom. Hong Kong, which leads the list, has a ranking of 89.7 while the U.S at 8th, has a ranking of 78.0.

At the bottom with a ranking of 1.0 is North Korea. No surprise there. The next five from the bottom are Zimbabwe with a ranking of 21.4; Cuba (26.7); Eritrea (35.3); Burma (36.7); and Venezuela (37.1). Each of these nations is some form of a dictatorship. Once again, no surprise.

In my travels as a correspondent I never found one dictatorship that had formulated a successful economic policy--unless it was to enrich those at the top of the political pyramid.

It is interesting to note that the four freest economies are in Asia. The next two are in Europe and then there is Canada and the U.S. in North America, followed by Denmark and Chile.

Chile is a particularly interesting case. In the late 1970s following the 1973 military coup that deposed Salvador Allende, Chile adopted the economic policies of the so-called "Chicago Boys"--Chilean economists who had studied under the University of Chicago's Nobel Prize winning economist Milton Friedman. Prior to that the Chilean economy was wilting under 140 percent inflation and was not considered part of the global mix.

In 1975 Chile adopted a "free market" economy and while that move created severe hardships for Chilean businesses, manufacturers, workers and financial institutions, it ultimately turned the economy around so that it was finally integrated with the rest of the global economy.

I recall visiting Chile at a time when unemployment was hovering around 20 percent. Not everybody in the country was convinced that a free market economy was the way to go. But by 1990 the country had become a democracy and its GDP growth was the highest in Latin America. Today it is number 10 on the Index of Economic Freedom.

Here is what the Obama administration and those in Congress who still want to keep their hands in our pocketbooks should heed: Gross domestic product per capita is much higher in countries that score well in the Index. And that is true for all levels of economic freedom. The idea that government can spend us to prosperty is absurd. It only enriches those who control the purse strings.

Finally, the report says: "Economic freedom improves the overall quality of life, promotes political and social progress and supports environmental protection. Economic freedom correlates with poverty reduction, a variety of desirable social indicators, democratic governance and environmental sustainability."

We can only hope that the U.S. will not fall further in the Index. I would hate to find myself living in a place that mirrors those failed government managed economies I once covered in the 1970s and 1980s.

When I think of that scenario I have to shudder and then I am reminded of what President Ronald Reagan once said: "The most terrifying words in the English language are: I'm from the government and I'm here to help."

Post a Comment