Declining Economic Freedom is Sinking the U.S. Economy

The 2014 Index of Economic Freedom, published by the Heritage Foundation in partnership with the Wall Street Journal, was released today. The United States continued its decline in both absolute and global rankings, falling from the tenth to twelfth freest world economy. Canada, Chile, Ireland, Estonia, and even the welfare state of Denmark are all more economically free than the United States.

Economic freedom is defined by the Index as “the fundamental right of every human to control his or her own labor and property.” The four pillars of economic freedom are rule of law, limited government, regulatory efficiency, and open markets. The Index rates 186 countries based on their averages of ten factors which support these pillars. The data for the 2014 rankings come from the second half of 2012 and first half of 2013.

America’s fall in economic freedom is supported by data from the widely-cited Economic Freedom of the World Index, co-published by the Cato Institute, the Canadian Fraser Institute, and more than 70 other think tanks from around the world. Since 2000, the United States has fallen from the second freest economy in the world to the nineteenth, based on the Index’s chain-linked summary ratings (see my earlier article, “Is the U.S. Canada’s Socialist Neighbor to the South?”).

The U.S. is the only country in the Heritage Index to fall in its ranking each of the past seven years. This troubling trend is the result of several converging factors which all reduce economic freedom: increasing public debt, high taxes, weakened private property protection, barriers to free trade, and burdensome regulations.

Total U.S. public debt is larger than the size of the economy, and debt held by the public is over $12 trillion—a 140 percent increase from six years ago. To pay off this debt, every person in the U.S. would have to contribute $38,000, equivalent to 135 percent of per capita money income. This growing debt is primarily driven by increasing entitlement spending, which accounts for 60 percent of the federal budget compared with “only” 45 percent 15 years ago.

America’s overall tax burden amounts to a quarter of gross domestic income. While other countries have worked to lower their corporate tax rates over the past 25 years, the United States has refused to follow this trend—its rate actually increased to 39 percent over that time. The highest individual tax rate is now over 40 percent when phaseouts are included. High rates are sending jobs and entrepreneurs overseas, to the benefit of more economically free countries.

American protection of property rights has been uneven, raising charges of favoritism. Government-orchestrated bailouts of the financial and auto industries violated creditors’ property rights to limit equity holders’ losses. Abuses of eminent domain, legitimated by the Kelo case, sanctioned the taking of private property by the government for alternative private development, not public use.

It is still relatively easy to set up a business in the United States, even with some ridiculous and unnecessary occupational licensing laws. What is more difficult is meeting the substantial regulatory requirements necessary to stay in business. The Affordable Care Act and Dodd-Frank are both filled with more regulations (almost 25,000 pages worth combined) that will only increase costs of doing business and regulatory uncertainty.

Free trade is harmed by protectionist regulations such as the antiquated Jones Act, which benefits shipbuilders but harms the rest of the United States through higher prices for goods. Shipping between U.S. ports can only be done by American ships. For example, a ship carrying cargo from Asia cannot stop in Hawaii on its way to the mainland United States. The ship must be unloaded on the West Coast so an American-built ship can bring the now overpriced goods to other, less politically connected, American citizens in Hawaii.

Clark Neily, Institute for Justice attorney, offers an explanation for why U.S. rankings have been falling. His new book, Terms of Engagement, points out that some individual freedoms such as religious liberty, freedom of speech, and voting rights are provided meaningful protection by courts and viewed as inviolable by the public. On the other hand, non-fundamental rights are not legally protected or publically respected—rendering them, in effect, meaningless. Judges are charged with acting as neutral arbitrators in cases concerning fundamental rights, whereas they act as government advocates in cases concerning non-fundamental rights. These non-fundamental rights include such vital freedoms as earning a living, having private property rights, or seeking life-saving medical treatment.

It is difficult to see the United States making a comeback anytime in the near future. This is sobering news. These rankings matter since a country’s economic freedom has direct impact on its ability to spur investment, and its prosperity. Whether people are working to find jobs, finance homes, start businesses, or save for retirement, they are deeply affected by the level of government interference in the economy. Without increased respect for economic freedom, the American dream will grow more difficult to pursue.

Jared Meyer is a policy analyst at the Manhattan Institute for Policy Research. You can follow him on Twitter here.

[Originally published on e21]

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