The State of Economic Freedom

The great news for humanity: Economic freedom around the world is on the rise. This means liberation for millions and billions of people. What a change from 20 years ago, when so many lived under despotism and socialist slavery. These people are freer, and getting freer. More people avail themselves to the global division of labor than ever before. Poverty, hunger, and violence are falling. Technology is linking people as never before. The future is bright.

All of this information comes from one of my favorite ongoing projects: Economic Freedom of the World, an annual index that attempts to quantify what really matters in this world. It tries its best to assemble as much of the data available and keep the quantification methods consistent year by year, so we can gain a better picture of the trends.

This index lists countries by most to least free, using every available objective criterion. Are people free to make contracts, keep what they earn, use a sound currency, rely on some degree of legal stability, trade internationally, associate as they please toward their mutual well-being? The more people can do this, the higher their countries rank on the scale. The more that government interferes with their lives, the lower on the scale they rank.

Here is the executive summary of this point from this year’s report:

  • “Nations in the top quartile of economic freedom had an average per capita GDP of $37,691 in 2010, compared to $5,188 for bottom quartile nations in 2010 current international dollars
  • In the top quartile, the average income of the poorest 10% was $11,382, compared to $1,209 in the bottom in 2010 current international dollars
  • Interestingly, the average income of the poorest 10% in the most economically free nations is more than twice the overall average income in the least free nations.
  • Life expectancy is 79.5 years in the top quartile compared to 61.6 years in the bottom quartile
  • Political and civil liberties are considerably higher in economically free nations than in unfree nations.”

What is the relationship between freedom and prosperity? They are directly related. If this index doesn’t prove it to a person’s satisfaction, nothing on this Earth will prove the point.

We think we live in the age of science. Maybe so. But ideology remains more powerful. Otherwise, we would see a gigantic rush the world over to free the market, and fast. It’s the path to prosperity, peace, and human flourishing. Even if you don’t understand the logic, you can at least look at the numbers. You have to postulate an amazing number of coincidences to come up with any other explanation for why freedom is associated with prosperity and despotism is associated with poverty.

This year’s report contains a real shocker when it comes to the United States. We aren’t just slipping on the index. We are falling off a cliff. In many parts of the world, life is freer. Not in the “land of the free.” Not by a long shot. What this reports says about the United States should be front-page news. Instead, it has received barely any attention at all.

The long and short of it:

“The United States, long considered the standard-bearer for economic freedom among large industrial nations, has experienced a substantial decline in economic freedom during the past decade. From 1980-2000, the United States was generally rated the third-freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980-2000, the chain-linked EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010. The chain-linked ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 and 19th in 2010 (unadjusted ranking of 18th).”

One might think that it would bug people that Canada is now a more economically free nation than the United States. Remember how Finland was supposed to be ruled by muddle-headed socialists? No more. It ranks higher. So do Chile, New Zealand, and Australia. So do Ireland, Denmark, and the United Kingdom. It goes without saying that Hong Kong and Switzerland beat the U.S. But so do Qatar, the UAE, and Bahrain.

The question is why. The U.S. fell in every area. Regulation is more intense. There are more trade barriers. Property rights are less secure. Government is much larger. Money is not sound either, but the report gives a good grade here only because of the method of quantification. They look only at official rates of inflation so that there are accurate data across many countries. If you look under the hood at U.S. monetary policy, you can see that we are headed for a devastating fall in this area too.

What is the main reason for the fall of the U.S.? Property rights are less secure. As the authors say, “While it is difficult to pinpoint the precise reason for this decline, the increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs, and the violation of the property rights of bondholders in the bailout of automobile companies have all weakened the United States’ tradition of the rule of law and, we believe, contributed to the sharp decline…”

We’ve all sensed this. We see evidence all around us. But even so, it can be difficult to process intellectually. We are born to believe that we live in the land of the free. As much as we regret many of the things we see, we don’t want to make any fundamental adjustments in our outlook for the future. We want to believe that our freedom is somehow divinely protected and, despite all political trends, essentially unalterable.

This report puts us on notice. We have to come to terms with the realities. It is going to get worse before it gets better. We live in a digital age, surrounded by miracles. But those miracles are coming to us not because of anything our government is doing. We are dependent so much on the freedom that exists and grows outside our borders.

A major advantage that formerly poor countries have is that they don’t have to deal with the rotting industrial-age infrastructure that plagues the U.S. and Europe. They don’t have an antique grid and their economies are not saddled with endless and entrenched public-private partnerships and central plans like the federal code. They can leapfrog the industrial age and move right to the digital age. It’s a beautiful thing to behold.

Someone who looked at this report asked me a question. Is it time to start thinking of sending my kids abroad? The answer, I believe, is yes. Going abroad provides an important cultural education. But nowadays, we are really talking about the future itself. They may have to emigrate for economic opportunity. We all might have to.

But where? Looking at the index, Canada is looking better all the time. So is New Zealand. China ranks low overall, but sectors of China like Shanghai are extremely free by any international comparison. There is also Latin America. Nicaragua, for example, ranks very high and is rising year after year. It’s the trend line that matters.

It was my privilege to interview the main number cruncher behind the report, Robert Lawson. Below he provides more detail and some extremely interesting observations about how not being a “developed industrialized nation” can be a gigantic advantage in the digital age.

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