U.S. losing economic freedom

What do Hong Kong, Singapore, Australia, Ireland and New Zealand have in common? An odd assortment, to be sure, they share the fact that each of them has a greater degree of economic freedom than the United States.

The Index of Economic Freedom is an annual analysis of world economies, now totaling 183 countries. It is a collaborative effort of The Heritage Foundation and The Wall Street Journal. The rankings are an average of 10 components analyzed during the last half of 2007 and the first half of 2008, on a 100-point scale, with 100 representing the highest degree of economic freedom.

The components of economic freedom are: Business Freedom, Trade Freedom, Fiscal Freedom, Government Size, Monetary Freedom, Investment Freedom, Financial Freedom, Property rights, Freedom from Corruption, and Labor Freedom.

The Heritage Foundation describes economic freedom as “the fundamental right of every human to control his or her own labor and property. 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.”

Heritage tells us that the U.S. economy “is the world's largest. Services account for more than 70 percent of economic activity, but the U.S. is also the world's largest producer of manufactured goods and fourth-largest producer of agricultural products. The United States is the world's oldest constitutional democracy, and its size, culturally and ethnically diverse population, and republican form of government that reserves significant powers to the state and local levels all promote a competitive atmosphere in which a variety of economic policies and strategies can be pursued.”

To achieve its 6th place ranking, the U.S. scored 80.7, which is three-tenths of a point lower than last year, due to declines in five of the 10 economic freedoms. We scored 90 or more in three of the 10 components, Business Freedom, 91.9; Property Rights, 90.0; and Labor Freedom, 95.1.

The two lowest scores were in Fiscal Freedom and Government Size, where the U.S. scored below the world average.

In terms of Fiscal Freedom, we scored 67.5, seven-plus points below the average of 74.9. “U.S. tax rates are burdensome,” according to the Heritage. “Both the top income tax rate and the top corporate tax rate are 35 percent. Other taxes include a property tax, an estate tax, and excise taxes, and additional income and sales taxes are assessed at the state and local levels. In the most recent year, overall tax revenue as a percentage of GDP was 28.2 percent.”

No surprise to proponents of small government, the United States’ score of 59.6 for Government Size was the lowest of the 10 components, and below the world average of 65.0. “Total government expenditures, including consumption and transfer payments, are high” Heritage said. “Government spending has been rising and in the most recent year equaled 36.7 percent of GDP. Stimulus measures passed in the second half of 2008 promised to push government spending significantly higher,” the report noted. No doubt the 2010 ratings will be downwardly affected by the events of late 2008 and early 2009.

Heritage acknowledges this: “Presidential and congressional elections in 2008 raised serious questions about the overall direction of future economic policies, particularly with respect to trade liberalization, regulation of greenhouse gas emissions, taxes, and the role of government.”

The Economic Freedom ranking is less a goal to achieve than a measure of how we are doing, and while the U.S. made progress in past years, for the last two years we’ve been moving in the wrong direction. Last year, the U.S. ranked 5th, and in 2007 it was 4th. We are losing economic freedom.

The Heritage analysis identifies high taxes as a major factor in our loss of economic freedom, yet today, in the midst of a deep recession, the administration and Congress are pursuing health care reform and a plan to reduce greenhouses gases, and both will increase taxes and costs on businesses and on individuals at all income levels.

Furthermore – and more to the point – neither of those is the most serious problem facing Americans today; unemployment is the paramount concern.

But instead of stimulating job creation and easing the financial burden on the Americans by cutting taxes, our leaders piddle around trying to jam through highly controversial and unpopular measures that will take us in the wrong direction.

Cross-posted from Observations