Economic freedom falls in the United States

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The Fraser Institute’s 2022 Economic Freedom of the World Index report has been released. This year’s report covers the year 2020. The development of the index was led by Dr James Gwartney in the late 1980s and early 1990s as a means of measuring economic freedom in each country.

Countries are scored on the basis of several categories and are divided into four groups (quartiles) ranging from “most free” to “least free”.

The index calculates the score every year since 2000, and every five years since 1970. The index rates 165 jurisdictions in the most recent report.

The 2020 report is bad news for freedom lovers in the United States. The United States fell in the ranking from the 6th most economically free country to 7th. And while this drop is only a one-rank drop, the actual decline in economic freedom is quite significant.

Measuring economic freedom

To understand why economic freedom is declining in the United States, we need to examine how the authors of the index measure economic freedom. They do this by considering five categories.

1. Size of government. The first category is the size of government. The logic is simple: the more resources controlled by the government, the less people can freely access the resources. The category measures the size of government by looking at taxes, spending, and the amount of industry controlled by the government, among others.

In this category, the United States declined in freedom. The index measures each category from 1 to 10. A score of 10 means your country is as free as possible for that measure. In other words, a “10” in the size of government category would mean that you have a relatively small government. A “1” would mean the government is spending and taxing at very high levels.

In this category, the United States went from a score of 7.32 to 6.79. This is a drop of more than half a point, which is very significant for a 10 point scale. The size of government has grown significantly from 2019 to 2020 due, in part, to massive spending increases.

2. Legal system and property rights. At the heart of economic freedom is the ability of individuals to rely on the courts for impartial adjudication of property disputes. The extent to which government can enforce property rights and contracts impartially is essential to economic freedom.

How did the United States behave? Over a year, the United States has not changed much. The justice system score fell slightly from 7.64 to 7.56.

3. Access to sound currency. The authors of the index recognize that a key aspect of property rights is access to a currency that enables exchange. When the government prevents access to sound currencies and engages in policies that cause the value of a national currency to fluctuate wildly, it hampers access to sound currency and hinders mutually beneficial trade.

The authors measure changes in the money supply, inflation variables and access to foreign currency

The United States is historically very high on this measure. The fact that the US dollar is the world’s reserve currency should tell us a lot about its strength. In 2020, the sound money score dropped from 9.75 to 9.63.

This may seem like a small change, but readers should note that this score is for 2020, before massive inflation started. The rapid expansion of the U.S. currency began in 2020 but did not end until March 2022. So while this decline will certainly pick up some of the monetary expansion of 2020, the high inflation we are experiencing and the continued money printing in 2021 won’t be taken into account until future years.

One last thing to note is that while this seems like a small drop, the sound money score for the US hasn’t been this low since 2009, when the financial crisis began.

4. Freedom of international trade. Economic freedom includes the ability to voluntarily exchange your property with whomever you want, regardless of national borders. The welfare gains resulting from the specialization made possible by international trade have long been recognized by economists.

Customs duties, quotas and other restrictions on international trade are considered in this category. Again, the United States saw a slight decline in economic freedom, with the score dropping from 7.83 to 7.77.

Although slight, this decline is part of a much larger and prolonged trend in which the United States fell from a score of 8.81 in 2000.

5. Rules. The final category of the index is regulation. Regulatory labor laws, restrictions on the mobility of capital (like investment), and burdensome licensing laws are an obstacle to a truly free market. Laws that make certain contracts illegal because of their terms or the purported qualifications of the participants constitute voluntary barriers to trade.

It is in this category, as in the size of government category, that the United States has taken a nose dive. From 2019 to 2020, the United States went from a score of 8.68 to 8.11. This sharp drop, of more than half a point, represents a massive increase in regulation.

In fact, it’s the largest one-year increase in regulation in the United States this century, according to the Index of Economic Freedom rankings.

That the United States has become so much less free in the areas of “size of government” and “regulation” in 2020 should come as no surprise. The rollout of massive COVID-19 related spending policies and government interference in the industry throughout 2020 represented strong government growth that future taxpayers will feel for years to come.

At the same time, business regulations have increased as the government tries to use its power to stop COVID.

Index author Dr Gwartney summed it up succinctly, saying: “People will continue to debate the appropriateness of pandemic policies, but there is no doubt that they have reduced economic freedom. The danger now is that many of these policies will remain in place in the future.

Why economic freedom?

A critical reader might wonder why this matters. What’s the problem if economic freedom falls?

Theoretically, the argument for freedom is clear. When people are free to own and trade property, they strive to improve the value of their property. Allowing exchange allows individuals to trade things they value less for things they value more.

There’s a lot to be said for why free markets are good in theory, but the Index of Economic Freedom also shows that freer countries do better in practice. In other words, the theory works.

The authors consistently find that the “freest” countries are wealthier, live longer, have more civil rights, and are more literate. Moreover, the poorest of the most economically free countries are richer than the poorest of the less free countries. In other words, economic freedom is not just good for the rich.

Critics may argue that the fact that the freest countries are better off on all these margins does not prove that freedom is the cause, but when paired with a logically consistent theory of why economic freedom leads to economic growth, there is a very strong case. that economic freedom is the cause.

Author Peter Jacobsen teaches economics and holds the post of Gwartney Professor of Economics.


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