The political response to COVID-19 has put more of the economy in the hands of the government, threatening economic freedom around the world.
Two troubling questions lurk behind the results of the Fraser Institute’s 2020 Economic Freedom of the World report, released on September 10.
This year’s report is based on 2018 data (the most recent available). By 2018, global economic freedom had recovered from the 2008 financial crisis and was at an all-time high, albeit by little.
Canada was among the top 10 economically free countries. Hong Kong was number one – where it has been since the first ranking was published in 1970.
But now all of that is under threat. The political response to COVID-19 has increasingly put the global economy in the hands of government, threatening economic freedom globally and in Canada. And Hong Kong is now completely under the thumb of the freedom-hating Chinese Communist Party.
By the time 2020 data becomes available for the 2022 report, Hong Kong will almost certainly not rank number one and economic freedom will likely have declined worldwide.
Economic freedom is the ability of individuals and families to make their own economic decisions without control from government or cronies. The report stems from a decade-long (mid-1980s to mid-1990s) research project led by Michael Walker, then executive director of the Fraser Institute, famed economist Milton Friedman and his wife Rose. It involved 60 of the world’s top scholars, including three Nobel laureates.
Subsequent research has shown that economic freedom helps to raise living standards, reduce poverty, and contribute to other positive outcomes, including increased levels of life satisfaction. People simply make better economic and personal decisions for themselves than crony elites or overly powerful governments.
It’s easy to see. Just look around the world. Countries with free markets help produce good lives for their citizens, even if they started out very poor like in Taiwan or South Korea. Meanwhile, once wealthy countries like Argentina and Venezuela have degraded freedom and their peoples have suffered.
Now consider Hong Kong. It emerged from the poverty and devastation of World War II and thrived even as its giant neighbor China descended into chaos and murderous tyranny. Hong Kong absorbed thousands of refugees from China, Vietnam and other Asian countries, and yet became one of the greatest cities in history – prosperous, open and free.
But the Chinese Communist Party wants to destroy the rule of law, the cornerstone of economic freedom, in Hong Kong. Economic freedom is only possible if the rule of law protects the liberty and property of all equally. This is not the intention of the party and its accomplice elites.
The COVID-19 crisis poses another global threat to economic freedom. Governments everywhere are spending heavily, shrinking free trade space while supplanting individual freedom and responsibility. Many economists believe that a spending explosion might have been necessary, but it became a nuclear spending explosion.
A recent TD Bank analysis of Canadian government finances estimates that the deficit of all levels of government this year will reach $420 billion (or 20% of gross domestic product) and overall debt will equal 85% of GDP .
The situation in the United States could be worse. According to the Congressional Budget Office, the federal deficit alone will reach $3.3 trillion (or 16% of GDP), with debt likely to reach 100% of GDP next year, the US debt and deficit the more important since the end of the Second World War.
So how can we get back to something resembling normality?
As people become accustomed to various subsidy programs, governments may find it politically difficult to bring spending back to where it was, so some may try to keep spending at a new high level by increasing taxes.
But that becomes a cup game, because high taxes not only reduce economic freedom, but have also been shown time and time again to be a drag on economic growth and tax revenue. This can then lead to a vicious circle of ever-increasing taxes never catching up with revenue needs.
These two threats to economic freedom are unrelated. An arrogant Chinese Communist Party will have its way with Hong Kong regardless of the economic circumstances.
But the threat to both Hong Kong and global economic freedom could mean we have reached the pinnacle of economic freedom for some time to come.
Fred McMahon is a senior researcher at the Fraser Institute.