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HOLMES: As economic freedom declines, so does prosperity

- - Thursday, January 21, 2010

ANALYSIS/OPINION:

Governments often make poor policy decisions. And all too often, they then fervently cling to these mistakes, compounding the error. Unfortunately, the U.S. is no exception.

Consider our recent economic policy. In late 2008, the specter of a financial meltdown triggered dangerous decisions under President Bush. He approved an unprecedented intervention in the financial sector — the $700 billion Troubled Asset Relief Program — which actually fed the crisis. Instead of changing course, President Obama not only doubled down on those decisions, but went even further, in the belief that only bigger government can "lift us from a recession this deep and severe."

The early return on those big-government policies is disappointing, to say the least.

In December, the U.S. economy lost an additional 85,000 jobs. Despite all the bailouts and stimulus spending, the economy shed 3.4 million net jobs in 2009. But while employment has shrunk, the federal deficit has ballooned. One year after Mr. Obama took office, the deficit has grown to $1.4 trillion. His 10-year budget will add $13 trillion to the national debt by 2019.

We've heard a lot of talk in the U.S. about the need to revamp or even abandon the free enterprise or capitalist system. Not surprisingly, much of the world is ignoring this rhetoric. Indeed, America is becoming something of an outlier, with its calls for greater regulation and government spending.

A lot of countries, particularly in Eastern Europe and the former Soviet Union, have emerged from decades of having their economies dominated by the government. Having lived with the consequences of big government, they're not about to turn back now from the promise of free markets. They are cutting taxes and taking other steps that free their businesses to compete in a global economy and attract foreign customers and investors.

The bad news is that the United States is falling behind. The 2010 Index of Economic Freedom, released Wednesday, finds that the U.S. experienced the most precipitous drop in economic freedom among the world's top 20 economies (as measured by the gross domestic product). The decline was steep enough to tumble the U.S. from the ranks of truly "free" economies. We are now numbered among the ranks of the "mostly free" — the same as Botswana, Belgium and Sweden. Canada now stands as the sole beacon of economic freedom in North America, getting a higher score on the economic-freedom Index than the United States.

On the index's 100-point scale of economic freedom, the U.S. fell 2.7 points. Canada's score dropped, too, but only one-tenth of a point. Meanwhile, countries such as Germany, France, Poland, Japan, South Korea, Mexico and Indonesia managed to maintain or even improve their scores, despite the economic crisis.

Why? In large measure, it's because of the way Washington has exacerbated the financial and economic crisis since 2008. By June of last year, when we cut off data collection in order to begin our analysis, Washington's interventionist policies had already caused a decline in seven of the 10 categories of economic freedom we measure. Particularly significant were declines in financial freedom, monetary freedom and property rights.

Conditions attached to large government bailouts of financial and automotive firms significantly undermined investors' property rights. Additionally, politically influenced regulatory changes - such as the imposition of executive salary caps - have had perverse effects, discouraging entrepreneurship and job creation and slowing recovery. On top of this, we had massive stimulus spending that is leading to unprecedented deficits.

It's not good news, and the trends we document in the index are worrisome, indeed. We are heading the wrong way. The index, co-published annually by the Heritage Foundation and the Wall Street Journal, has become a "leading indicator" of economic vitality, but other surveys also show that when economic freedom drops, falling opportunity and declining prosperity follow. Unless Washington takes steps to reverse the poor decisions it has made, Americans can expect a long and difficult time ahead.

The good news is that we've been here before, and we've turned things around before. There's no reason we can't do that again. Poll after poll demonstrates that the American people understand this, even if their politicians don't.

They clearly want Washington to gather up the political will to do things such as lowering taxes and reducing regulation and massive spending that feeds the federal debt. We need to unleash the power of the market to create jobs and to reclaim our competitive edge in the global economy.

The solutions to our problems are not magic. Indeed, they are well-documented in the Index of Economic Freedom. The less government intervenes in our lives and our economy, the freer and more prosperous we can become. The choices Mr. Obama takes in the future will determine whether America remains a land of opportunity and can reclaim its international reputation as "the land of the free."

Kim R. Holmes, a former assistant secretary of state, is a vice president at the Heritage Foundation (Heritage.org) and co-author of the 2010 Index of Economic Freedom.