- - Wednesday, January 12, 2011

ANALYSIS/OPINION:

America’s free and open economy is the key to our unparalleled prosperity. It’s why we have the world’s largest economy and why so many people around the world want to come here. Without economic freedom, there would be no American dream.

Alas, that dream is fading. As this year’s Heritage Foundation-Wall Street Journal Index of Economic Freedomdocuments,America is becoming less economically free. For the second year in a row, its ranking fell. Ours is now just the ninth-freest economy in the world. Sadly, the U.S. is no longer the “land of the free” economically but is mired in the category of “mostly free.”

Among the straightforward reasons: Government spending is skyrocketing, mainly because of President Obama’s bailouts and deficit spending. New regulations to implement Obamacare and the administration’s failure to move forward on free tradewhile imposing more non-tariff barriers to trade contributed. Other culprits are government intervention in the housing and financial markets and measures that create uncertainty for businesses and investment.

The 2011 index puts the decline of American economic freedom in perspective. The United States ranks 122nd out of 179 countries on government spending. That puts us in the bottom third on this measure, along with Brazil, Spain, Libya and Belarus.

This explosion of spending has run up unprecedented total public debt, now approaching 100 percent of the gross domestic product, or GDP. Our deficit for 2010 actually was higher, as a percentage of GDP, than the deficits of Greece or Spain. That additional debt will only make government spending worse, feeding on itself through ever higher interest payments and borrowing.

The index also shows that America has one of the world’s most burdensome tax systems. The U.S. scores worse on taxes than on government spending, ranking just 139th in fiscal freedom (which measures taxation). America has the second-highest corporate tax rates in the Organization for Economic Cooperation and Development, which includes the U.S., Europe and Japan. Even Canada has lower tax rates than the United States.

Canada, in fact, has an overall economy freer than that of the United States.

On measures of government spending, Canada scores about as poorly as the U.S. How can this be, you ask, if Canada has nationalized health care? Well, don’t forget that the U.S. has several large national health programs of its own: Think Medicare, Medicaid and the State Children’s Health Insurance Program, or SCHIP. The U.S. makes huge outlays in other areas as well. All that debt doesn’t come cheap, so we must make sharply higher interest payments.

Also, unlike Canada and Western European nations, the U.S. also funds a world-class military — although that area of the budget is not growing. Like many European welfare states, Canada has the luxury to spend wildly on nationalized health care because we pick up the lion’s share of the Western world’s defense. It is a luxury the U.S. does not have.

Of course, there’s much more to economic freedom than fiscal restraint by the government, and Canada does better in other areas of economic freedom compared to the U.S. For example, Canada eschewed the “too big to fail” bailouts, giving it better scores on corruption and property rights. Its business-regulatory environment is not as cumbersome as America’s. Canada actually falls behind the U.S. only in the mobility of labor (and it ties in the freedom to invest).

Meanwhile, the U.S. economy is slowly being strangled by government regulations. We rank a poor 62nd worldwide in the index’s “monetary freedom” category because of price distortions caused by excessive regulation in the financial, housing, health, agricultural and transportation sectors. We trail not only Europe in this category, but nations such as Lebanon, Mali and Cambodia as well.

Why does this matter? When you put it all together, it means America is becoming less competitive in the world market. Less competitiveness means slower growth and fewer jobs. And that means less prosperity for all Americans.

Analyses show, with mathematical certainty, that long-term economic growth is associated with higher levels of economic freedom. Unless America changes course, she is heading into economic decline.

Decline is not inevitable, but a choice. It’s not too late to turn the trend around. We could begin by capping federal spending at no more than 20 percent of GDP; that’s about the average level since World War II. We also need to reduce regulations, eliminate trade barriers and subsidies and take entitlement spending off autopilot.

Economic freedom is no luxury. It is what makes Americans free and secure. It is the bedrock of the American dream. Without it, we will head into a decline as surely as other once great nations did. With it, we will always be reinventing ourselves, waking up to new possibilities, better jobs and higher incomes.

Kim R. Holmes, a former assistant secretary of state, is a vice president at the Heritage Foundation. Follow him on Twitter @kimsmithholmes.

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