If you were to rank the countries of the world in terms of economic freedom, where would the United States fall? First, or at least in the top three? The top five, surely.
There is, in fact, a resource that ranks every country by this measure - the “2012 Index of Economic Freedom,” and the United States comes in at No. 10. That’s right: The nation that is supposed to lead the world in liberty finishes behind nine others, including Ireland, Chile, Switzerland and Canada. Even the small African nation of Mauritius beats us.
And although this ranking represents a new low for the United States, which was ninth last year, it’s part of a recent trend. As recently as 2008, the U.S. ranked seventh worldwide, had a score of 81 (on a zero-100 scale, with 100 being the freest) and was listed as a “free” economy. Today, the U.S. has a score of 76.3 and is “mostly free,” the index’s second-highest category.
Now, before we explain why, let’s back up and touch briefly on how the editors of the index - published annually since 1995 by the Heritage Foundation and the Wall Street Journal - figure out the scores. Each country is evaluated in four broad areas of economic freedom:
1) Rule of law: Are property rights protected through an effective and honest judicial system? How widespread is corruption - bribery, extortion, graft and the like?
2) Regulatory efficiency: Are businesses able to operate without burdensome and redundant regulations? Are individuals able to work where and how much they want? Is inflation in check? Are prices stable?
3) Limited government: Are taxes high or low? Is government spending kept under control, or is it growing unchecked?
4) Open markets: Can goods be traded freely? Are there tariffs, quotas or other restrictions? Can individuals invest their money where and how they see fit? Is there an open banking environment that encourages competition?
For the most part, of course, the United States does very well on these measures. Finishing 10th out of 179 countries, after all, is impossible if you don’t have a large degree of economic freedom, and the U.S. is very free. Property rights are strong. Our court system is independent. Business startup procedures are efficient. The labor market is flexible.
In certain key areas, however, the United States is lagging badly. A big one is government spending. The U.S. ranks 127th in the world in this category. Spending by government consumes 42.2 percent of the gross domestic product. Total public debt is larger than the entire economy.
Taxes are another problem. The U.S. score isn’t helped by the fact that the tax structure relies so much on taxes on capital and investment, which restrict growth. Regulations continue to grow in number, making it harder than necessary for our economy to recover. How bad is it? More than 70 major rules have been imposed since 2009, and they cost Americans nearly $40 billion last year.
The deterioration of the U.S. score on freedom from corruption is especially troubling. Blame the government (read: taxpayer) bailouts of troubled industries such as automaking. These create the perception of corruption. As far as many Americans are concerned, it’s politically well-connected companies and special-interest groups that get the breaks. They see the more than 1,100 companies that have won exceptions to Obamacare, and they can’t help but wonder if some form of cronyism is involved.
We can’t hope to create the number of jobs we need under these conditions.
That’s why we have to get serious about cutting government down to size, overhauling our tax system and transforming costly entitlement programs. Otherwise, the United States has just completed its last year as a top-10 finalist in the index.
Ed Feulner is president of the Heritage Foundation (heritage.org).