Testimony before
The House Committee on Foreign Affairs'
Subcommittee on Terrorism, Nonproliferation
and Trade
June 10, 2009
My name is Terry Miller. I am Director of the Center for
International Trade and Economics at The Heritage Foundation and
editor of the Index of Economic Freedom. The views I express
in this testimony are my own, and should not be construed as
representing any official position of The Heritage Foundation.
Though we sit today at what may well be the low point of a
recession that has seen world economic growth slow to near zero, it
is important to remember that what we are experiencing is a
temporary setback. If one takes a longer view, it is clear that the
economic policies that have come to dominate world economic
thinking over the last 60 years, and especially since the fall of
the Soviet Union, are producing strong broad-based growth, growth
that is increasing prosperity and reducing poverty around the
world.
The numbers are not ambiguous. Over the last decade, per capita
income in all countries of the world combined has increased by an
average of about three percent per year. Over the 10 years, that
adds up to an increase of over one-third in average world
incomes.
The growth in incomes is remarkably broad-based, not
concentrated in just a few countries or regions. Of the 156
countries for which we have reliable data, only 12 failed to
participate in this positive growth over the decade.
The economic system that has been producing these remarkable
results is known by various names. Most economists would call it
the free market system or capitalism. Some identify it with
globalization. Some call it the Washington consensus, because it
represents the consensus of views and policies espoused by the
World Bank, the International Monetary Fund and, at least until
recently, the government of the United States.
At The Heritage Foundation, we call it economic freedom, and we
measure it each year in the Index of Economic Freedom, which
we publish jointly with The Wall Street Journal.
The key principles of economic freedom are individual
empowerment, non-discrimination, and the dispersion of power:
- Individual empowerment means that individuals retain control of
where they live and how much they work. They have the right to own
property and decide when and how to spend their wealth and
income.
- Non-discrimination means that there should be no preferences
based on race, gender, religion, class, family connections or any
other such trait. Each individual deserves an equal opportunity to
prosper to the full extent of their ability and effort.
Transparency in decision-making is a key aspect in ensuring such
fairness; it is behind walls of secrecy that discrimination most
often flourishes.
- Dispersion of power means pursuing policies and practices that
foster competition in labor markets, in capital markets, between
firms and even among countries. The separation of political and
economic power is a key aspect in the dispersion of power.
Countries that respect these principles of economic freedom do
far better on average economically than countries in which
governments play a more intrusive role. The countries ranked as
most free in the 2009 Index of Economic Freedom had average
per capita incomes of over $40,000, more than 10 times the income
levels in countries where economic freedoms are repressed.
Some criticize the free market system as good for the rich but
not for the poor. The data show otherwise. When we compare economic
freedom scores with poverty levels as measured in the United
Nations Human Poverty Index, we find that countries that gained at
least 5 points of economic freedom in the decade between 1997 and
2007 moved almost 6 percent of their populations out of poverty on
average. Countries that lost at least 5 points of economic freedom,
by contrast, saw poverty levels increase.
The same positive trends are evident in connection with social
development in areas like education, health, child or maternal
mortality, and overall life expectancy, as well as in protection of
the environment, where countries that are more economically free do
a far better job than their less free counterparts.
Given these positive long term trends, and the proven good
economic results in countries around the world that respect
principles of economic freedom and market-based decision-making, I
would submit that the first responsibility of policy makers in
leading economies, especially in a time of downturn or crisis, is
to preserve the capitalist system and to do no harm. Markets are by
and large self-correcting. Government interventions, which are
almost always designed to restore or protect the status quo ante,
impede the corrective action of the market and thus slow
recovery.
The record of government interference in the economy, whether in
the United States or in countries around the world, is not pretty.
The TARP and TALF programs, both initiated under the previous
administration, are good examples of the problems of government
interference in markets. The policy-makers involved argued that the
programs were necessary to avoid an immediate melt-down in
financial markets. We cannot, of course, know what would have
happened in the programs' absence. However, from the perspective of
six months following their passage, we can see that their lasting
result has been not the hoped-for increase in stability and lending
in credit markets, but rather greater uncertainty and volatility.
Markets need sure and stable government laws and policies in order
to properly price assets. The TARP, in particular, has created
confusion and interfered with the establishment of a
market-clearing price for the troubled assets in question. There
has been a disappointing lack of transparency in the program's
decision-making processes that leaves potential investors uncertain
of the direction of the market and therefore unwilling to invest.
The TARP may have artificially inflated the value of the troubled
assets, but it has done little to get them off the books of the
financial institutions.
The fiscal stimulus package passed under the current
administration is even worse. Even if one accepts the Keynesian
notion that increased government spending can increase economic
growth, and there are real doubts about this, almost none of the
money has actually been spent, or will be spent, in a timely
fashion. One estimate this month is that only about $37 billion of
the $787 billion stimulus package has been spent so far. Most of
the money is projected to be spent in the future when government
stimulus will no longer be appropriate and will most likely only
contribute to inflationary pressure.
The cost of these programs is creating a huge debt for our
children that will have to be financed somehow. If we continue
them, we are going to see either inflation or increased taxes or
both, as well as a fall in the value of the dollar and decreased
foreign investment in the United States, lower productivity
overall, and reduced economic growth in the future. That is far
from doing no harm.
Between January and April this year, the International Monetary
Fund reduced its projection of U.S. economic growth in 2010 from a
positive 1.6 percent to zero. The most significant U.S. public
policy change during this period was the passage of the stimulus
package. Now we are seeing bond markets driving up the cost of
Treasury borrowing in response to unprecedented government
spending. This is a path to impoverishment rather than recovery. We
need to stop.
Some have expressed the hope that increased international
cooperation, such as among the G-20, could contribute to a solution
to the problem. I have very modest expectations in this regard. The
G-20 can play a positive role in exchanging information and
promoting mutual confidence among governments, but the most
important macro-economic variables under the control of
governments, the money supply and spending levels, must and will
remain the province of individual governments.
There was much talk about regulatory reform at the recent G-20
summit, and such reform is, in fact, needed. Financial market
regulation needs to change to encourage more transparency, greater
competition, and a reduction in regulatory distortions that
increase lending risk. The probability, unfortunately, is that
international cooperation will lead to just the opposite, a
regulatory system that is more complex, more subject to
manipulation, and more restrictive.
The general rule is that more regulation leads ultimately to the
provision of less of the regulated product. It is extremely
unlikely that increasing regulation of financial and credit markets
could lead to any result in the end other than a reduction in the
availability of credit to individuals and businesses and an
increase in its cost.
Looking forward, as we begin to recover from the financial
crisis, there are different and even greater potential risks to the
U.S. and world economies. Policies that would greatly and
artificially increase the cost of energy will cut U.S. and world
growth and lead to increased poverty worldwide. It is imperative
that these costs be fully considered in the development of any
policies to address climate change.
In addition, actions that would restrict or reduce the flows of
goods and services or capital among the countries of the world
would also have a devastating impact on world growth. Trade flows
increase productivity and growth rates. Income from trade dwarfs
all other aspects of financing for development in poorer countries.
Trade restrictions go by the name of protectionism, but what they
protect are the unfair privileges of politically-connected special
interests.
If policies must be developed in any of these areas, it is most
important that they be as simple, straight-forward and transparent
as possible. As the size and reach of the federal government
increases in the U.S. economy, there is an ever-present risk of
increased graft and corruption. These factors, more than any
others, account for low levels of development in much of the world.
Corruption thrives where economic regulations are complex and
government involvement pervasive. It must not be allowed to take
root here.
Over the past decades we have maintained in America, and
exported to most of the rest of the world, a free market economic
system that encourages openness, the free flow of goods, services
and capital, and interconnectedness among the nations and people of
the world. The result has been greatly increased prosperity for
all. A time of crisis may be a time to examine what has been done
and what might be done better, but it is surely not the time to
fundamentally undo the policies and practices that have brought so
much benefit to so many.
Economic Freedom Improves
Lives
Graphics reprinted from the 2009 Index of Economic Freedom