A new report from the Heritage Foundation, the 2017 Index of Economic Freedom, shows advances worldwide in cutting regulations, curbing government spending, rooting out corruption, and increasing openness to international trade and investment. Lagging behind? The United States.
The Index is a comprehensive measure of economic freedom that compiles data from dozens of independent sources to measure the extent to which a government intervenes through economic policy to control the actions of its citizens and businesses. The latest edition reflects conditions in the world economy through the middle of 2016.
Since 1995, when the Index was first produced, there has been about a 5% increase in economic freedom around the world. That may sound small, but that modest increase has been accompanied by massive improvements in human well-being. Global poverty rates have dropped by two-thirds as economic freedom has grown.
Economic freedom matters for a lot of reasons beyond income and wealth. It's true that improvements in economic freedom correlate with increases in economic growth. And countries with higher levels of economic freedom have much higher average per capita incomes.
In addition, however, their citizens enjoy myriad other benefits. They are better educated, for example, and they enjoy better health and longer lives than those who lack economic freedom. Economic freedom even helps the environment: Economically free countries scored almost 30 points higher on the Yale University 2016 Environmental Performance Index than did countries where economic freedom is repressed.
This year, more than 100 countries recorded increases in their economic freedom. Those winners are found around the world, but the Asia-Pacific region had the highest number of countries recording major gains. Forty-nine countries recorded their highest economic freedom scores ever. This group included both China and Russia, though even with their improvements, both continue to lag far behind most western developed economies in economic freedom.
The U.S., regrettably, headlined the list of countries not only losing freedom, but recording their lowest scores ever. Driving the U.S. decline was a new category in the Index: fiscal health. That category measures fiscal deficits and government debt relative to the size of the economy. U.S. government spending has accounted for over 38% of total U.S. economic activity over the last three years, with deficits averaging above 4% of GDP and total government debt exceeding a full year's output of the economy.
U.S. business and labor freedom both also declined slightly over the last year, increasing concerns that the combination in recent years of expanding government, increased regulatory and tax burdens, and the loss of confidence that has accompanied perceptions of increased cronyism, elite privilege, and corruption is eroding U.S. international competitiveness.
The big question, of course, is whether the election of President Trump will change the trajectory of economic freedom in America. He has promised a strong break with the policies of his predecessor, particularly in areas such financial and health care regulation, tax policy, and trade.
Regulatory and tax reform are clearly areas where even modest improvements could have a major positive impact on U.S. economic freedom and performance. The U.S. corporate income tax rate remains one of the highest in the world, and the explosive regulatory burden of mammoth laws such as the Affordable Care Act and the Dodd-Frank financial regulatory bill has stifled investment and slowed recovery. Policy fixes in these areas will pay big dividends.
Any increase in protectionism, by contrast, could have a devastating impact on U.S. economic growth and job creation. Though U.S. trade accounts for a relatively modest share of our overall economy (exports and imports together equaling roughly 28% of GDP), the jobs created by the international flows of goods, services, and investment capital are a vital factor in the productivity growth necessary to keep the U.S. on top in terms of economic performance and our standard of living.
One of the most interesting conclusions of the Index of Economic Freedom is that intentions matter. Policy changes that increase or retard economic freedom can have an immediate impact for good or ill on economic performance. The free market, now ascendant in much of the world, is an incredibly fast and accurate monitor of economic prospects, whether at the level of the household, the firm, or the national economy.
At the moment, most market indicators are pointing up for the U.S. Hope is high that policy changes are coming to restore American's economic freedom. We'll see if the politicians can deliver.
This piece originally appeared in Investor's Business Daily