howardnlby Howard Stephenson
We in the United States have always believed, correctly, that our economic prosperity is the result of the freedoms we enjoy. We’ve been proud of the fact that historically, the United States has set the standard for economic freedom. In recent decades, however, Hong Kong and Singapore have had fewer economic restrictions and governmental burdens. But still, we weren’t too worried about losing our designation as an economic powerhouse.

But times are changing. According to the 2004 Index of Economic Freedom published by the Heritage Foundation and the Wall Street Journal, nine other countries are now ranked above the United States: Hong Kong, Singapore, New Zealand, Luxembourg, Ireland, Estonia, the United Kingdom, Denmark, and Switzerland. (While Hong Kong has been a special administrative region of the People’s Republic of China since 1997, because it enjoys a high degree of autonomy, it is treated as a separate “country” in the study.)

Can it really be true that a former Soviet state, Estonia, has surpassed the U.S. in economic freedom? Is it possible that a country which, before Margaret Thatcher, was clearly a socialist country is now more economically free than the United States? The Heritage Foundation says it’s not only possible — it’s actually true.

What Happened?

According to Heritage Foundation Senior Policy Analyst Ana Isabel Eiras, the United States is losing ground on economic freedom in two ways: First, other countries are freeing their markets at a faster pace than the U.S. In important areas of economic openness — capital flows and foreign investment, trade policy, wages and prices, and regulations — the U.S. has simply failed to keep pace with the changing world. Second, the United States is simultaneously burdening its own economy with increasingly higher government expenditures and barriers to trade and investment. Specifically, the U.S. government’s continued expansion of expensive entitlement programs has increased the fiscal burden. Recent protectionist policies of the Bush administration have also hurt U.S. economic rankings.

Eiras says this slippage in our international ranking is not something to take lightly. “Economic freedom is the foundation of U.S. economic strength, and economic strength is the foundation of America’s high living standards, military power, and status as a world leader,” she said.

“The U.S. government should take steps to reverse this slide in economic freedom. To that end, the Bush Administration and Congress should cut expenditures to balance the federal budget; eliminate agricultural subsidies, anti-dumping provisions, and other protectionist policies; and continue to support the expansion of free trade. More economic freedom at home will assure that a healthy U.S. economy remains the solid basis of U.S. prosperity and strength,” Eiras wrote.

How the Index Works

The Index of Economic Freedom identifies the most important components of economic freedom and determines how each country measures up, factor by factor. Positive ratings on these factors lead to wealth, economic stability, and influence in the world’s economic system.

The Index assesses economic freedom in 10 different areas of the economy:

  • Trade policy (tariffs and non-tariff barriers)
  • Fiscal burden (taxes and government expenditures);
  • Government consumption;
  • Monetary policy;
  • Banking and finance regulations;
  • Capital flows and foreign investment regulations;
  • Wages and prices regulations (including subsidies);
  • Protection of property rights;
  • Regulations to start a business, including labor and environmental regulations; and
  • Informal market activity.

Each country is scored on each of the 10 areas. In the 10 years the Heritage Foundation has been assessing economic freedom, the U.S. has dropped from the world’s fourth freest economy to the tenth. In nine countries today, the opportunities for generating wealth are more abundant than in the United States. As a result, opportunities to invest, work, and do business have moved outside the United States.

Escalating U.S. Spending

The Heritage Foundation reports that federal spending has increased in almost all budget categories since 1998, but the fastest growing categories (outside of 9/11 response and defense) include:

  1. Unemployment compensation , which increased by 132 percent to $56 billion because of rising unemployment and the several extensions of unemployment benefits passed by Congress;
  2. Education spending , which increased by 78 percent to $58 billion, mostly due to the No Child Left Behind Act;
  3. Health programs outside Medicare and Medicaid, which increased by 81 percent to $60 billion; and
  4. Agricultural subsidies , which increased by 76 percent to $23 billion.

U.S. Trade Barriers

U.S. citizens currently pay higher prices for SUVs, textiles, lumber, sugar, peanuts, orange juice, and many other products than they would if there were no trade barriers in place. As if that were not enough, U.S. consumers and some producers suffered two blows to their pockets subsequent to the start of the Bush Administration: First, in March 2002, President Bush raised steel tariffs to protect a few steel producers at the expense of all American consumers of steel and producers of steel-made products. Second, in May 2002, President Bush signed an agriculture bill that dramatically expanded farm subsidies, which essentially subsidize wealthy U.S. farms at the expense of millions of consumers. In addition, the U.S. government continues to use China as the scapegoat for job losses in manufacturing and threatens to meddle with tariffs on Chinese products. The most recent proposal would impose nine different tariff rates on Chinese furniture.

However, the Heritage Foundation points out that to its credit, the Bush Administration has engaged in an aggressive expansion of free trade with more than 10 nations, and President Bush lifted the steel tariffs in late 2003. These are steps in the right direction, the Foundation says, but the Administration needs to express its support for freer markets more forcefully and credibly by pushing for elimination of subsidies and tariff barriers at once so that America can increase its economic freedom and preserve the image of a pro-freedom government.

Time for Change

The Heritage Foundation says the United States is not taking economic competition with other countries seriously. They say America is relying too much on its self-image as the free market “champion,” but already nine foreign economies have friendlier business environments. They say it is past time for the United States to start taking this race seriously.

The Foundation points to examples of five policy choice areas which have made these nine economies more attractive than the U.S. economy and which need attention by congress and the president. The policy areas include:

Trade Policy. Hong Kong, Singapore, and Estonia are virtually duty free. Each country’s weighted average tariff rate is lower than 0.5 percent, and there are almost no non-tariff barriers. In contrast, the United States has an average weighted tariff rate of 1.8 percent and numerous non-tariff barriers, including import quotas, antidumping provisions, countervailing duties, and licensing requirements on a number of goods.

Fiscal Burden. Hong Kong, Singapore, Ireland, Estonia, and Switzerland have better tax systems.

Capital Flows and Foreign Investment. Hong Kong, Singapore, New Zealand, Luxembourg, and Ireland have fewer restrictions on foreign investment and on the free movement of capital.

Regulations. Hong Kong, Singapore, and Denmark have fewer regulations on establishing a new business–including labor laws, environmental and zoning regulations, and bureaucratic steps required to start a business.

Informal Market. Singapore, New Zealand, Luxembourg, the United Kingdom, Denmark, and Switzerland have a smaller informal market. This refers to the portion of the economy which is underground, or off the books.

Why should we care?

Some may wonder whether it really matters if America maintains its designation as the bastian of economic freedom. Why should we care about such an economic ranking? The Heritage Foundation makes a strong case that we should care very much. They point out that as a country becomes wealthier, it has more resources to invest in national defense and other secutiry issues. The wealth of a country makes it a world player, a leader that can shape world affairs. Preserving economic freedom is the key to being a wealthy, prosperous, and politically powerful nation. In today’s dangerous world, America cannot afford to leave its security up to the other players in the world economy. Consequently, we must reclaim our place as the leader in economic freedom.