The Decline in Economic Freedom

December 3, 2010 10:11

We are now in the midst of a great debate between the proponents of limited government and open markets on the one hand and those favoring more collectivism and political direction of the economy on the other. The outcome of this debate will determine the future of both economic freedom and the prosperity of Americans and others throughout the world.

James D. Gwartney, Joshua C. Hall and Robert A. Lawson at The Freeman


From 1980 to 2007 there was a gradual but steady movement toward economic freedom. (The graph includes only the countries that have been in the index since 1980.) However, as the world confronted financial instability and economic decline in 2008, the average economic freedom rating fell for the first time in several decades.

The rating of the United States is down from 8.45 in 2000 to 7.93 in 2008, which has sent the accompanying ranking down to sixth from third in 2000. The rating reduction in the United States was primarily the result of lower ratings in the area of “Legal Structure and Security of Property Rights,” but the huge recent increase in government borrowing was also a contributing factor. The increased government expenditures, larger deficits, and increased regulations of the past two years are sure to push the U.S. economic freedom rating even lower in the years immediately ahead.

The world now faces a situation similar to that of the Great Depression. During the 1930s perverse economic policies transformed a cyclical downturn into a decade of hardship and suffering. The length and severity of the Great Depression were the result of a sharp monetary contraction, imposition of trade restrictions, higher taxes, increases in government spending financed with debt, price controls, and uncertainty created by constant policy changes that were supposed to hasten the end of the crisis. This is ironic since perverse policies caused the Great Depression in the first place.

The policy response to the crisis has also been similar to that of the Great Depression: more regulation, growth of government spending financed by debt, and constant policy changes that have created uncertainty and undermined private-sector activity.

It is important to distinguish between market entrepreneurs and crony capitalists. Market entrepreneurs succeed by providing customers with better products, more reliable service, and lower prices than are available elsewhere. They succeed by creating wealth—by producing goods and services that are worth more than the value of the resources required for their production. Crony capitalists are different: They get ahead through subsidies, special tax breaks, regulatory favors, and other forms of political favoritism. Rather than providing consumers with better products at attractive prices, crony capitalists form an alliance with politicians. The crony capitalists provide the politicians with contributions, other political resources, and, in some cases, bribes in exchange for subsidies and regulations that give them an advantage relative to other firms. Rather than create wealth, crony capitalists form a coalition with political officials to plunder wealth from taxpayers and other citizens.



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