Tag: prosperity

The U.S. Fall in Economic Freedom and the Rule of Law

The United States is the 12th  freest economy in the world according to the new Economic Freedom of the World report. Co-published today by Cato and the Fraser Institute, it finds a strong relationship between economic freedom and human well-being.

The U.S. ranking is part of a worrisome decline in economic freedom that began more than a decade ago. For decades, the United States ranked in second or third place on the index. In 2000 it was #2, yet by 2005 it ranked 8 and it continued its precipitous fall until recently. On a 0-10 scale, the U.S. rating is now 7.81 compared to 7.74 last year, a slight improvement. The level of economic freedom in the United States is lower today than it was in 1980. Since 2005, Canada has ranked higher than the United States.

The authors of the report note that the United States has fallen in all five areas that they measure: size of government; legal system and property rights; sound money; freedom to trade; and regulation. But the rule-of-law indicator (legal system and property rights) has seen the biggest decline and, as the graph shows, it has been enormous.

The U.S. Decline

The measured deterioration in the rule of law is consistent with scholarship in that field and, according to the report, is a result of “increased use of eminent domain to transfer property to powerful political interests, the ramifications of the wars on terrorism and drugs,” and other property rights violations. Because the rule of law is of course a cornerstone not just of economic freedom but of all freedoms, and because there is a strong relationship between economic freedom and other liberties (civil and political), all Americans should be concerned with the findings of the report.

A deterioration in the rule of law should also be of special concern to Hong Kong, the top ranked territory in the index, where recent protests highlight the danger that Beijing’s interference in its legal system, including the perception of such, poses to the overall freedoms and economic success of Hong Kong.

Prosperity and World Population Growth

Readers of Matt Ridley’s The Rational Optimist and Ronald Bailey’s columns in the Reason magazine will not be surprised to hear that the rate of population growth is slowing—dramatically—throughout the world. Jeff Wise’s article in the Slate magazine, “About that Overpopulation Problem,” revisits that familiar territory and makes some interesting points. Ultimately, however, Wise fails to appreciate the real reasons for the fall in population growth rate.

First, the good news. As Wise notes, “[The] rate of global population growth has slowed. And it’s expected to keep slowing. Indeed, according to experts’ best estimates, the total population of Earth will stop growing within the lifespan of people alive today. And then it will fall… the long-dreaded resource shortage may turn out not to be a problem at all.”

“For hundreds of thousands of years,” Wise’s article continues, “in order for humanity to survive things like epidemics and wars and famine, birthrates had to be very high. Eventually, thanks to technology, death rates started to fall in Europe and in North America, and the population size soared. In time, though, birthrates fell as well, and the population leveled out.”

Why might that be? “The reason,” Wise avers, “for the implacability of demographic transition can be expressed in one word: education. One of the first things that countries do when they start to develop is educate their young people, including girls. That dramatically improves the size and quality of the workforce. But it also introduces an opportunity cost for having babies.”

True enough, better education is a by-product of development, but where does development come from?

For that we have to look to Ronald Bailey. As he writes, “In 2002, Seth Norton, a business economics professor at Wheaton College in Illinois, published a remarkably interesting study on the inverse relationship between prosperity and fertility. Norton compared fertility rates of over 100 countries with their index rankings for economic freedom and another index for the rule of law. ‘Fertility rate is highest for those countries that have little economic freedom and little respect for the rule of law,’ wrote Norton. ‘The relationship is a powerful one. Fertility rates are more than twice as high in countries with low levels of economic freedom and the rule of law compared to countries with high levels of those measures.’”

And, “Economic freedom and the rule of law produce prosperity which dramatically lowers child mortality which, in turn, reduces the incentive to bear more children. In addition, along with increased prosperity comes more education for women, opening up more productive opportunities for them in the cash economy. This increases the opportunity costs for staying at home to rear children. Educating children to meet the productive challenges of growing economies also becomes more expensive and time consuming.”

So, education is a proximate cause of population growth slowdown. The ultimate cause, however, rests with economic freedom and resulting prosperity.

The U.S. Takes a Dive in Economic Freedom of the World Index

Economic freedom in the United States has plummeted to an all-time low. According to the Economic Freedom of the World: 2012 Annual Report, co-published today with the Fraser Institute, the United States’ ranking has dropped to 18th place after having ranked 3rd for decades up to the year 2000. The loss of freedom is a decade-long trend—the United States ranked 8th in 2005—that has accelerated in recent years.

Virtually every U.S. indicator has seen a deterioration. Government spending and regulations have grown, the rule of law and protection of property rights have weakened, and foreign investment and non-tariff barriers have increased. Authors James Gwartney, Robert Lawson, and Josh Hall note some of the reasons for the decline, including the war on terror and the growth of crony capitalism.

As the graph below shows, the United States now has a lower economic freedom rating than it did in the 1970s.

The United States’ fall is alarming not only because it’s the most important economy in the world, long associated with market-liberal policies, but also because Economic freedom is strongly correlated with prosperity, higher growth, and improvements in the entire range of standard-of-living indicators, so a decline negatively affects those outcomes. The authors calculate, for example, that the loss of economic freedom will cut long-term U.S. growth by half to about 1.5 percent per year.

Another country that has seen a notable, steady drop in its economic freedom is Venezuela, now ranked last in the index. Other countries have been on an upward trend. Chile is now ranked 10th and China, while still largely unfree, continues to head in the right direction (see graph).

Below are the top ten countries in this year’s index. You can see a full listing here on page 10.

As my colleague Richard Rahn says in his column today, this year’s economic freedom report should be a wake up call to all Americans.

The Brutal Impact of North Korean Statism

One hopes that the dictator of North Korea suffered greatly before he died. After all, his totalitarian and communist (pardon the redundancy) policies have cause untold death and misery.

But let’s try to learn an economics lesson. In a previous post, I compared long-term growth in Hong Kong and Argentina to show the difference between capitalism and cronyism.

But for a much more dramatic comparison, look at the difference between North Korea and South Korea.

Hmmm… I wonder if we can conclude that markets are better than statism?

And if you like these types of comparisons, here’s a post showing how Singapore has caught up with the United States. And here’s another comparing what’s happened in the past 30 years in Chile, Argentina, and Venezuela.

New Video Has Important Message: Freedom and Prosperity vs. Big Government and Stagnation

The folks from the Koch Institute put together a great video a couple of months ago looking at why some nations are rich and others are poor.

That video looked at the relationship between economic freedom and various indices that measure quality of life. Not surprisingly, free markets and small government lead to better results.

Now they have a new video that looks at recent developments in the United States. Unfortunately, you will learn that the U.S. is slipping in the wrong direction.

The entire video is superb, but there are two things that merit special praise, one because of intellectual honesty and the other because of intellectual effectiveness.

1. The refreshingly honest aspect of the video is its non-partisan tone. It explains, in a neutral fashion, that Bush undermined prosperity by making government bigger and that Obama is undermining prosperity by increasing the burden of government.

2. The most important and effective argument in the video, at least from my perspective, is that it shows clearly that a larger government necessarily comes at the expense of the productive sector of the economy. Pay extra-close attention around the 2:00 mark.

It’s also worth pointing out that there are several policies that impact on economic performance. The Koch Institute video focuses primarily on the key issues of fiscal policy and regulation, but trade, monetary policy, property rights, and rule of law are examples of other policies that also are very important.

This video, narrated by yours truly, looks at economic growth from this more comprehensive perspective.

The moral of the story from both videos is very straightforward. If the answer is bigger government, you’ve asked a very strange question.

Sweet Commerce

A study on anti-Semitism in Germany offers the disturbing finding that “communities that murdered their Jewish populations during the 14th-century Black Death pogroms were more likely to demonstrate a violent hatred of Jews nearly 600 years later,” during the Nazi era. But cities

with more of an outward orientation—in particular, cities that were a part of the Hanseatic League of Northern Europe, which brought outside influence via commerce and trade—showed almost no correlation between medieval and modern pogroms. The same was true for cities with high rates of population growth—with sufficient in-migration, the newcomers may have changed the attitudes of the local culture.

Free trade helps lead to peace, prosperity, and the erosion of prejudice.

Obama’s Economic Policies Create Misery

The public has finally started to give President Obama’s economic policies a big “thumbs down”.  This shouldn’t surprise anyone who is familiar with the Misery Index.

While President Obama sings the glories of big government, it is ironic that he has been marked by the curse of government failure.  One metric that measures how this curse will affect the President’s performance is the Misery Index (see the accompanying chart).

The Index is calculated by adding the difference between the average inflation rate over a president’s term and the average inflation rate during the last year of the previous president’s term; the difference between the average unemployment rate over a president’s term and the unemployment rate during the last month of the previous president’s term; the change in the 30-year government bond yield during a president’s term; and the difference between the long-term, trend rate of real GDP growth (3.25%) and the real rate of growth during a president’s term.

I have forecast what President Obama’s most likely Misery Index score will be at the end of his current term.  This miserable score – one that is relative to George W. Bush’s very weak performance in his second term – is already baked in the cake and can be laid squarely at the feet of President Obama’s own policy errors and government failure.  For a president whose agenda is designed to overthrow the Reagan Revolution, the Misery Index should be a sobering reminder that free markets, not big government, generate prosperity.