Personal freedom around the world has seen a notable decline since 2008, according to the Human Freedom Index 2020 published today by the Cato Institute with the Fraser Institute in Canada. The index uses 76 indicators of personal, civil, and economic freedoms to rank 162 countries from 2008 to 2018, the most recent year for which internationally comparable data is available.

Overall freedom has also declined, though to a lesser degree, over the same time period. Of the 12 major categories that we measure in the report, all but five have seen some deterioration, with freedom of religion, identity and relationship freedoms, and the rule of law seeing the largest decreases.

New Zealand and Switzerland are ranked in the top two spots, with Hong Kong coming in third. My coauthor Fred McMahon of the Fraser Institute and I note that the territory has been losing freedom during the past 10 years and we expect future editions of the index to show notable declines in Hong Kong’s ratings and rankings, especially given Beijing’s aggressive interventions there in 2019 and 2020.

The United States ranks 17th and has begun a decline in its level of freedom in 2018 after years during which it had been regaining lost ground from a previous decline. Its drop in economic freedom in 2018 exceeds its decline in personal freedom.

The report continues to find a strong, positive relationship between freedom and prosperity, but also finds that here is an unequal distribution of freedom in the world. Fifteen percent of the world’s population lives in the freest quartile of countries in the index, while 34 percent lives in the bottom quartile of countries. The gap in freedom between the most free and the least free countries has also been increasing since 2008.

Find out where other countries and regions rank and how they have performed over time here.

Congress is debating another aid package for the states and private sector. Further aid for the states is a bad idea. Aid for small businesses makes more sense, but a better approach would be for state governments to end mandated shutdowns which are starving businesses of revenues.

Many economists are saying that more federal aid is needed to boost GDP. But, as noted here, GDP shot up in the third quarter even as government spending fell.

Canada’s experience in the 1990s also does not support the Keynesian idea that higher government spending boosts growth. Canada cut spending in the mid‐​1990s and its economy boomed.

Canada had a sharp recession in 1991, worse than the U.S. downturn at the time. Keynesians would say that Canada should have boosted spending in subsequent years to stimulate recovery. But Canadian policymakers worried that deficits were high and government debt was rising. The federal and provincial governments changed course and started cutting spending.

What was the result? The chart shows annual real GDP growth and the annual real change in total federal‐​provincial‐​local program spending. By program spending, I mean total non‐​interest government spending.

Here is my interpretation of the chart:

• 1992 to 1997: Decelerating, then falling, government spending coincided with a strong rebound in economic growth. Government program spending fell four years in a row (1994 to 1997) while GDP growth averaged a robust 3.3 percent annual rate during the period. Total government spending including interest fell from a peak of 52.5 percent of GDP in 1992 to 43.5 percent by 1997 (Table 52).
• 1998 to 2008: Steady GDP growth slightly outpaced growth in program spending in this period. Total government spending fell to 38.8 percent of GDP by 2008.
• 2009: Canada is dragged into recession by the U.S. crash, and then like the United States passed a stimulus spending package.
• 2010 to 2019: From 2010 to 2014, Canadian governments revert to a more frugal spending path and GDP grows fairly strongly. Justin Trudeau takes office in 2015 and shifts the federal government toward higher spending. Total government spending was back up to 41.2 percent by 2019.

Federal and provincial governments have followed somewhat different paths over the years, and there are other nuances not addressed here. The important lesson for U.S. federal policymakers is that the Canadian federal government in the 1990s cut spending on defense, unemployment insurance, aid to provinces, business subsidies, and much else while pursuing microeconomic reforms such as privatization, as discussed here. The federal government ran surpluses every year from 1998 to 2008.

As the U.S. economy pulls out of recession, we have huge federal deficits and rising debt, as Canada did in the early 1990s. We should follow the same reform approach: slash spending and pursue microeconomic reforms such as privatization and deregulation.

Notes:

For the chart, government spending and interest payments are from Table 34. I deflated spending by the GDP price index, which is from Table 36–10-0223–01. Real GDP growth is from the OECD here.

Details on Canada’s economic reforms of the 1990s are here.

The Fraser Institute has a wealth of information on Canadian government spending here. I appreciate Milagros Palacios of Fraser helping with the chart data.

On November 22, 1990, Margaret Thatcher resigned as Prime Minister of the United Kingdom. Six days later, she was replaced by her Chancellor of the Exchequer, John Major. Thirty years on, I still remember hearing of Thatcher’s resignation on the radio. Like many people in what was then Eastern Europe, I could not make any sense of it (though, in my defense, I was only 14 years old). In my native Czechoslovakia, which only a year earlier saw the end of communism, Thatcher enjoyed the status of a demi‐​God. Stylish and staunchly anti‐​communist, she was credited – along with the Pope John Paul II and the U.S. President Ronald Reagan – with defeating socialism (a temporary victory, as it turned out). How on Earth, could the British people be so ungrateful? I am sure lots of people throughout the world felt the same way about Winston Churchill’s defeat in the 1945 election. Of course, the British people in general and the Conservative Party politicians who forced Thatcher’s resignation in particular, had their reasons for dumping the Prime Minister. Still, the memory lives on – fresh as ever.

Ten years later, I found myself at a London dinner with the great Lady — now ennobled as Baroness Thatcher of Kesteven in the County of Lincolnshire – in attendance. I was on my way to Washington, D.C. to start my professional life as a Cato scholar. The dinner was organized by my friend Roger Bate from the American Enterprise Institute. Lots of other friends were present, including Richard Tren (now at the Searle Freedom Trust) and Veronique de Rugy from the Mercatus Center. At some point during the dinner, I plucked up the courage to say “hello” to the former Prime Minister. My Eastern European accent quickly betrayed my exotic origins. Upon hearing that I was from Czechoslovakia, the Baroness visibly perked up (no doubt, she knew how popular she remained in ex‐​communist countries). I told her “The communists really hated you and, therefore, we loved you.” She laughed, gave me one of those “eyes of Caligula” looks and said “GOOD!” I am sorry I never saw her again, though Conor Burns, one of my Scottish friends who is a Conservative Member of Parliament for Bournemouth West, has done a good job telling me about her last years – they grew very close toward the end of her life.

I was reminded of Margaret Thatcher again, while watching the fourth season of the Crown (I love and hate it at the same time, but that’s another story). The American audience might find it unbelievable that Thatcher kept making dinner for her husband Denis and ironed his clothes (she loved ironing), while putting in 14 hours a day toward liberalizing the British economy, defeating communism and winning the Falklands War. That, at least, is completely true. Years after I met Thatcher in London, I had a drink with the deliciously named Barry Potter, who was the Prime Minister’s Private Secretary in 1990. During the night before her resignation, while Potter and his colleagues were busy drafting the Prime Minister’s speech for the confidence vote called by the opposition Labour Party for the next day, Thatcher apologized to her staff for keeping them late. She then said, “You must be starving.” With those words, she went to the upstairs flat at No. 10 Downing Street, and cooked everyone dinner. They don’t make them like that anymore…

With the health crisis and recession, many restaurants and other businesses have been hit hard. Some businesses, such as online retailers, have done well. Overall, the nation’s gross domestic product plunged in the second quarter of 2020 but bounced back strongly in the third quarter.

The rate at which Americans are launching new businesses provides another gauge of economic health. In the recession a decade ago, the number of startup businesses fell substantially and never fully recovered. Indeed, the U.S. startup rate has trended down since the 1970s, which is a concern because new businesses are a major source of jobs, innovation, and competition.

The Census Bureau tracks startups in its “business formation statistics,” which are tallied weekly and quarterly. The data include total “business applications,” which are calculated from requests to the IRS for Employer Identification Numbers. A subset are “high‐​propensity applications,” which are applications the Census judges will likely become active businesses with payroll. Background on the data is here and here.

The chart shows that there were about 860,000 total applications per quarter in recent years, of which about 325,000 were high propensity. High‐​propensity applications dipped in the first and second quarters of 2020 as the economy went into recession.

As startups were falling, business shutdowns were rising. We don’t have accurate, up‐​to‐​date data on permanent shutdowns, but various indicators suggest they have risen in 2020. We know that shutdowns rose during the last recession and that some cities and industries have been hit hard this time. A third or so of New York City restaurants may close permanently.

The good news is that we appear to have had a big turnaround in startups. The chart shows that high‐​propensity applications soared to 537,000 in the third quarter. Apparently, Americans are opening or planning to open large numbers of startups. According to the Census data, applications for online retailers have gone through the roof.

The apparent upward spike in entrepreneurship is impressive, as we did not see such a jump during or after the recession a decade ago. As one of the experts behind the Census data, John Haltiwanger, noted, “One of the reasons we took so long to recover from the Great Recession is startups got clobbered and didn’t come back.” A Wall Street Journal news piece concurred, “The sluggish pace of new‐​business creation in years after the [great] recession officially ended contributed to a slow recovery and unusually high unemployment.”

A share of the third quarter’s startup boom likely represents “entrepreneurship by necessity,” or people thrown out of jobs scrambling to find new sources of income. Others are likely seeing opportunities created by the health crisis, such as mask manufacturing. As one reporter noted, “because of the huge changes in economic behavior brought on by the pandemic, a lot of people have ideas for new businesses.”

Will the startup boom last? We’re now in another cycle of rising virus counts and mandated shutdowns. Also, the incoming Biden administration has proposed a range of anti‐​market policies that threaten to undermine businesses and startups. Weekly data show that business applications are now down from the peak in August.

Nonetheless, the Census data provide hope that entrepreneurs are coming to the rescue of our battered economy. They are reallocating resources from declining activities to new areas of opportunity. They are helping the economy adapt and begin to grow once again. Let’s work to convince Biden and his team not to throw an interventionist wrench into the works.

The health crisis and office shutdowns in New York, San Francisco, and other cities have prompted companies to liberalize their policies on remote working. That has led to some office workers rethinking where they live and moving to locations with nice weather, natural beauty, and lower taxes.

The Wall Street Journal examined the new moving trends the other day:

Drew Erra, a 52‐​year‐​old insurance broker and moving‐​company co‐​owner, and wife Melissa Erra, lived in Minneapolis for 24 years. But in July—when many Americans were realizing that working from home, remote learning and social distancing would be the new reality for a long time—they picked up and moved to Las Vegas. Their new home, a $3.2 million, arts‐​and‐​crafts home with a pool and golf‐​course views, cost over $2 million more than the one they sold in Minneapolis. “I was paying 10.5% state income tax in Minnesota,” a rate which has now dropped to zero in tax‐​free Nevada, Mr. Erra said. “Just the tax savings alone covered the cost of the house.”

This study showed that Americans are moving from high‐​tax to low‐​tax states in substantial numbers. This year’s crisis may have strengthened the trend, and it appears that the election results will not upset the pattern. Republicans have the edge to retain the U.S. Senate majority, which means that the cap on deducting state and local taxes on federal returns will likely stay in place for now. The cap increases the tax savings for middle‐ and higher‐​income households when they move from high‐​tax to low‐​tax states.

The table summarizes IRS data on interstate migration for 2018. The column on the left shows the ratio of in‐​migration to out‐​migration for all households, while the column on the right shows the ratio for households earning more than $200,000 per year.

Florida, for example, has 1.23 households arriving for each one leaving but has 2.36 high‐​earning households arriving for each one leaving. By contrast, New York has 0.67 households arriving for each one leaving, and it has just 0.48 high‐​earning households arriving for each one leaving. In other words, low‐​tax states such as Florida attract people overall but particularly high earners, whereas high‐​tax states such as New York repel people overall but particularly high earners.

The Wall Street Journal article continued:

Searches by out‐​of‐​towners for homes over $1 million in the Las Vegas metro area surged by 155% from last year, according to Zillow’s analysis. Ten agents and brokers in the area said they have never seen more relocation interest. “More are driven to come here by high taxes in their states,” said Heidi Kasama, the listing agent at Berkshire Hathaway Home Services Nevada Properties for the home the Erras purchased. Weather is also a draw.

Last week, CNBC discussed the finance industry leaving New York City.

By forcing the mass adoption of remote work and crimping many of the advantages of urban life, the pandemic has turbocharged migration from high cost, high‐​density places to lower‐​cost states including Texas, Florida and Nevada.

… Data from the U.S. Postal Service, national moving companies and tech start‐​ups tracking smartphones all show an elevated outflow from New York City this year. More than 246,000 New Yorkers filed a change‐​of‐​address request to zip codes outside the city since March, almost double the year‐​earlier period, for instance.

… For those in finance, the simple math of lower tax regimes is hard to ignore. New York state levies 8.8% on wages for high earners, and New York City takes another 3.9%, or nearly 13% combined. Meanwhile, states including Florida, Texas and Nevada don’t tax wages. The more people make, the greater the incentive there is to leave, and the difference could easily mean hundreds of thousands more dollars in after‐​tax pay.

That’s a trade that some Wall Street titans have already made. Hedge fund billionaire Paul Singer is moving the headquarters of Elliott Management to Florida from midtown Manhattan, Bloomberg reported this month. His move follows that of another billionaire, famed corporate raider Carl Icahn, who made the switch last year to avoid New York taxes.

As this study discussed, high earners are often business owners who bring their businesses and related jobs with them when they move. The CNBC story continues:

“My concern isn’t that they’re leaving, it’s that they’re taking their businesses with them,” said Mark Klein, a New York‐​based tax attorney and chairman of Hodgson Russ. The flight of business owners is worrying for those remaining in the city, he said … “I’ve never been as inundated with people leaving New York and Connecticut, any of these high‐​tax states, in my 40 years of doing this,” he said. “Once Covid hit, with the recognition that people can work from any location, the floodgates opened.”

… When fintech CEO Paraag Sarva bought a weekend home in Bucks County, Pennsylvania last year, he figured he’d probably rent it out most of the time. But months into the pandemic, after it became clear that full‐​time, in‐​person schooling in New York was unlikely for his small children, he made it his permanent residence …. His taxes are 10% lower in Pennsylvania, he figures.

What should high‐​tax states such as New York do?

New York’s government is twice as large as Florida’s for no good reason, and New Yorkers endure the least freedom in the nation. New York and other people‐​losing states should downsize their governments by slashing taxes, spending, and regulations which reduce economic and personal freedoms. Policymakers in these states need to wake up to the new realities of mobile businesses and lifestyles.

In assessing the New Deal's contribution to economic recovery, I've naturally tended to draw on fairly recent research. That keeps me from being accused of being out of date. But it makes me vulnerable to the charge of overlooking the testimony of experts who studied the New Deal's consequences at first hand.

To that charge, I plead an emphatic Not Guilty! Those who know me will back me up when I say that I'm actually an antiquarian at heart, who'd much rather read a musty old report than any recent journal article. So I've read plenty of contemporary writings on the course of the depression and recovery, and the New Deal's contribution to them, including those of several of FDR's own advisors. These works often support the critical assessment of subsequent economic historians. If anyone is guilty of exaggerating the New Deal's contribution to the recovery, it's those popular historians who gloss over its failures while declaring that anyone who points to them must be a Hoover Republican!*

Of those failures, none was more glaring than that of the National Recovery Administration, the subject of my previous post in this series. And that failure was no less evident to those who witnessed its consequences as it has been to most economic historians since. I might cite numerous contemporary works to make the point—no other product of New Deal legislation met with more caustic or widespread criticism. But none makes it more assiduously than the 1935 Brookings Institution publication, The National Recovery Administration: An Analysis and Appraisal.

Last week, the Wall Street Journal examined government efforts to secure early access to doses of the most advanced COVID-19 vaccines, and how this access could prove to be a game‐​changer for these economies in 2021. As shown in the following WSJ chart, many governments have contracted with multiple pharmaceutical companies in order to ensure that they have access to at least one vaccine that successfully completes “Phase III” trials, which are now underway for most of the listed drugs. Among these governments is the United States, which has thus far secured vaccine commitments from Oxford/​AstraZeneca (0.91 doses per capita); Novavax (0.3); Sanofi/​GSK (0.3); BioNTech/​Pfizer (1.83); J&J/Janssen (0.3); and Moderna/​NIAID (1.52). This puts the United States second, behind only the United Kingdom, in contracting for early vaccine doses and thereby potentially saving thousands of American lives and restarting the struggling domestic economy if one or more of those vaccines pans out.

Beyond the sheer size and scope of the U.S. effort, what’s perhaps most striking here is the extent to which the Trump administration jettisoned its economic nationalism in pursuit of a game‐​changing COVID-19 vaccine. Indeed, as shown in the chart below (based our own independent research), each of the vaccines that the United States has secured appears to be heavily reliant on globalization — of investment, manufacturing, testing, and research personnel — to produce the final doses at the absolute maximum speed and scale.

This summary, moreover, is only the tip of the iceberg when it comes to the truly‐​global effort to beat COVID-19. Unmentioned in the chart above, for example, are all of the other people from around the world — investors, researchers, production workers, etc. — that make the listed companies, facilities and processes hum, as well as the previous global collaborations that have driven pharmaceutical innovation for decades.

Also unmentioned are the numerous other vaccine candidates that are in earlier stages of development. For example, a recent survey by the Coalition for Epidemic Preparedness Innovations (CEPI), which is working with the World Health Organization to ensure global access to a COVID-19 vaccine, showed over a hundred potential manufacturers of both vaccine‐​related drug substances (inputs) and drug products (doses) located in dozens of countries around the world (including, of course, the United States):

Since the unfortunate onset of COVID-19, American politicians of all stripes — but especially in the Trump administration — have blamed “globalization” for the pandemic and promised to re‐​shore U.S. manufacturing to bolster American “resiliency” and national security. Yet these very same officials have quietly embraced that very same globalization when it matters the most.

Lessons abound.