Economic Freedom on the Wane
“Land of the free.” It's right there in our national anthem. As well it should be – the personal liberties we enjoy are the envy of many around the world.
Freedom is no accident. It requires constant vigilance. It takes economic liberty, an area where the United States has begun to slip quite a bit lately.
How would you say the United States compares to other nations? There's no need to guess. We can pinpoint it exactly by using an annual guide known as the Index of Economic Freedom.
Top three, you think? Top five? Nope. Last year at this time came the news that the United States had dropped to 10th place. Now, the 2013 index is out, and we can see that the United States hasn't budged from that spot.
In fact, we're lucky we didn't fall out of the top 10 altogether. Our index score declined a bit over the last year. We held onto the No. 10 slot mostly because Ireland declined enough to wind up in 11th place.
As recently as 2008, the United States ranked seventh worldwide, had a score of 81 (on a 0 to 100 scale, with 100 being the freest), and was listed as a “free” economy. Today, the United States has a score of 76 (its lowest since 2000) and is “mostly free,” the index's second-highest category.
Before explaining why, let's back up and touch on how the editors of the index – published annually since 1995 by the Heritage Foundation and The Wall Street Journal – determine the scores. Each country is evaluated in four broad areas of economic freedom:
1) Rule of Law: Are property rights protected through an effective and honest judicial system? How widespread is corruption – bribery, extortion, graft and the like?
2) Limited Government: Are taxes high or low? Is government spending kept under control, or is it growing unchecked?
3) Regulatory Efficiency: Are businesses able to operate without burdensome and redundant regulations? Are individuals able to work where and how much they want? Is inflation in check? Are prices stable?
4) Open Markets: Can goods be traded freely? Are there tariffs, quota or other restrictions? Can individuals invest their money where and how they see fit? Is there an open banking environment that encourages competition?
For the most part, of course, the United States does very well on these measures. Finishing 10th out of 177 countries, after all, is impossible if you don't have a large degree of economic freedom. Property rights are strong in the U.S. Our court system is independent. Business startup procedures are efficient. The labor market is flexible.
In certain key areas, however, the United States is lagging badly.
The biggest decline since last year comes in the area of regulations. Simply put, it's becoming costlier and more complicated to start up or maintain a business. More than 100 major new federal regulations have been imposed since early 2009, at an annual cost that exceeds $46 billion. Small wonder we're stuck in a “jobless recovery.”
Yet, regulatory freedom is hardly our weakest spot. Indeed, we're above the global average in that category, and all the others – except one: limited government. In short, it's not so limited anymore.
The United States has the highest effective corporate tax rate in the developed world, and the top individual income tax rate has been raised to 39.6 percent. We're also saddled with a capital-gains tax and an excise tax. The overall tax burden is 24.8 percent of total domestic income, meaning that government confiscates nearly $1 out of every $4 earned.
Total government spending is another Achilles' heel for the United States. It amounts to 42 percent of gross domestic product. That's unacceptably high.
It shows no signs of abating. Under current policies, government spending is headed in one direction only: up.
That's why we have to get serious about cutting government down to size, overhauling our tax system, and transforming costly entitlement programs. Or will this be our last year as a top-10 finalist in the index?