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Edwin J. Feulner / January 14, 2014

Why Is America Losing Its Economic Freedom?

Only the U.S. has declined for seven straight years

For generations, people worldwide who yearn for freedom have looked to the United States. Here, every citizen can speak his mind, pursue his passion and exercise other God-given liberties that are unjustly denied many others around the globe.

That doesn’t mean we’re above reproach in all areas of freedom, though. Take economic freedom, which continues to deteriorate a little more each year.

I’m not basing this on hearsay or on the latest jobs report. Every year, the Heritage Foundation and The Wall Street Journal release a detailed, country-by-country policy guide known as the Index of Economic Freedom. The news for the United States has been getting a little worse each year over the past several editions.

In the 2013 index, the United States managed to hold onto its 10th-place finish from the year before, despite an overall decline in its score. My last index column concluded with this sentence: “Or is this our last year as a top-10 finalist in the index?”

According to the 2014 index, our 20th-anniversary edition, the answer is yes.

The United States now stands at No. 12 globally. Even among North America’s economies, we have little to brag about: Canada, sixth globally and one of many that improved last year, has a comfortable lead on us.

As recently as 2008, the United States ranked seventh worldwide, had a score of 81 (on a 0-100 scale, with 100 being the freest) and was listed as a “free” economy (a score of at least 80). Today, it has a score of 75.5 and is “mostly free,” the index’s second-tier economic-freedom category.

Before explaining why, let’s examine how the editors of the index determine the scores. Each country is evaluated in four broad areas of economic freedom:

Rule of law: Are property rights protected through an effective and honest judicial system? How widespread is corruption – bribery, extortion, graft and the like?

Limited government: Are taxes high or low? Is government spending kept under control, or is it growing unchecked?

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?

Open markets: Can goods be traded freely? Are there tariffs, quotas 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, the United States does very well on these measures. You can’t finish 12th out of 178 countries if you don’t have a large degree of economic freedom. Property rights are guaranteed (though they declined by five points last year). Our court system is independent. The average tariff rate is commendably low (1.3 percent). Business-startup procedures are relatively efficient. The labor market is flexible.

Still, the United States is lagging. “Substantial expansion in the size and scope of government, including through new and costly regulations in areas like finance and health care, has contributed significantly to the erosion of U.S. economic freedom,” the index editors write.

Incorporating a business takes an average of five days, but the cost of our regulatory requirements has risen by more than $60 billion since 2009. More than 130 new regulations have been imposed. Government subsidies are on the increase.

The news is no better when it comes to taxes. The top corporate rate remains at 35 percent, and the top individual income-tax rate is 39.6 percent. The overall tax burden has risen to 25.1 percent of total domestic income, meaning that government confiscates $1 out of every $4 earned.

Total government spending is another weak spot for the United States. It amounts to more than 40 percent of gross domestic product, or what we produce in a year. That’s much too high.

“The U.S. is the only country to have recorded a loss of economic freedom in each of the past seven years,” the editors write. Will we pressure our elected officials to take bold and serious steps to reverse that trend? Or make it eight straight years next time?

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