Freedom Lost: 2010 Heritage Index of Economic Freedom

Today heritage has come out with it's 2010 Index of Economic Freedom (See http://bit.ly/65rIHh).  Economic freedom crucial for economic development.  The correlation between economic freedom as Heritage measures it and GDP per capita is undeniable.  See the chart by Heritage below.

EconomyPolitics publishes their own list, the Global Economic Efficiency Index, which is a compilation of the indices used by Heritage, Fraser Institute, IMD, Euromoney and the World Economic Forum (See http://bit.ly/7gYg4d).  We have updated today with the most recent numbers put out by Heritage. 
The bottom line is the United States and United Kingdom are both participating in a dramatic deterioration of basic economic freedom.  In our poll, the US has slipped from second place to fourth.  Heritage has placed the United States below Canada, Ireland and Australia.  Even worse, the direction that the United States is heading is troublesome.   The US was among the countries that had declined most in economic freedom.   In fact, China, the US and the UK, were all among the nasty three that responded to the economic crisis in exactly the wrong way.  Heritage shows that all this spending and regulation does more harm than good. 

Increased government spending did not improve economic crisis performance. In light of the global financial and economic storm, many advanced economies’ governments have stepped up spending to promote growth and employment. The early evidence is that such spending has not worked.

Many of the countries whose scores have dropped have responded to the economic crisis with policy moves that, whether intended or not, add up to a fundamental assault on economic freedom. In the United States, for example, policies or proposals have included more intrusive regulations, government takeovers of businesses, government subsidies and bailouts of private firms, loose monetary policy, tax increases, and protectionist measures to reduce trade.

Just some of the things that the United States has done in the last year to reduce economic freedom:
  1. General Bad-Mouthing the financial sector.  Limited Executive Compensation and Bonuses ( See http://bit.ly/89UUef) and assumed greater powers over all companies.
  2. Underwritten 95% of mortgage risk in the secondary market (FHA, Fannie Mae, Freddie Mac, etc).
  3. Tarriffs on Tires from China.
  4. Assumed Counterparty Risk for Credit Default swaps (AIG).
  5. Proposed elimination of actuarial risk for insurance companies (health bill).
  6. Proposed tax increases on most productive (health care tax) and capital gains tax increases. 
  7. Proposed carbon tax increases (cap and trade).
  8. Guaranteed Auto Warranties (General Motors and Chrylser).
  9. Arbitrarily reduced bond-holder legal guarantees (GM and Chrysler bankruptcy).
  10. Forced Mergers (GMAC/Chrysler Financial and Merril Llynch/Bank of America).
  11. Proposed special taxes on all financial insitutions. 
  12. Unprecedented expansion of Federal Reserve balance sheet MBS, ABS, CDOs and whole loans, thereby assuming market risk of those assets.
  13. Increased Federal spending by unprecedented amounts (Stimulus)
 If I would have told you two years ago, that we would have eliminated many of the basic legal guarantees of bankrupcy law and assumed counterparty risk for Credit Default Swaps, odds are you would have chuckled.  But the real problem is that in spite of their not working, they are not completely impotent.  They do have the ability to wreak havoc on the real economy in unintended ways.  And, they won't go away with the recession.

Comments

  1. I disagree...
    Even supposing that the criteria used to measure a country's economic freedom is one that most theories would approve, the fact that most of the economically "free" countries have more wealth does not automatically implies that such is a cause-consequence relation.

    Many of the now-wealthy countries have applied economic protectionism when developing (mainly US, and european ones after wars), and some have always applied it to protect their weak but strategical markets such as food/agriculture, while specifically opening the markets where they had enough strength. From that point of view, it would be possible that in fact their opportune ban to absolute economic freedom was the key to their actual success.

    And on the other hand, many of the countries that are nowadays poor have been forced (through financiery -IMF and others- or even military pressure) to open their markets and free their economies, some decades ago; The results of a economic opening in my own country, for example, lead to a great increase in poverty, disemployment and eventually caused a quite severe crisis.

    I think that the analisys in the article lacks the inclusion of some key variables (such as historical background), considering the complexity of the matter.

    ReplyDelete
  2. It would be interesting for me to see where you are actually from (you didn't mention). Every country has a history and culture that either promote or take away from economic liberty.

    I will give you that the US has not always been the best proponent of economic liberty. FDR, Woodrow Wilson, and Teddy Roosevelt all had big protectionist instincts.

    However, the fact that all countries at some point have practiced economic protectionism, does not take away from their relative dynamics.

    Just look at North vs South Korea. South Korea isn't rich because of protectionism. They are rich because of economic freedom. In fact, there are sectors of South Korea that have been coddled by the gov't, mainly shipbuilding and cars. But these have largely been taken off the government tit.

    The areas where you see lackluster growth is in agriculture which is both protected and subsidized. If you have ever been to Korea, you will see grocery stores with ugly vegetables because the farmers don't have to compete. The same is the case in France. Ugly bananas because there is favoritism to their former colonies.

    Thanks for the comment and keep coming back. If you give me more information about where you are from, we could discuss your particular situation.

    Regards,

    ReplyDelete
  3. Thanks for your response!
    And I hope I can express myself correctly, because English is not my own language.

    I'm from Argentina. Our economic structure, inherited from colonial times, wars and oligarchy (governement/power of the few), was basically an oligopolic agroeconomic one, in the begginings of the XX century. The same as the US (but later), we had internal wars wich decided the economic structure of the country, in wich even an English-Fench fleet invaded the main country`s river to ensure the free importation of european manufactured products. Unlike the US, the industrialist and protectionist model lost the war.
    Through the XX century, different democratic (pollitically free) political movements tryed to aid the economy through statal intervention of economy, leading to a flawfull but quite rich and fair economy.
    The economic freedom (school of Chicago theories) was imposed through a military coup(1976) when the democratic government (which had lost it´s president and main pollitical leader) couldn't fight the model's flaws and had a economic crisis. However, the economic freedom imposed through pollitical restriction in the way of statal terrorism (guerrilla groups, people who peacefully disagreed, or even neutral people, were often kidnapped, killed and buried in illegal hidden graveyards by the army and police without judgement nor habeas corpus, causing pollitical terror) lead to economic concentration, multiplication of external debt, de-industrialization, trouble to small/medium farmers, and poverty.
    When democracy was back, the government had to fight the not-yet-blown economic and social crisis left by the military, and even though it did a good job considering the circumstances (http://es.wikipedia.org/wiki/Archivo:Pobreza_1965-2005_Gran_Buenos_Aires_-gobAlfons%C3%ADn.jpg poverty vs time graph) , an inflationary crisis and the threat of another coup made it give command to the elected next governement before time. That next government couldn`t fight the crisis with interventionism so it applied an even deeper economic opening (as financiery organisms said) so as to reduce statal expenses. For some years, it managed to reduce the poverty, but the yet unstopped deindustrialization and disemployment lead to a progressive worsening with another crisis during the 4º democratic government.
    From then on, we have had a rather protectionist economic politic, which has worked well in some aspects as economic activity - employment and poverty (also helped with state economic aid).

    ReplyDelete
  4. Thanks for your response!
    And I hope I can express myself correctly, because English is not my own language.

    I'm from Argentina. Our economic structure, inherited from colonial times, wars and oligarchy (governement/power of the few), was basically an oligopolic agroeconomic one, in the begginings of the XX century. The same as the US (but later), we had internal wars wich decided the economic structure of the country, in wich even an English-Fench fleet invaded the main country`s river to ensure the free importation of european manufactured products. Unlike the US, the industrialist and protectionist model lost the war.
    Through the XX century, different democratic (pollitically free) political movements tryed to aid the economy through statal intervention of economy, leading to a flawfull but quite rich and fair economy.
    The economic freedom (school of Chicago theories) was imposed through a military coup(1976) when the democratic government (which had lost it´s president and main pollitical leader) couldn't fight the model's flaws and had a economic crisis. However, the economic freedom imposed through pollitical restriction in the way of statal terrorism (guerrilla groups, people who peacefully disagreed, or even neutral people, were often kidnapped, killed and buried in illegal hidden graveyards by the army and police without judgement nor habeas corpus, causing pollitical terror) lead to economic concentration, multiplication of external debt, de-industrialization, trouble to small/medium farmers, and poverty.

    ReplyDelete
  5. When democracy was back, the government had to fight the not-yet-blown economic and social crisis left by the military, and even though it did a good job considering the circumstances (http://es.wikipedia.org/wiki/Archivo:Pobreza_1965-2005_Gran_Buenos_Aires_-gobAlfons%C3%ADn.jpg poverty vs time graph) , an inflationary crisis and the threat of another coup made it give command to the elected next governement before time. That next government couldn`t fight the crisis with interventionism so it applied an even deeper economic opening (as financiery organisms said) so as to reduce statal expenses. For some years, it managed to reduce the poverty, but the yet unstopped deindustrialization and disemployment lead to a progressive worsening with another crisis during the 4º democratic government.
    From then on, we have had a rather protectionist economic politic, which has worked well in some aspects as economic activity - employment and poverty (also helped with state economic aid).

    Here and in some other latin american countries (chile, brazil, bolivia) economic freedom has been forced through pollitical restrictions (coups even supported by US government and later finnanced by the IMF and World Bank), and hasn's given good results, in general. Many of the coups in Arg. have been made just after major economical projects (petroleum statization and agrary reform). The neoliberal paradigma, Chile, has greatly improved it's country wealth but has also caused economic concentration, meaning that the gained wealth hasn't reached most of the people. From my point of view, economy (as a tool) should serve the citizens, not only great capital blocks, so I personally don`t consider Chile`s case a success.

    ReplyDelete
  6. That subjective part of this is what I tryed to mention in my first phrase: ¿How do you measure success and failure or a model? ¿What results do you measure, the whole or only those that the model considers? I Know it`s quite impossible to ask 6 billion people, but theories should consider as much of relevant factors as possible, for example not only economic activity but economic concentration and poverty.... and those three still are few.

    In the case of competition and product quality, free economy isn't optimal when markets are olligopolic, which is a frequent flaw at least in my country. Large producers and distributors fix prices (alone or coordinated) in dumping operations or price rising. It isn´t optimal also when some producers can get better information (satellite imaging in farming, expected offer/demand, or price prediction, for example). As markets are never ideal, theories tailored for such markets will probably have flaws that might be partially correctable through concensed actions. For that, I think the government actions on economy -if lead correctly, as in my country some times- are a powerful tool. Of course, if mislead they might even be worse than the original flaw, just as any theory, including those of free economy.

    Hope I wasn't too boring!

    Regards,

    ReplyDelete
  7. Juan,

    Puedes escribirme en Castellano. Yo vivia muchos anos en Peru, y se muy bien hablar e escribir espanol.

    I'll write you in English and hopefully we can communicate the best we know how. I call you Juan because you are anonymous.

    Argentina is a country that is economically inexplicable at first blush.

    There is a lot that we don't know and don't understand when it comes to economics. Why did Argentina fail to grow when they practiced Chicago style economics? Why did Chile seem to grow when the situations that both underwent seem to be very similar?

    Why did Venezuela and Argentina seem to be growing by leaps and bounds during the 2000s when they practiced unorthodox and even anti competitive economic practices? Were all the theories about economic growth wrong?

    I will tell you this: economic liberty is not the knob that controls growth. It takes time. It takes a generation of economic growth to lift a country out of poverty. If you look at the time of greatest economic growth it was from 1989-1998 and 2002-present. Those were the result of years of stable business friendly economics.

    One period was purely free markets and one was less so. One period was followed by a severe currency crisis and the other is still playing out. I know what the situation was like in Argentina after 2001. I have family from Argentina.

    Then enter the Kirchner dynasty. In some tokens they have done right, just by providing political stability. They have defaulted on their debt to the IMF and a number of other anti-orthodox solutions, but at the end of the day, they didn't go on a nationalization binge a la hugo chavez, so it is never 100% bad.


    The man on the street might say, it was the free market reforms that caused the financial catastrophe.

    I would say, fiat currencies are unstable and can make things even worse. That is what happened in Argentina in my opinion. There was a problem with debt and the currency. The currency was devalued and the country had a severe financial crisis.

    I can't say it was definitely a cause of free markets. It sounds more like it was caused from a peg to the dollar causing the debt payments to spiral out of control. It was exacerbated by the theft of dollars from the devaluation.

    Kirchner is not a anti-business and his rhetoric would make you think. In a way he was like Lula. All the leftist talk, but generally business friendly.

    The dirty wars from 1976-82 were characterised by a little bit of financial deregulation with a lot of political persecution. All in all the reforms that were persued were only in the financial sector. The GDP growth that occured was almost strictly in the form of public work projects financed by foreign debt. That doesn`t sound too free markets to me.

    Two more points, economic crises are not just the domain of free market countries. Look at cuba. Secondly, economic oligarchies are the domain of statist capitalism or what they would call Peronism in Argentina. True free markets and competition eventually kill oligarchies unless they are legally protected by the state.

    Also, if you assume that the growth in Argentina hover the past few years is due to statism by the Kirchner dynasty, you also have to wonder why Peru also experienced high growth rates when they pursued very different policies. There are other things going on there as well, including a commodities boom.

    ReplyDelete

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