The 2010 edition of the Index of Economic Freedom poses a frightening paradox. Around the world, the economically freest countries are, by and large, those with a British legacy. Indeed, the top five – Hong Kong, Singapore, Australia, New Zealand, and Ireland – were either founded or influenced by the British. Of the top ten states, only Denmark, Switzerland, and Chile were not, at one point, governed from London. The lesson should be clear: economic freedom, born of the thought of Adam Smith and David Ricardo, spread round the world with the English-speaking people, to the immense benefit of both their children and those who learned from them.
And yet the two most important English-speaking countries today are sliding backwards. In 2009, the United States, for the first time, dropped out of the ranks of the free, and into those of the ‘mostly free.’ The United Kingdom dropped only slightly less than the United States, and it fell out of the top ten for the first time. Even more disturbing is the fact that the U.K. has now declined for four consecutive years, and that the level of economic freedom in Britain is now as low as it has been since the Index began to measure it in 1995. Britain’s decline is even more disturbing when compared to its major European competitors, such as Germany, France, and Italy, all of whom increased their scores in 2009.
The reasons for the U.K.’s comparative decline are clear: while some countries did not respond to the 2008-9 financial crisis by limiting economic freedom, others, including Britain, did. The U.K. already had to carry the burden of the National Health Service and the E.U.’s Common Agricultural Policy, which distort its domestic prices and impose higher costs on consumers, as well as a high and increasing level of government spending. Add to that the nationalization of Northern Rock Bank and the majority and minority stakes, respectively, the government has taken in the Royal Bank of Scotland and Lloyds Banking Group, and you have a nation that is moving increasingly rapidly away from economic freedom.
There is little likelihood that the U.K. will reverse this retreat in the next edition of the Index. The 2010 Index reports that government spending as a share of national income in the most recent year was 44%. But the OECD reports that public spending will reach 53% of national income in 2010. That by itself will hurt the U.K.’s score next year, just as the jump in public spending that began under President George W. Bush and accelerated under President Obama will drag the U.S.’s ranking down.
Of course, in the end, the ranking’s not the thing: it’s the policies that the ranking reflects, and their results, that matter. And with both Britain and the U.S. moving for the first time into the ranks of the ‘mostly free,’ they can, if they keep on their current road, look forward to a future that has more debt and less prosperity, and where politics revolves around how to share the pie, not how to grow it. Nothing could be less in keeping with the lessons the world’s leaders in economic freedom learned from Britain, lessons that both Britain and the United States badly need to relearn before they fall even further behind.