This year’s Index of Economic Freedom contains the unsettling news that the United States has dropped out of the exclusive club of free economies and is graded “mostly free” for the first time in the Index’s 16-year history. The United States’ Index score dropped from last year’s 80.7 to this year’s 78. For many Americans who still have their jobs and incomes, “mostly free” may feel no different than “free.” For the nearly 20 million who lack work or the millions more who find themselves working for a lot less than they did two years ago, this news may be part of the answer to their question, “Why me?”
The decline of the United States to “mostly free” means that our economy is less capable of strong, sustained economic growth than it was when it was freer. That’s bad news for the job seeker and someone starting their climb up the income ladder. The U.S. economy needs to produce a net increase in jobs of about 150,000 per month just to keep up with high school and college graduates searching for work and with those re-entering the labor force after raising a family or retraining. When average job creation falls below this level, the unemployment rate usually rises.
The U.S. economic freedom score declined in six of the ten factors used to calculate the economy’s overall rank. Reviewing why they fell may help explain why prospects in labor markets have dimmed. Here are the factors the fell and why:
1. Government spending: Massive increases in overall government spending since July of 2008 through June of 2009 (the data time period of this year’s Index) reduced the U.S. score for this factor. In 2009 alone, spending grew by 20 percent over 2008 levels – an astounding increase in the weight of government on the economy. The spending score dropped from 59.6 to 58 on a 100 point scale.
2. Monetary Freedom: Aggressive interventions by government in private housing, financial and automotive industries substantially distorted prices, and these price distortions encouraged inefficient economic behaviors. When labor and capital are not used in their highest and best ways, economic productivity (and thus job creation) falls. The monetary freedom score dropped from 84 to 78.1.
3. Financial Freedom: The past year saw the federal government take over many of the key financial firms and taking virtually unprecedented steps to control the compensation of financial industry employees. The financial freedom score dropped 10 points.
4. Property rights: The ability of individuals to use their own labor and capital – that is their own property – peacefully and in any way they wish is central to economic freedom. When that ability declines, so does freedom. The U.S. score for this element of the Index declined by 5 points this year.
5. Investment freedom: The freedom to invest one’s property stems directly from the enjoyment of property rights. Unfortunately, the federal government has increased controls on the ability of non-U.S. citizens to invest in the United States over the past 12 months. This past year saw the U.S. score for investment freedom fall 5 points.
6. Fiscal freedom: While much of the developed world continued to reduce tax rates on personal and business income, the United States continued to fall behind by doing nothing. Like increased spending that expands the burden of government on the economy, high tax rates reduce economic growth by discouraging the use of private resources in new business ventures and the creation of new labor-saving, capital goods. While the US score for this element did not fall, many of our key economic competitors did better.
While the U.S. economy undoubtedly is righting itself from the most severe recession since the 1930s, it is doing so at a glacial pace. Clearly, the burden of public policies that reduce the free use of personal property and retard the unsubsidized risk taking of entrepreneurs are lengthening the recovery process. The real cost of this sluggishness are the millions of unemployed Americans who continue to wait for the return of economic spring and the millions more who hope for a better economic times. The real source of this human cost – the real driver of persistent economic want – is the erosion of our economic freedom caused by these government policies.