The 2011 Index of Economic Freedom is out, and the news is not good. For the second year in a row, America became less economically free. The U.S. is now just the ninth-freest economy in the world. The decline in the U.S. ranking was driven by skyrocketing government spending, new regulatory uncertainty associated with Obamacare, and government intervention in housing and financial markets.
Economic freedom matters for many reasons. It is the way societies create wealth: government is necessary, but it provides only the framework within which autonomy can flourish. It is also an inherent liberty: the right to do what you will with the fruits of your labor is among the most basic of human freedoms. As the Index demonstrates, economic freedom also correlates strongly with overall well-being, cleaner environments, and democratic governance.
Promoting economic freedom abroad, and practicing it at home, is also a basic responsibility of American leadership. This is true for a fundamental reason: as the United States falls down the ranks of the economically free, it will, over time, lose the ability to play the leading role as the world’s most powerful democracy. If the U.S. is to provide for its own defenses, and that of its allies, it must be able to pay the resulting bills.
Economic freedom is not just a pocketbook issue: it is fundamental to American security. For the sake of its leading role in the world, as well as the prosperity of its citizens, the U.S. must return to the ranks of the economically free.
America International Leadership Rests on Its Dynamic Economy
All capitalist economies, including the American one, go up and down. Recessions are disturbing, but necessary: a completely stable economy would be a stagnant one. In economics, as in other areas of life, a price of freedom – and the opportunities and growth that come with it – is the need to accept maturely that complete safety is unattainable. Government efforts to provide social insurance, in all its forms, must be balanced by recognition that such efforts reduce economic and personal freedom.
Historically, American international leadership after World War II was predicated on the correct belief that political and economic freedom and progress were interdependent. The U.S. decided to move away from protectionism, and encourage other countries to do the same, to prevent another Great Depression and the accompanying rise of totalitarianism. But now, instead of the U.S. driving the world’s move towards economic freedom, the U.S. is holding the rest of the world back. This is a rejection of the U.S.’s successful, bipartisan post-war grand strategy.
The United States cannot be a world leader if it has a stagnant economy. Even slower economic growth, over time, will take a severe toll. It is disturbing that, in the 2011 Index, North America (dominated economically by the U.S.) and Europe (the home of most of the U.S.’s traditional allies) declined or held level, while the rest of the world, containing its developing powers, gained economic freedom.
Over the long run, this trend will mean that the U.S. and its allies will grow more slowly than the rest of the world. So far, it is Western Europe’s share of world output that has shrunk most dramatically as China’s has risen, but the U.S. is not immune to the European – and, increasingly, the British – desire to seek safety over growth.
Defense Spending Is Not The Cause of Declining Economic Freedom
One quick, easy, and incorrect response to declining American economic freedom is to reduce federal spending by cutting the defense budget. This ignores two vital realities. First, and most importantly, the U.S. spends money on defense because it is a primary and central duty of the Federal Government to protect our sovereignty, our freedoms, and our interests.
Second, defense spending as a share of total government spending, and of U.S. G.D.P., has declined over time, and is now at or near post-1945 lows. The U.S.’s budget deficit, and the many other policies that are making America less economically free, are not driven by defense spending, or by the wars in Iraq and Afghanistan. They are driven by the social and entitlement spending that consumes by far the largest share of the U.S.’s budget.
It is certainly true that defense spending, like all government spending, imposes costs on the American economy. And it is also true that the necessary funds allocated to our defenses should be spent as efficiently as possible, and that America’s allies under-invest in their own security. But blaming ballooning defense spending for the growth of the federal government is simply incorrect.
In the Long Run, Economic Freedom Makes Everything Easier to Afford
The power of economic growth compounded over time is amazing: over a generation, even a marginal decline in growth makes Americans startlingly less well off. Slower economic growth is not only undesirable in itself, it forces many difficult budgetary choices. It means lower tax revenues and, if accompanied by higher borrowing to fund social spending, higher interest payments.
It is easy to claim that any particular government intervention or program is necessary, but the end result is that, slowly, economic freedom is whittled away, and the choices that we will have to make in the future become more and more painful. The pressure on defense spending, and, more broadly, on America’a role as the world’s leading democracy, will be particularly intense, for the simple reason that social spending will always have many highly-motivated lobbyists – those who receive benefits – working on its behalf.
The events of recent months have made this painfully obvious. Alone among the major departments, and after an epic spending blowout on social programs, defense has been targeted for cuts. One recent survey of public opinion found that cutting defense spending receives the support of about half the American people: only scaling back foreign aid and cutting the IRS’s budget is substantially more popular.
While foreign aid should be cut, and the IRS is understandably unpopular, the fact is neither defense, foreign aid, nor the budget of the IRS places an unsustainable burden on the American economy. The public support and political enthusiasm for targeting them is a reflection of the choices that America’s declining economic freedom is beginning to force. Unless America returns to the path of economic freedom, these choices will only get harder in the years to come.
What the United States Must Do
When asked why he robbed banks, Willie Sutton said “Because that’s where the money is.” If Americans want to save money, restore their country’s economic freedom, and give the next generation a stronger economy, they need to start by understanding where the money is. After the epic debate on Obamacare in 2010, the answer should be obvious: it is in the entitlements budget.
The United States, and the American people, must recognize that defense spending is a core function of government, and that economic freedom, national security, and American leadership in the world, go hand in hand. The United States must enact policies that will reform entitlement spending and advance economic freedom at home and abroad.
Over the long run, these policies will provide the resources to allow the government to fulfill its necessary functions, the American people to improve their lives, and to sustain U.S. leadership, and to defend America, its allies, its interests, and its freedoms.
