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Converging Points: Economic Freedom

September 20, 2022

Since first being published in November 2020, When Free to Choose has become a monthly habit for people who seek a substantive, thoughtful examination of the principles of liberty. Northwood University is proud to provide this forum, and we are announcing a new feature, Converging Points. This feature will present the viewpoint of a respected author on a given topic, alongside the perspective of a Northwood University faculty, staff, supporter or student. It provides an opportunity to understand how our views converge with others, and why it is so vital that we continue to stand steadfast in the defense of liberty. Our first two essays provide perspective on economic freedom.

Economic Freedom Falls in the United States, Global Report Shows

By Peter Jacobsen

Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics. This piece originally was posted by the Foundation for Economic Freedom.

The Fraser Institute’s 2022 Economic Freedom of the World Index report has been released. This year’s report covers the year 2020. The index development was led by Dr. James Gwartney in the late 1980s and early 1990s as a way of measuring economic freedom in each country.

Countries are rated on the basis of several categories and are put in four groups (quartiles) ranging from “most free” to “least free.”

The index calculates the score every year since 2000, and in five-year intervals as far back as 1970. The index rates 165 jurisdictions in the most recent report.

The report on the year 2020 is bad news for lovers of freedom in the United States. The US fell in the rankings from the 6th freest country economically to the 7th. And while that fall represents only falling by one rank, the actual decline in economic freedom is quite large.

Measuring Economic Freedom

To understand why economic freedom is falling in the US, we need to consider how the index authors measure economic freedom. They do this by considering five categories. (Readers interested in a detailed methodology can check out the Fraser website.)

1. Size of Government

The first category is the size of government. The logic is straightforward—the more resources which are controlled by government, the less individuals can access resources freely. The category measures the size of government by looking at government taxes, spending, and the amount of industry controlled by government, among other things.

In this category, the US declined in freedom. The index measures each category from 1 to 10. Getting a score of 10 means your country is the freest possible for that measure. In other words, a “10” in the size of government category would mean you have a relatively small government. A “1” would mean the government spends and taxes at very high levels.

In this category, the US fell from a score of 7.32 to 6.79. This is a decline of over half a point which is very significant for a 10-point scale. The government increased in size significantly from 2019 to 2020 due, in part, to massive spending increases.

2. Legal System and Property Rights

Central to economic freedom is the ability of individuals to rely on courts for impartial decisions relating to property disputes. The extent to which government can enforce property rights and contracts in an unbiased manner is key to economic freedom.

So how did the US fare here? Over one year, the US didn’t have much change. The score for the legal system fell slightly, from 7.64 to 7.56.

3. Access to Sound Money

The authors of the index recognize a key aspect of property rights is access to a currency that enables exchange. When government prevents access to solid currencies and engages in policies that cause the value of a national currency to fluctuate wildly, they are hampering access to sound money and impeding mutually beneficial exchange.

The authors measure money supply changes, inflation variables, and access to foreign currencies

The US is historically very high on this measure. The fact that the US dollar is the world’s reserve currency should tell us something about its soundness. In 2020 the sound money score fell from 9.75 to 9.63.

This may seem like a small change, but readers should note that this score is for 2020—before massive inflation began. The rapid expansion of the US currency started in 2020 but didn’t conclude until March 2022. So while this decrease is certainly picking up some of the currency expansion of 2020, the high inflation we’re experiencing and continued money-printing in 2021 won’t be factored in until future years.

One last thing of note is that even though this seems like a small decrease, the sound money score for the US hasn’t been this low since 2009, the beginning of the financial crisis.

4. Freedom to Trade Internationally

Economic Freedom includes the ability to voluntarily exchange your property with whoever you want—regardless of national borders. The well-being gains which spring from specialization enabled by international trade have long been recognized by economists.

Tariffs, quotas, and other restrictions on international trade are considered in this category. Again, the US saw a slight decline in economic freedom here, with the score falling from 7.83 to 7.77.

Although slight, this decline is part of a much larger and protracted trend in which the US has declined from a score of 8.81 in 2000.

5. Regulation

The last category of the index is regulation. Regulatory labor laws, restrictions on capital mobility (such as investing), and cumbersome licensing laws are a barrier to a truly free market. Laws that make certain contracts illegal because of their terms or the alleged qualifications of the participants are barriers to voluntary trade.

This category, like the size of government category, is where the US took a nosedive. From 2019 to 2020, the US fell from a score of 8.68 to 8.11. This sharp decline, over half a point, represents a massive increase in regulations.

In fact, this is the largest one-year increase in regulations in the US in this century, according to the Economic Freedom Index rankings.

The fact that the US became so much less free in the areas of “size of government” and “regulation” in 2020 should be no surprise. The rollout of massive COVID-19 spending policies and government interference in industry throughout 2020 represented a large growth of government that future taxpayers will feel for years to come.

At the same time, business regulations increased as the government attempted to use its power to stop COVID.

The author of the index, Dr. Gwartney, put it succinctly in saying, “people will continue to debate the appropriateness of the pandemic policies, but there is no question that they reduced economic freedom. The danger now is that many of these policies will remain in place in the future.”

Why Economic Freedom?

A critical reader might wonder why this matters. What’s the big deal if economic freedom falls?

Theoretically, the argument for freedom is clear. When people are free to own and exchange property, they work to improve the value of their property. Allowing for exchange enables individuals to trade things they value less for things they value more.

There’s much to be said for why free markets are good in theory, but the Economic Freedom Index also makes the point that freer countries do better in practice. In other words, the theory works.

The authors find consistently that the “most free” countries are wealthier, live longer, have more civil rights, and are more literate. Furthermore, the poorest in the most economically free countries are richer than the poorest in less free countries. In other words, economic freedom isn’t just good for the rich.

Critics may argue that the fact that the freest countries are better off on all these margins doesn’t prove that freedom is the cause, but when paired with a logically consistent theory for why economic freedom leads to economic growth, there is a very robust case that economic freedom is the cause.

Why Socialism Fails

By Alissa Butcher

Alissa Butcher

Socialism fails. Every. Single. Time. There is not one example of true socialism that has been enacted successfully, instead, it is the opposite. Capitalism is proven to be the most successful form of government and when you take that away you take away the foundation of America. Socialism destroys countries and ruins lives, whereas capitalism saves and is the cause of countries’ prosperity. Increasing government not only extends the reach of government but it crushes economies.

Socialism is defined as the full ownership of the means of production. Capitalism is based on the theory that incentives matter Perry, M. (2019, August 28). Every product or service you buy requires some form of production. Companies will then price these products and services at what they believe will make them the most profit. Under socialism, the government tries to regulate and take over the means of production. This means that the government would be taking over the companies’ job of regulating what the price of the products and services are. The profit incentive is gone, which is what makes a free market work. The government can barely run the DMV, let alone the market of the United States. They would not know how to price anything correctly and they would not care. No motive for the government, the entity that prints the money and determines the interest rates, to price goods in the best interest of the business, because again, there is no profit incentive Perry, M. (2019, August 28).

If you are not convinced yet, let me provide some evidence. Every country socialism has been introduced to has failed. Not a single socialist country has increased the state of well-being of its citizens or even helped the economy. When India gained independence in 1947 it quickly became a socialist nation. This lasted for 40 years and resulted in only hunger and poverty spread across the country. Eventually, the country looked for inspiration in economist Adam Smith, also known as the father of capitalism (Kilcoyne, M. 2018, July 26). India now has the largest middle class in the world.

Another example of socialism absolutely demolishing a nation is Spain. Jones, T. (2018, September 10) reports that the country went from a growing middle class with a budget surplus to one with disintegrating wages due to the failure of the Spanish banks. The socialists nearly doubled the country’s debt overnight by launching the most substantial stimulus package in the European Union. Looking at Biden’s America we can see first-hand the negative impact of unnecessary spending and excessive stimulus packages. In Spain, taxes were also raised and unemployment reached depression levels. The economy was obliterated. India and Spain are just a couple of the hundreds of examples of socialism ruining a country, which ultimately can be saved by capitalism.

The effects of socialism on a country are nothing short of death. According to Follett, C. (2016, October 19), “Recent reports that infants now die at a higher rate in Venezuela than in war-torn Syria were, sadly, unsurprising – the results of socialist economics are predictable.” On top of this startling statistic, infant mortality rates have continued to fall almost everywhere else and declined even faster in countries with more freedom and stability. This can be attributed to the starvation of the citizens under socialism. It is no surprise because the people do not have access to food given the lines they have to wait in for hours just to get a loaf of bread and hopefully some milk. All in all, socialism kills.

Supporters of socialism look to the Scandinavian countries for support, claiming they don’t want “repressive socialism” like in Russia or Cuba, but instead “democratic socialism” like in Sweden. However, Sweden is far from being a socialist nation. The nation did have a period where they owned the means of production, were heavily taxed, and had high government spending; causing the economy to decline. Take from Reason TV (2018, October 23), Sweden immediately cut public spending, privatized public transportation, abolished inheritance taxes, and sold state-owned businesses. The results: an impoverished nation was developed into one of the world’s richest countries. These countries truly are not socialist at all, instead their successes come from free markets. They do have higher welfare and taxes than the U.S. but when it comes to free-trade and markets, Sweden is even more free-market than the U.S. Although Sweden looks like it taxes the rich, the truth is that the people with below average income pay up to 60% in taxes. Reason TV (2018, October 23)

Critics of capitalism continue to claim that capitalists are greedy people who only care about themselves and money. We have more socialists serving in Congress than ever before. Take a look at the cars these senators drive, ranging from Cadillacs to Mercedes. It is thanks to capitalism that anyone has the potential to purchase these vehicles. With socialism, they would be the only ones who could ever have them, Turning Point USA (2020, November 27). No socialist will admit that capitalism has been the most effective way to eliminate poverty. Between 2000 and 2012 the rate of absolute poverty in the world fell by 50% Harsanyi, D (2018, July 27). We must reject any form of socialism because in all cases, with socialism comes the destruction of economies and starvation of citizens.

The direct result of capitalism is a flourishing country as opposed to a world of poverty and debt with socialism. People like Bernie Sanders are the reason that many Americans, especially young ones, are brainwashed with the fantasy of socialism being beneficial. They have the idea that socialism is just another type of government system. The truth must be put forward about capitalism, and the better life it has brought to billions of people, the diversity and freedom of choice it celebrates, and the rejection of big government that always leads to the failure of leadership.

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