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February 2012 - Volume 20, Number 1

   

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The United States Economic Freedom Ranking 2012

by The Heritage Foundation and The Wall Street Journal

 

For over a decade, The Wall Street Journal and The Heritage Foundation have tracked the march of economic freedom around the world with the influential Index of Economic Freedom. Economist Adam Smith formed this theory in his influential work, The Wealth of Nations, in 1776. In 2012, his theory is measured – and proven – in the Index of Economic Freedom, an annual guide published by The Wall Street Journal and The Heritage Foundation, Washington’s No. 1 think tank.

 

Since 1995, the Index has brought Smith’s theories about liberty, prosperity, and economic freedom to life by creating ten benchmarks that gauge the economic success of countries around the world. The Index of Economic Freedom allows us to see how 18th century theories on prosperity and economic freedom are realities in the 21st century. The Index covers 10 freedoms – from property rights to entrepreneurship.

 

The Index evaluates countries in four broad areas of economic freedom: rule of law; regulatory efficiency; limited government; and open markets. Based on its aggregate score, each of 179 countries was classified as “free” (i.e. combined scores of 80 or higher); “mostly free” (70-79.9); “moderately free” (60-69.9); “mostly unfree” (50-59.9); or “repressed” (under 50).

 

Sharp increases in government spending and more costly regulations contributed to continuing decline in the United States’ ranking in 2012. A growing sense that policymakers put special interests above the public interest also was a factor. It was the fourth straight year of decline on the Index for the United States. As recently as 2008, the U.S. ranked seventh worldwide, earned a score of 81 and was considered a “free” economy. Today, the U.S. is only a “mostly free” economy, placing it in the Index’s second-highest category.

 

For the 18th straight year, the Index ranked Hong Kong as the world’s freest economy. Its score of 89.9, a slight improvement over 2011, was enough to outdistance runner-up Singapore by more than two points. Australia, New Zealand, Switzerland, Canada, Chile, Mauritius, and Ireland also were ranked above the United States. However, the United States continues to score far above the world average of 59.5 and the regional average of 73.8. It remains in second place among the three countries in the North America region – ahead of Mexico but behind Canada.

United States Score 2012


The United States’ economic freedom score of 76.3, on a 0 – 100 scale, drops it to 10th place among 179 countries. Its score is 1.5 points lower than last year, reflecting deteriorating scores for government spending, freedom from corruption, and investment freedom.

 

The U.S. economy faces enormous challenges. Although the foundations of economic freedom remain strong, recent government interventions have eroded limits on government, and public spending by all levels of government now exceeds one-third of total domestic output. The regulatory burden on business continues to increase rapidly, and heightened uncertainty further increases regulations’ negative impact. Fading confidence in the government’s determination to promote or even sustain open markets has discouraged entrepreneurship and dynamic investment within the private sector.

 

Restoring the U.S. economy to the status of a “free” economy will require significant policy changes to reduce the size of government, overhaul the tax system, and transform costly entitlement programs. By boosting growth in the private sector, such freedom-enhancing policies are the best hope for bringing down high unemployment rates and reducing public debt to manageable levels.

 

Background


The U.S. economy, the world’s largest, has not recovered fully from the 2008 financial crisis and ensuing recession. Under Democrat President Barack Obama, the federal system of government, designed to reserve significant powers to the state and local levels, has been strained by the national government’s rapid expansion. Spending at the national level rose to over 25 percent of GDP in 2010, and gross public debt surpassed 100 percent of GDP in 2011. A 2010 health-care bill that greatly expanded the central government’s reach has been under challenge in the courts, and the Dodd–Frank financial overhaul bill has roiled credit markets. Although the election of a Republican Party majority in the House of Representatives in late 2010 slowed spending growth, divided government has left U.S. economic policy in flux.

 

The U.S. drop of 1.5 points fueled a regional decrease for North America of 1.3 points, the largest decline among six regions in the world. North America also was the only region in which every country registered a decline in economic freedom. Canada slipped from “free” into the “mostly free” category, and Mexico lost ground in six of 10 measures.

 

The Index’s editors attributed about half the U.S. decline to increases in government spending and another third to the explosive growth of intrusive regulations, particularly in health care and finance.

 

Rule of Law


Property rights are guaranteed, and the judiciary functions independently and predictably. Worrisome, however, is the four tenths of a point drop in the category of freedom from corruption. This stems from both the growing perception of corruption in government bailouts of troubled industries, including automakers and investment houses, and regulatory exemptions granted to politically well-connected companies and special-interest groups. More than 1,100 companies won exemptions from provisions of the Patient Protection and Affordable Care Act, President Obama’s signature health-care legislation.

 

Serious constitutional questions related to government-mandated health insurance have been under consideration in the courts. Corruption is a growing concern as the cronyism and economic rent-seeking associated with the growth of government have undermined institutional integrity.

 

Limited Government


In the absence of comprehensive tax reforms, the top individual and corporate tax rates remain at 35 percent. Other taxes include a capital gains tax and excise taxes, with the overall tax burden amounting to 24 percent of total domestic income. This tax structure – which leans heavily on taxes on capital and investment that restrict growth – contributed to the falling scores.

 

Government expenditures have grown to 42.2 percent of GDP, and the budget deficit is close to 10 percent of GDP. Total public debt is now larger than the size of the economy. The United States now ranks 127th in the world in government spending.

 

Regulatory Efficiency

 

Business start-up procedures are efficient, and the labor market remains flexible. However, over 70 new major regulations have been imposed since early 2009, with annual costs of more than $38 billion. There were only six major deregulatory actions during that time, with reported savings of just $1.5 billion. Although inflation is under control, price distortions caused by government interventions persist.

 

Open Markets


The trade weighted average tariff rate is 1.8 percent, with non-tariff barriers such as “buy American” procurement rules adding to the cost of trade. Investment freedom is hampered by ongoing protectionist restrictions. The impact of the recently passed financial reform bills has yet to be measured, as detailed regulations are gradually emerging. However, they are likely to increase compliance costs, complicating the banking sector’s recovery.

 

The following table outlines the sub-category scores for the United States in 2012.

 

U.S. Economic Freedom

 

Article compiled from information from The Heritage Foundation, <http://www.heritage.org/index/press-release-North-America>, <http://www.heritage.org/Index/country/UnitedStates> accessed on January 25, 2012. Reprinted with their permission, granted January 26, 2012.

 

IOWA ECONOMIC SCORECARD is our quarterly economic forecast, arriving in February, May, August,
and November. It consists of statistics about and analysis of the Iowa economy.

 

IOWA ECONOMIC SCORECARD is published by Public Interest Institute at Iowa Wesleyan College, a
nonpartisan, nonprofit, research and educational institute whose activities are supported by contributions from private individuals, corporations, companies, and foundations. The Institute does not accept government grants.

 

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