Is the United States losing its luster as a bastion of economic freedom? The answer is an unqualified yes, according to the Heritage Foundation, which puts out an annual index of such things as tax burden, size of government and regulation.
In the foundation’s 2012 Index of Economic Freedom, the U.S. fell from ninth to tenth place. In 2010 the U.S. lost its position as one of the freest countries in the world economically, the right-leaning foundation says.
Terry Miller, who runs the project for the Heritage Foundation, says the biggest reason for the U.S. decline was the “massive increase in government spending,” that took place in the last year. He says Washington’s share of GDP rose to 25 percent from about 20 percent three years ago.
Miller maintains that an additional reason for the fall from grace was the increase in the government debt, now standing at $15.2 trillion. The fact that this was the result of deficit spending on a recession and two wars is immaterial to the index, Miller says, which counts only raw data.
Another strike against the U.S. was the regulatory burden imposed by the Obama healthcare bill and the Dodd-Frank financial regulation act, both of which were opposed by U.S. businesses. Dodd-Frank contains 2,000 pages of regulations for financial firms.
“They have increased the regulatory burden and uncertainty,” Miller says. The bailout of various auto companies and financial firms “undermines investor confidence” in the United States, he adds.
The Heritage Foundation says there is a direct link between economic freedom and the level of unemployment in a country. “People don’t know what labor is going to cost in the future because of uncertainty over the healthcare bill,” Miller says. “They also don’t know what credit is going to cost in the future because of uncertainty on the financial side, which makes it very difficult to plan an investment where you are expecting a return several years down the pike.”
Of course, not everyone agrees with the Heritage assessment of the U.S. economy. The cost of credit is now at historic lows. The Obama bailout of Detroit saved thousands of jobs, rather than hurt the economy, critics argue.
“This is just a political axe to grind,” says Dean Baker, co-director of the left-leaning Center for Economic and Policy Research in Washington. “It’s well known that the smaller the deficit, the higher the unemployment rate would be. There’s a lot of research on that.” Baker says the Obama healthcare bill has not taken effect yet, but when it does “it’s a little hard to see how that’s an infringement on economic freedom.”
The Heritage Foundation maintains that places like Hong Kong, Singapore and Mauritius — a tiny island in the Pacific — are the world’s freest economically and even rose in their top 10 rankings this year.
Miller says he was pleasantly surprised that Hong Kong, still No. 1, has maintained the rule of law despite the handover from British rule to China in 1997. “I was very much the pessimist when the handover took place, but I think they’ve done very well in maintaining a separate system and they have low tax rates and a very high level of business freedom there,” he said.
On Singapore, No. 2, Miller acknowledged that it is a country “where the government controls an awful lot of the capital. They own a lot of property and real estate and there are many aspects of Singapore that I would not characterize as free — I certainly wouldn’t characterize their political system as free.”
He said Singapore moved up in the rankings because it has recently liberalized its banking rules. But Indonesia recently complained that its banks had a hard time opening offices in Singapore while Singaporean banks were free to operate in Indonesia.
The big winner on the list was Mauritius, now No. 8, which the report described as the first sub-Saharan African country to make the top ten list. That will no doubt come as a surprise in the capital of Port Louis, some 600 miles off the African coast. Mauritius is a tourist isle with 1 million in population and a GDP of $10 billion.
“I think it’s good for symbolic value to have an African country that is scoring very well,” Miller says. “Botswana is also doing well, South Africa not so well, and I worry about that place.”
