Sunday, December 16, 2012

Economic Freedom

This past September, the Fraser Institute released it's 2012 Economic Freedom of the World report.  The annual report is an index of nations ranked from most free to least which is constructed by using over 40 variables in five broad areas: (1) size of government: expenditures, taxes, and enterprises; (2) legal structure and security of property rights; (3) access to sound money; (4) freedom to trade internationally; and (5) regulation of credit, labor and business.  The 2012 report uses data from 2010 and includes 144 nations.

Though the United States has long been considered a model of economic freedom, it has experienced a considerable decline in recent years.  "From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980 to 2000, the chain linked EFW rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010. The chain-linked ranking of the United States has fallen precipitously from second in 2000 to eighth in 2005 and 19th in 2010 (unadjusted ranking of 18th)".1

Here is a table I created showing the ranking of the United States from 2000 to 2010.

Given that there is strong evidence to support a causal relationship between higher levels of economic freedom and economic prosperity, there is cause for concern over our decline in the rankings.  Year after year, nations ranked in the top quartile of economic freedom have consistently had higher average per-capita GDP, higher average income for the poorest 10%, higher life expectancy and higher political and civil liberties than the bottom quartile.1  Exhibits 1.7, 1.8, 1.9, 1.10, 1.11 and 1.12 are taken from the 2012 report and show the results in these four areas for 2010.1

Unfortunately I don't believe our near future outlook is good.  As both government debt and regulation continues to grow I don't foresee any improvement on next years report.

1. Fraser Institute: Economic Freedom of the World 2012

*Originally posted on 12/06/12.  Updated on 12/16/12.

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