Losing Ground

United States behind Mauritius and Qatar in survey of worldwide economic freedom

AP Images
September 24, 2012

The United States ranked 18th in a recent study on worldwide economic freedom, falling behind countries such as Finland, Chile, Mauritius, and Qatar.

The annual Economic Freedom of the World report examined data from 144 countries, considering 42 different variables to determine the degree to which a given country is 'economically free."

Variables included size of government, legal systems, property rights, free trade, and market regulation. The countries were then rated and ranked accordingly.

After decades of being ranked among the world’s freest economies, according to the report, the U.S. has steadily declined from 3rd in 2000 to 8th in 2005 to 18th in 2010, the most recent year for which complete statistics are available.

'The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a remarkable plunge in economic freedom during the past decade," the report said.

The country’s declining rank should come as no surprise given President Barack Obama’s policies over the past several years, experts said.

'There is a clear, direct line between Obama's policies and the decline in ranking," said Douglas Holtz-Eakin, a former White House budget director and president of the American Action Forum. 'High debt and deficits, the regulatory burden. This administration is not committed to economic freedoms, and it’s troubling that we've declined because we’re losing our competitive edge."

Yuval Levin, Hertog Fellow at the Ethics and Public Policy Center, concurred.

The decline of economic freedom in America is reflective of the Obama administration’s 'general attitude toward the economy, a crony capitalism that prefers big players over small players and stifles competition," Levin said.

Other countries experiencing a marked decline in economic freedom include Venezuela and Zimbabwe, which are currently ruled by authoritarian regimes.

The United States’ ratings have dropped in four of the five major variables considered: legal system and property rights protection, size of government, free trade, and regulation. The reports cited several reasons for the decline in U.S. economic freedom.

Developments such as 'the increased use of eminent domain to transfer property to powerful political interests" and 'the violation of the property rights of bondholders in the bailout of automobile companies" have 'weakened the United States’ tradition of the rule of law," the report found.

The U.S. ranked 33rd in the legal system and property rights category, behind Estonia, Botswana, and Kuwait, among others.

Size of government has increased due to higher consumption and spending levels and increased government transfers and subsidies.

Federal spending as a percentage of gross domestic product (GDP) under Obama is projected to reach 22.8 percent over the next decade, a full three points higher than the historical average since World War II.

Spending on welfare programs increased 90 percent between 2000 and 2010, according to a Heritage Foundation report. A record of nearly 47 million Americans received food stamp assistance as of June 2012.

The U.S. ranked 61st in size of government, behind countries such as Uganda, Egypt, and Russia, according to the report.

The country’s overall economic freedom rating has declined from 8.65 (out of 10) in 2000 to 7.70 in 2010. The report notes that studies indicate such a decline 'is associated with a reduction in the long-term growth of GDP of between 1.0 and 1.5 percentage points annually.

'This implies that, unless policies undermining economic freedom are reversed, the future annual growth of the US economy will be half its historical average of 3 percent," the report states.

The economy grew at an average annual rate of 3.4 percent between 1981 and 2000, but in the following decade grew just 1.6 percent per year on average.

'Growth is poor, government finances are a mess, the public sector is sclerotic and bloated, the private sector is hampered by regulations and unpredictability, an anti-competitive tax system—it shouldn’t come as a surprise," said Levin.

On the tax front, the United States recently acquired the dubious honor of having the highest corporate tax rate in the world, at nearly 40 percent.

Whereas countries such as Sweden and Canada, generally thought to be more socialist in nature, have in the past year cut their corporate tax rates to 22 percent and 15 percent, respectively, the Obama administration has made no serious effort to reform the U.S. tax code.

The U.S. is less competitive as a result.

The president has also failed to take significant action to address the country’s mounting debt burden—currently at $16 trillion and counting, with annual budget deficits exceeding $1 trillion for the past four years.

Obama has fallen well short of his promise to cut the national deficit in half by the end of his first term, critics observe.

The president’s inability to cut a budget deal with House Republicans in 2011 led to Standard & Poor’s decision to downgrade the country’s AAA credit rating. The rating firm Egan-Jones recently announced a similar credit downgrade.

Reining in the national debt and deficit, Holtz-Eakin said, is 'the number one thing" the United States can do to improve competitiveness and economic freedom.

Navy Adm. Mike Mullen, former chairman of the Joint Chiefs of Staff, has described the country’s massive debt burden as 'the single biggest threat to our national security."

Americans are working fewer hours for less pay, and median incomes are falling, as is household net worth; poverty rates remain at record highs. U.S. manufacturing recently suffered its worst quarter in three years.

Unemployment has been above 8 percent for 43 straight months, and the labor force participation rate is at its lowest level since September 1981.

Americans are qualifying for food stamps and other federal subsidies at a faster rate than the economy is creating jobs.

One particularly worrisome economic trend is the collapse of startup businesses, which typically account for the vast majority of jobs created in the U.S. economy. A recent study by Tim Kane, chief economist at Hudson Institute, found that far fewer startup firms are being created under Obama than under the past three presidents.

The number of new establishments fell from 670,000 in 2006 to 500,000 in 2010, Kane found. New firms created about 2.5 million jobs in 2010 and 2011, significantly less than the historical average of 3 million since 1977.

The rate of startup job creation during those two years is the lowest on record, according to the study.

A likely reason for the decline, Kane noted, was the fact that 'the U.S. policy environment has become inadvertently hostile to entrepreneurial employment."

Higher taxes and tax uncertainty were 'inhibiting" factors, he wrote, but perhaps the most significant impediment to startup creation is the Obama administration’s regulatory regime.

That includes the sweeping changes mandated by the Affordable Care Act, which a recent report from the Competitive Enterprise Institute concluded will cost American taxpayers and business almost $2 trillion a year, or more than 20 times the administration’s own estimates.

Since 2009, Kane added, the Internal Revenue Service has been cracking down on domestic employers that hire independent contractors in order to avoid paying mandatory benefits, while simultaneously encouraging the practice when it comes to foreign contractors—a policy that 'may be pushing jobs overseas."

The net effect has been to seriously constrain economic growth, what many considered to be the most urgent need in this sluggish recovery.

'The problem is lack of economic growth, and Obama is neither interested in that nor promising to do anything about it," Levin said. 'We can't tax our way out of this hole, we can’t spend our way out of it or regulate out of it. We can only grow out of it."

'Growth is a philosophy, it's not a bill or law," said Holtz-Eakin. 'The Obama administration made the mistake of thinking it’s a bill, and passed a stimulus package thinking that would solve the problem. And the president has not said anything in particular he would do in a second term that is different from his first term."