Economic Freedom and Economic Growth

 

I have written several posts recently, here and here, about America’s current very slow rate of economic growth.  In fact:

  • From 1970 – 2000 our economy grew on average at the rate of 3.5%.
  • Since 2000 it has grown at only half this rate, 1.76% annually.Capture4

The economics journalist, Gene Epstein, writing in Barron’s, “The Real Reason Behind Slowing U.S. Growth,” points out the very strong correlation between our rate of GDP growth and the Fraser Institute’s Index of Economic Freedom in the U.S. This index is based on ratings in the five categories:

  • Size of Government.
  • Legal System and Security of Property Rights.
  • Soundness of Money.
  • Freedom to Trade Internationally.
  • Regulation of Credit, Labor and Business.

    Capture5

As shown in the chart above, the biggest reductions have occurred in the (2nd) Legal System, (4th) International Trade and (5th) Regulation areas.  Examples of freedom declines in the Legal System area are:

  • Judicial Independence: political interference in the bankruptcy proceedings of GM and Chrysler.
  • Impartial Courts: expanded use of Foreign Intelligence Surveillance Courts (FISA) where government requests are rubber stamped.
  • Property Rights: eminent domain made easier by the Supreme Court’s Kelo vs City of New London decision in 2005. The expanded use of civil asset forfeiture.
  • Military Interference in the Political Process: local police officers using excess military equipment.

According to the Fraser Institute, ”The effects of the Reagan and Thatcher political revolutions … led to increases in economic freedom and convergence among OECD nations. The so-called Washington Consensus of lower taxes, lower trade barriers, privatization and deregulation is quite evident in the data in the EF index.  The last decade has not been as kind to the cause of economic freedom.”
Such a huge correlation between the rise and decline of economic freedom and the concurrent rise and decline of economic growth is unlikely to be a coincidence.  Government policies strongly effect economic growth.  To ignore this self-evident truth is to invite economic decline.

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2 thoughts on “Economic Freedom and Economic Growth

  1. Jack,
    I am not very good when it comes to statistics, so I need help to figure out the numbers of people who actually have gained and lost in what characteristics of freedom. Is the chart to determine economic freedom to be in business or to start up a business? I make a distinction between freedom to and freedom from. For instance to be free from hunger, from worrying about having a home or shelter, and free from fear of not having enough money for the week are some of my concerns for the general lot of people. On the other hand, is the voter encouraged and facilitated to vote? Who has and who does not have some level of job security? What are the options for different classes of people when it comes to access to legal counsel? Do those different levels cited show improvements largely for which groups?

    We seem to be moving more and more in the direction of each person contracting with a company rather than establishing any kind of job security, i.e. private transportation in cities. I also am troubled with what distinctions we are trying to secure for private industry and for governmental services. Are there clear divisions between public services and private enterprise?

    As you know I am most troubled with a society with excessive selfishness and little selflessness for the less fortunate.

    • The above chart above has to do strictly with freedom to rather than freedom from, using your expressions, freedom to be in business and freedom to start up a business. These are the freedoms which increase economic growth.
      The other freedoms you refer to, freedoms from, fall under the category of social welfare. The stronger our overall economy is, the more resources we will be able to devote to helping those who are less fortunate.

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