Economic Development

U.S. ranking falls to 11th in economic freedom index

March 4, 2016
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An international ranking found economic freedom in the “Land of the Free” is on the decline again.

In the most recent Index of Economic Freedom, published by The Heritage Foundation in partnership with The Wall Street Journal, the United States fell to 11th place to match its “worst score ever.”

For the past two decades, the Index of Economic Freedom has tracked macroeconomic data and ranked countries across the globe based on 10 quantitative and qualitative factors in four categories of economic freedom: rule of law, limited government, regulatory efficiency and open markets.

Now in its 22nd edition, the 2016 index scores 178 countries based on averaging the economic indicators: property rights and freedom from corruption; government spending and fiscal freedom; business, labor and monetary freedom regulations; and trade, investment and financial freedoms in open markets.

Ambassador Terry Miller, director of Heritage’s Center for Trade and Economics, and Center for Data Analysis, said the countries are ranked on a variety of factors that relate to the economic freedom that individuals enjoy.

“We are looking at things like the relationship to government and the individual; we are looking at the rule of law; and we are looking at openness for trade and investment flows,” said Miller. “We score each country independently in all 10 factors and then average those together to get a total score.”

While the good news is economic freedom has been on the rise across the globe for the past 22 years, Miller said the bad news is the U.S. has been declining.

“In eight of the past 10 years, the U.S. has lost ground. We are no longer considered a free economy,” said Miller. “We dropped out of the top 10 in the index, so the recent trend is not good for America.”

For 2016, the U.S. had an Economic Freedom score of 75.4 points, which was down 0.8 points from the previous year. While it is considered “mostly free,” the country placed 11th internationally and second for North America.

Tim Nash, senior vice president of corporate and strategic alliances at Northwood University, said the decline speaks to the U.S. as a whole.

“It has become more difficult for business to operate in Michigan and in the United States,” said Nash. “There are only so many things that the state and local government can do.”

While the three indicators of trade, investment and financial freedom for open markets were considered a notable success for the country, the Index of Economic Freedom highlighted management of public finance and rule of law as concerns.

“The kinds of factors that have driven down scores in the U.S. are pretty clear. For example, we have seen things like the (Troubled Asset Relief Program), the stimulus spending, Obamacare and the Dodd-Frank regulatory bill,” said Miller. “All of these have put burdens in the path of entrepreneurs and hurt our job growth.”

Since 2009, more than 180 new major federal regulations have been introduced in the U.S. with an estimated annual cost of about $80 billion, according to the 2016 index. While labor regulations “are not rigid,” other policy initiatives such as occupational licensing can restrict employment growth opportunities.

“The government policies that created so much uncertainty — primarily regulatory uncertainty, but also tax uncertainty — what we measure is there is about 6 million missing jobs in the economy from what we would normally expect,” said Miller. “I think it is absolutely reasonable companies that face an uncertain regulatory environment are not going to be in a position to expand, they are not going to be in a position to invest, and they are not going to be in a position to create jobs.”

Nash said although Gov. Rick Snyder has tried to streamline state-based regulations for businesses, a “majority of regulations that businesses in Michigan face come from the federal government.”

“We have a national debt that is approaching $19 trillion. If we can’t get spending under control, we can’t balance our budget and then begin to lower our national debt,” said Nash. “The United States has to get its fiscal house in order.”

In the U.S., the top income tax rate for individuals is 39.6 percent and corporate tax remains “among the world’s highest” at 35 percent, according to the index. The overall tax burden is 25.4 percent of total domestic freedom, while total government spending is approaching 39 percent of GDP.

“The U.S. corporate tax rate is now the highest among developed economies around the world. We are just not competitive, at all,” said Miller. “We are losing jobs in the United States as a result of this high corporate tax rate.”

Miller said there seems to be an idea in the country that the business community is causing the problems.

“I think that is exactly backward. We would say it is, in fact, the government that has caused the problems, and what we need to do is liberate the business community,” said Miller. “If we do that, the market is perfectly capable of creating new business opportunities, new jobs and greater prosperity for all Americans.”

In comparison to America’s 11th place, Hong Kong placed No. 1 for both its global and regional ranking with an overall score of 88.6 points; Singapore placed second for its global ranking with an overall score of 87.8 points; and Canada was ranked sixth globally with a score of 78.0 points.

Hong Kong’s notable successes included trade, investment and financial freedom for open markets; and business, labor and monetary freedom for regulatory efficiency.

Miller said the reason economic freedom is significant is based not only on its relationship to economic factors such as higher per capita income and higher growth rates, but also a correlation with positive social outcomes like reducing poverty rates worldwide.

“You have the basic building blocks of prosperity there, but when you look beyond the money there are a lot of really good social outcomes that happen, as well,” said Miller. “Countries with higher levels of economic freedom have better health care, they do a better job of education their kids, and they even do a better job protecting the environment.”

The Index of Economic Freedom has two main audiences: policymakers on Capitol Hill and policymakers in foreign governments. Miller said there is also a very high level of interest from heads of government, foreign finance ministers, and foreign ministers who are interested in ways to improve their score.

“It doesn’t matter what region we are looking at, and some of the best scores in our index come from every region in the world,” said Miller. “There is universal applicability.”

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