US slides in latest Economic Freedom Index, Canada holds on

The index served up some praise and reasons for caution. Canada remained in 5th place for the second year running on the back of light regulation, a strong legal system and property rights as well as on relatively ‘sound money’. Canada needs to do better on its free trade record however.

Last week’s presidential debate between Mitt Romney and Barack Obama could have served as a springboard for a renewed dialogue on economic freedom in the US and around the world. While Romney may have professed his enthusiasm for economic freedoms and Obama may have re-emphasized the caveats he would impose upon them, no real discussion on the matter took place.

Policy details on Medicare and taxation were aired and big numbers were thrown around, but no guiding principles on economic freedom were outlined nor strategies for enhancing them (or curbing them). Meanwhile, the discussion of what economic freedoms are and where they are headed has been taking place at the Frasier Institute. Since 1996, the institute has been publishing its Economic Freedom Index and it published its most recent report last week.

For economic nationalism chest-thumping Canadians of liberal persuasion, the index served up some praise and reasons for caution. Canada remained in 5^th place for the second year running on the back of light regulation, a strong legal system and property rights as well as on relatively ‘sound money’. Where the true north strong and free did not fare so well was in terms of free trade internationally (or inter-provincially for that matter) and also in terms of the size of government, ranking a paltry 74^th place in the latter category.

This latest edition of the report comes with some interesting if disconcerting tidbits of information regarding Canada’s biggest neighbour. The first being that the land of the free, just isn’t the home of the freest people anymore. While Hong Kong has always topped this particular list, the US’s 19^th place showing doesn’t inspire talk of freedom-loving as much as the US’s 2^nd spot finish back in 2000. Even social democratic countries like Norway, Finland and even union-loving Denmark scored higher in terms of economic freedom. Such a slide is unparalleled in the index’s history according to Fred McMahon, the index’s manager and Frasier Institute VP, who offered his thoughts on the index with the Prince Arthur Herald recently. With Dodd-Frank already on the books and Obamacare’s implementation in 2014 still very likely, the US’s slide looks like a trend which doesn’t seem at all ready to become favourable again.

Much of the American slide in rankings has been attributable to a surge in privacy-compromising legislation from the Patriot Act to more recent developments regarding regulation and the heftier size of government. The irony lies in that most of these developments commenced under a right of centre Republican administration in the U.S. while Canada’s decade-long gain in economic freedom started with a more leftward Liberal government under the Paul Martin/Jean Chretien duo. To this M. McMahon responded that throughout the world, no correlation appeared to exist between right wing or left wing administrations and economic freedom.

Another less intuitive finding revealed by the index survey is that economic freedom hasn’t much improved in the BRICS nations, while their economic performance has. To this M. McMahon responded, “Growth in those countries is spurious at best and won’t lead to a transition to Asian Tiger-styled economies”.

M. McMahon laid waste to the notion that future world growth in GDP will originate from the BRICS, as many a commentator has affirmed of late, implying that growth up till now was only based on catch up and could not be sustained long without a true transition to a market-based economy. As the BRICS recent slowdown leaves worries of a “hard landing”, such predictions seem appropriate.

While some of these contradictions of late may seem to provide Occupy Wall Streeters with ammunition to challenge the liberal free-market ideas, M. McMahon reassures us by reporting that the economic literature continues to side with the free marketers. To that end, this year’s survey came accompanied with 4 other studies, one of which reported that, while tenuous, the facts show that lower financial/banking regulation led to a lower likelihood of suffering from a banking crisis over the last four years. Some idealists may remain unimpressed and say that facts can only explain so much, giving credence to idealist who condemn factual policy making however probably isn’t much worthy of attention.

In light of the empirical reminders that the Economic Freedom Index and other studies provide our policy makers, let us hope they will adopt those policy prescriptions which have served successful economies so well: tear down trade barriers, thread carefully on regulation, keep money sound and reliable, protect private property rights and obviously shrink the government size.

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US slides in latest Economic Freedom Index, Canada holds on

by Erik Scanlon

12 October 2012