Inertia Wins!

Non-economists tend to be much more skeptical about economic freedom than economists are. This in itself is a powerful case for free markets. But empirical data present a far richer and more compelling argument in favor of freedom. That’s why I look forward each year to the release of an updated edition of the Economic Freedom of the World report, jointly published by our friends at the Cato Institute and the Vancouver-based Fraser Institute, with help from more than 30 think tanks around the world.

The report is nothing if not thorough. James Gwartney, Robert Lawson, Joshua Hall, and a small army of contributors assemble data on 144 countries, ranging from regulatory burdens to property rights protections to the amount of corruption. In all, each country is measured on 42 variables. Then each country is given a score from 1 to 10. The freer the economy, the higher the score.

If economic freedom had no bearing on wealth creation, then plotting the scores against per capita GDP would show no distinct pattern. It would be a random blob. What the data actually show is anything but random. As it turns out, poor countries all have something in common: little economic freedom. Countries in the bottom quartile of economic freedom have an average per capita GDP of $5,188. They are clustered in the lower left hand side of our graph.

Rich countries all have something in common, too. They have high scores. Countries in the top quartile of economic freedom have an average per capita GDP of $37,691. That extra freedom results in a seven-fold increase in wealth. If you value human well-being, economic freedom is extremely important. People can only prosper if they’re allowed to.

If that seven-fold difference in living standards doesn’t move you at least a little bit at the margin in favor of free markets, you probably have a hard head, a cold heart, or both. It is the difference between modern sanitation and open sewers. It is the difference between having respectable medical care and not. It is the difference between subsistence farming and an industrial/service-based economy.

Gwartney, et al have been putting out Economic Freedom of the World reports since 1996, so by now they some good long-run data. The trends are encouraging on one front: worldwide, economic freedom has been on the rise for some time. In 1980, the global average score was 5.30. By 2010, it rose to 6.83. Eastern Europe, especially the Baltic region, and southeast Asia have been the biggest stars. The world’s two freest economies are Hong Kong (8.90) and Singapore (8.69).

China (6.16) and India (6.42) are slowly moving in the direction of economic freedom – neither is there yet – and as a result, hundreds of millions of people have already been lifted out of poverty. Liberalization is the most effective anti-poverty program the world has ever seen. More would be nice.

Domestically, the situation is less encouraging. Presidents Bush and Obama have sharply increased spending and regulation over the last decade, and have worsened the government’s already poor financial health. The result is that the world’s second freest economy in 2000 fell to 18^th in 2010, the latest year for which data is available. America’s score has fallen from 8.65 in 2000 to 7.70 in 2010. It is the first time the U.S. has been outside of the top ten.

The Bush-Obama years have been very bad for economic freedom. There is a lot of regulatory excess to roll back, and a lot of debt to pay off. It will take time to undo all the damage, but it can be done. Perhaps the U.S. can look to the examples set by economically freer countries such as Canada, the UK, Finland, and, surprisingly, Qatar.