Being “the land of the free” apparently doesn’t apply to the American economy anymore.
Being a capitalist society with free markets, complemented by the Bill of Rights and the U.S. Constitution, have made America the freest country in the world with the highest standard of living.
And yet America’s standing is slipping. The 2016 Index of Economic Freedom gives the U.S. a rating of 75.4 points out of 100—what your teacher would call a C. That’s a drop of 0.8 points from last year, which is enough to nudge the U.S. out of the top 10. But, heh, we’re way ahead of North Korea, Cuba and Iran.
Ours is not an economy in shackles yet, but the degree of freedom needed to sustain rapid growth is eroding. It was the eighth time in the past 10 years that the U.S. has lost ground. In contrast, more than half of the countries in the index—97 out of 186—improved their score this year and 32 recorded their highest level of economic freedom ever.
Hong Kong and Singapore lead the rankings with scores of 88.6 and 87.6, respectively, but the U.S. is also bested by New Zealand, Switzerland, Australia, Canada, Chile, Ireland, Estonia and the United Kingdom.
Ratings are based on 10 factors, including the size of government, regulations, degree of corruption, taxes and the openness of markets.
“The ideals of economic freedom are strongly associated with healthier societies, cleaner environments, greater per capita wealth, human development, democracy, and poverty elimination,” according to The Heritage Foundation, which conducts the survey with The Wall Street Journal.
Freedom Yields Growth
It’s no coincidence that economic growth has stagnated in the U.S. as economic freedom has eroded. Since the financial crisis ended in 2008, the U.S. economy has limped along, growing at just over 2% a year, compared with an average growth rate of 3.3% dating back to World War II. For the most recent quarter, the economy grew at a meager rate of 0.7%.
Typically, the greater the recession, the stronger the recovery that follows it. Yet, in spite of the biggest financial crisis since the Great Depression, economic growth has been more than 50% below average.
Over the past seven years, we’ve had a $700 billion economic stimulus program and seven years of zero interest rate policy (ZIRP), fueled by a historically unprecedented $3.5 trillion in bond-buying. Revolutionary advances in hydraulic fracturing have made the U.S. practically energy independent, and we’ve had technological advances such as cloud computing, big data and cognitive computing.
And yet the economy has barely budged. Why?
There are plenty of reasons.
Regulations have a cost. When Americans spend more time filling out paperwork and changing the way they do business so they can comply with regulations, productivity suffers and the cost of doing business increases. The one area where productivity is setting records is the production of new regulations.
While regulations may produce benefits for society, such as a cleaner environment, they also produces tons of paperwork and often benefit special interests. For example, does ethanol in your gas tank, required by law, really benefit the environment? Studies show it actually harms the environment.
Depending on what you include and how you count the pages, the Affordable Care Act (i.e., Obamacare) has produced anywhere from 10,000 to 20,000 pages of new regulations—and it’s not fully implemented yet, so there will be more. The Dodd-Frank Wall Street Reform and Consumer Protection Act, likewise, had produced about 15,000 pages of regulations as of 2013, and, according to American Thinker, “they’re just getting started.”
Those are just two relatively new regulations. There are plenty more.
“Since 2009 alone, the federal government has saddled American businesses with more than 180 major new regulations,” according to National Review. “The cost each year is estimated at $80 billion, although the exact fallout of missed opportunities could be greater. The combination of a byzantine tax code, predatory federal agencies like the EPA, the monetary manipulations of an unaccountable Federal Reserve, and an administration that loves to pick winners and losers (e.g., sending millions to shiny ‘green’ Solyndras while shutting down coal-fired energy plants) plunges a lot of powerful, prying—and all too often fumbling—fingers into the economic pie.”
And it could get worse.
“Nearly 4,000 regulations are squirming their way through the federal bureaucracy in the last year of Barack Obama’s presidency—many costing industry more than $100 million—in a mad dash by the White House to push through government actions affecting everything from furnaces to gun sales to Guantánamo,” according to Politico.
Taxes have an impact. At 39%, the U.S. has the highest corporate tax rate of any developed country. And that doesn’t include state taxes.
Of course, some businesses receive significant reductions in their taxes, but wouldn’t it be fairer to eliminate the deductions and credits that favor special interests and have a lower overall rate?
The U.S. is also virtually the only country that taxes corporate income when it is returned to the U.S. The result is that businesses with overseas operations are taxed twice—first in the country where the income is earned and again when the money returns to the United States.
Many American companies have reacted by moving their headquarters abroad. Johnson Controls, for example, is merging with Tyco International and the merged company will be based in Ireland, where the corporate tax rate is 12.5%.
In spite of a growing number of “inversions,” as such mergers are called, Democrats and Republicans are unlikely to agree on tax reform measures. Rather than decrease the corporate rate, President Obama and Treasury Secretary Jack Lew have sought to change regulations to punish inversions.
Government efforts to help don’t. Just as the New Deal prolonged the Great Depression, the economic stimulus, the Federal Reserve Board’s actions and other government actions have likely stifled economic recovery.
Through the massive purchase of bonds, the Fed’s quantitative easing program reduced interest rates and weakened the dollar, making American goods less expensive in foreign countries. Now, though, other countries have followed suit—and, with interest rates increasing and the dollar strengthening, American goods will be more expensive than ever in foreign countries.
For the world as a whole, trade accounts for 59.4% of gross domestic product (GDP). For the U.S., trade accounts for only 30.0% of GDP.
Debt is out of control. Global debt has increased by$57 trillion since the financial crisis. It obviously hasn’t helped stimulate the economy, as much of the world is either in a recession or close to one.
As of today, the U.S. National Debt stands at more than $18 trillion, which is 104.56% of gross domestic product (GDP). That comes out to $56,699 per U.S. citizen. Counting only taxpayers, the debt comes to $154,122 per person.
But the national debt is just part of our debt problem. As previously noted, the federal government also has unfunded liabilities to cover Medicare, Social Security and government pension obligations that by some estimates exceed $100 trillion.
Spending more than $400 billion a year just to service our debt practically ensures that our children and grandchildren won’t enjoy the same quality of life that we’ve had.
As Terry Miller wrote in The Wall Street Journal, “Given the gains elsewhere, and the continued regression in the U.S., it is no wonder that so many Americans are angry this election year. As the Index notes, they have endured a full decade in which ‘government favoritism toward entrenched interests has hurt innovation and contributed to a lackluster recovery and stagnant income growth.’”