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What’s gone wrong with the U.S. economy? Maybe it’s nothing more complicated than a sharp decline in economic freedom

091812fraserinstitute

When it comes to what’s gone wrong with the American economy, Barack Obama has a theory of the case.

Rather than boost economic growth, Obama has theorized, three decades of pro-market policies such as tax cuts and deregulation have done nothing more than increase income inequality on Main Street and financial instability on Wall Street. In the 2000s, those chickens finally came home to roost, culminating in the Great Recession.

Mitt Romney’s theory? I’m really not sure. But some new data from the Fraser Institute suggests a decline in economic freedom during the Bush and Obama administrations could be the problem.

– From 1981through 2000, the U.S. economy grew at an average annual rate of 3.4%, creating some 42 million jobs in the process. During that period, according to a ranking of economic freedom from the Fraser Institute, the U.S. consistently had one of the freest economies in the world, ranking 2nd or 3rd during that entire period.

– But from 2001 through 2010, the U.S economy grew at an average annual pace of just 1.6%, creating a mere 819,000 jobs. During this most recent period, according to the Fraser Institute, the United States’ freedom ranking steadily declined to 8th in 2005, 15th in 2009 and 19th in 2010. The U.S. is now nestled between Qatar and Kuwait:

The United States, long considered the standard bearer for economic freedom among large industrial nations, has experienced a substantial decline in economic freedom during the past decade. From 1980 to 2000, the United States was generally rated the third freest economy in the world, ranking behind only Hong Kong and Singapore. After increasing steadily during the period from 1980 to 2000, the … rating of the United States fell from 8.65 in 2000 to 8.21 in 2005 and 7.70 in 2010. …

While it is difficult to pinpoint the precise reason for this decline, the increased use of eminent domain to transfer property to powerful political interests … the violation of the property rights of bondholders in the bailout of automobile companies have all weakened the United States’ tradition of the rule of law. … Government consumption, transfers and subsidies, and government investment all rose during the decade, while their private-sector counterparts were lower.

The approximate one-point decline in the summary rating between 2000 and 2010 on the 10-point scale of the index may not sound like much, but scholarly work on this topic indicates that a one-point decline is associated with a reduction in the long-term growth of GDP of between 1.0 and 1.5 percentage points annually.This implies that, unless policies undermining economic freedom are reversed, the future annual growth of the US economy will be half its historic average of 3%.

Now, correlation does not prove causation. But the decline in economic freedom is a pretty good place to begin looking for a culprit for America’s recent woes.

There’s also this political point: The Obama campaign says a Romney presidency would mean a continuation of the Bush presidency.

But given this data on economic freedom, Romney could argue that the Obama presidency has been a continuation of the Bush economy — and Romneyomics would represent a reversion to the pro-market policies of the Reagan-Clinton era.

10 thoughts on “What’s gone wrong with the U.S. economy? Maybe it’s nothing more complicated than a sharp decline in economic freedom

  1. What’s gone wrong with the economy is that the SUPER rich have been skimming off the top of society too long and have accumulated enough wealth, (plus their making even more by using that wealth to MANIPULATE the stock/metals market so “common folk” get ripped of there too) that there isn’t enough money left to recirculate as the economy NEEDS. So, we need to get back that money that the SUPER rich STOLE (the billionaires who laugh at millionaires who consider themselves rich), use some of it to give back to folks such as those who lost their homes from Elite GAMBLING/bailouts, and get it recirculating, which will create more demand, more jobs to fulfill the demand, and get the economy moving

    • You might do well to ask yourself why “Thou shalt not covet” is one of the ten commandments. You would also do well to consider what happened to the wealth of the Hunt brothers when they thought they could corner the silver market in the late 70′s.

      “You cannot help the poor by destroying the rich. You cannot strengthen the weak by weakening the strong. You cannot bring about prosperity by discouraging thrift. You cannot lift the wage earner up by pulling the wage payer down. You cannot further the brotherhood of man by inciting class hatred. You cannot build character and courage by taking away people’s initiative and independence. You cannot help people permanently by doing for them, what they could and should do for themselves.” – Abraham Lincoln

      “To “take” from those who have – - simply because they do “have” – - and to “give” to those who don’t have, simply because they don’t, makes a mockery of human merit, and is destructive to human beings on both sides of the equation.” – Austin Hill

  2. What has gotten big and all-powerful is government. The rich are pikers by comparison. Government spending is equal to 40% of GDP, and the direct costs of regulation are another 10-20% of GDP. Total government spending (federal, state, local) is $6.3 trillion for 2012. On a per-household basis that’s about $55,000 each, significantly more than the median family income of about $50,000. The real answer is staring us in the face. The same big-government disease is eating up Europe – high unemployment (especially for the young), slow growth, mushrooming regulation, massive borrowing, and declining productivity.

  3. Thomas, great note. Stevor, envy is not the solution! Bob, I forgot that quote from a real President; A Lincoln. We need to fire current occupier of the WH ( the Peoples House not his house). Anyone who runs a business or just a household knows income must exceed outgo else financial ruin awaits. The problem is overspending, overregulation not Legalized theft otherwise known as Tax the rich (actually the libs really want to soak the middle class no matter the lies they tell us before the election).Vote the socialists out! Let a business man have a shot at it
    , We see what a bunch of Liberal hacks can do and what a mess we’re in.

  4. Not a bad try, but it’s actually not that difficult: the problems are 1) we had a housing bubble, created by the government and Fed Reserve, burst. House prices dropped, 2) banks had entirely too much leverage just when housing collapsed and they quickly got into trouble with declining asset values, 3) we have hemorrhaged jobs to Asia for decades. Have a look at my take on what’s gone wrong: http://gulfcoastcommentary.blogspot.com/2012/09/misleading-democratic-talking-points.html

    The solutions: 1) more domestic energy, 2) repatriate asian jobs back to America by creating tax
    incentives for businesses to repatriate capital and jobs, 3) flat or flatter income tax rates with no or few deductions, 4) utilize our new-found natural gas
    reserves for transportation fuel and displace oil imports, 5) big government spending cuts but bigger tax cuts to offset them.

  5. Wow, Obama was right. Just coming to this board, I see a comical drug addiction to tax cuts. It really is a cult of confusion so sure of itself that it truly believes the deception it sells. The snake oil salesmen have ingested the oil. Or perhaps people here think that people being slaves with no money to actually buy anything in the “free market” will somehow make the free market better? You can’t have a strong economy if you don’t have people who can BUY things.

  6. The book makes an ideological assumption that economic growth is proportional to economic freedom. It should immediately strike the author that there is something wrong. China’s economy is supposed to overtake the US economy later this year 2014.China has no economic freedom,

  7. The major problem with our economy is it isn’t our economy anymore.we import more then we export. No one wants to do business in america anymore with how many new regulations are created every year. we have major foreign corporations taking over and using or g.n.p to reinvent there’s. Companies buying into american companies just to learn the business then pulling out and making a similar product for cheaper. And also We need to further reduce the military if we cant sell military equipment then why invest so much in it. Its government run areas of our economy that are destroying us. we worry to much about image when we need to be focused on sell sell sell. No one in another country cares that a product the buy from us was made in a facility to osha,fda,ect …standards. Do we care hell no we buy buy buy no matter where it comes from. there’s got to be a exchange some where . we are losing because we made rules for ourselves no one else follows.

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