This morning, The Heritage Foundation and The Wall Street Journal released their annual joint venture, the Index of Economic Freedom. Unlike other Economic indexes, rather on reporting on how an economy is doing at any particular point, the Index of Economic Freedom is a leading indicator. It reflects how well a nation’s economy allows for investment and expansion. This year 117 countries, mainly developing and emerging market economies, improved their Economic Freedom Index score. The United States was not one of them, it fell to 9th (out of 179) down three places from the report issued just prior to Barack Obama taking office.
The Index is computed by examining 10 different factors Business Freedom, Trade Freedom, Fiscal Freedom, Government Spending, Monetary Freedom, Investment Freedom, Financial Freedom, Property rights, Freedom from Corruption and Labor Freedom.
As you can already imagine driving the American decline was the huge increase in government spending.
Despite obvious past failures of Keynesian spending policies in countries like Japan, the U.S. government undertook a massive government spending spree designed to combat unemployment and slow economic growth. This Keynesian stimulus has proved to be an abject failure: Unemployment is still above 9 percent for a post–World War II record 20th month in a row, and economic growth has not returned as strong as the Obama Administration predicted.
The report says that government spending than any market factor, poses the greatest risk to growth potential of the United States economy. And the fact that our government is using the Keynesian spending model to unsuccessfully temper unemployment has actually prolonged the unemployment by hampering private sector investment.
The Index data show that countries with the highest levels of government spending had growth rates 4.5 points lower, on average, than countries where government spending was under control. shows that this truth applies to many other countries as well.
This report is a real eye opener and suggests that our economic future is in doubt if we don’t reverse our poor spending habits soon.
The U.S. economy faces enormous challenges. The government’s recent spending spree has led to fragile business confidence and crushing public debt. Interventionist responses to the economic slowdown have eroded economic freedom and long-term competitiveness. Drastic legislative changes in health care and financial regulations have retarded job creation and injected substantial uncertainty into business investment planning.
Ongoing regulatory changes, coupled with fading confidence in the direction of government policies, discourage entrepreneurship and dynamic investment within the private sector. Leadership and credibility in trade has been also undercut by protectionist policy stances and inaction on previously agreed free trade agreements with South Korea, Panama, and Colombia.