Ron Knecht: US drops out of top 10 in key economic index
January 22, 2014
Recently, I wrote that politicians should govern in the public interest, instead of favoring "stakeholders" and other special interests. So, what's the public interest, and how are we doing?
Fully defining the public interest is beyond this column, but certainly economic growth is a primary part. Before your eyes glaze over, consider this. Robustly and continually increasing the size of the pie means that on average, our children will have more opportunities and better lives than ours; diseases once widely fatal are now prevented or cured with shots or pills; poor children get educated and get better jobs; we can afford increased safety measures and cultural amenities, etc.
We take growth and its consequences for granted, because we've experienced them for 300 years. But it wasn't always so, and thus centuries ago people had much lower expectations. So, what determines economic growth?
Economists have researched the keys to it, moving beyond the simplistic mid-20th century focus on infrastructure and industries that motivated old infatuation with central planning, command and control (progressivism, socialism, communism). Today, they understand that the keys are economic, political and social institutions, practices and policies.
The good news: Not only is our understanding of how freedom causes growth improving, but economic freedom has for decades increased worldwide. The bad news: Except in the U.S., where seven straight years of decline atop decades of government excess have seriously darkened our future.
Economic freedom can be measured, as shown by the annual Economic Freedom of the World (EFW) index published by The Wall Street Journal and Heritage Foundation. According to an article in the peer-reviewed academic journal Contemporary Economic Policy, the EFW originated from six meetings in 1986-96 of "a veritable Who's Who of classical-liberal scholars" including Milton Friedman.
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The EFW index emphasizes the importance of classical liberal principles including government fiscal soundness; private-property protections; the rule of law; a limited role and size for government; and business, investment, financial and labor freedom. As the article summarizes:
"Of 402 [academic] articles citing the EFW index, 198 used the index as an independent variable in an empirical study. Over two-thirds of these studies found economic freedom to correspond to a 'good' outcome such as faster (long-term) economic growth, better living standards, more happiness, etc. Less than 4 percent of the sample found economic freedom to be associated with a 'bad' outcome such as increased income inequality. The balance of the evidence is overwhelming that economic freedom corresponds with a wide variety of positive outcomes and almost no negative trade-offs."
Another article found that lower unemployment and higher labor-force participation correspond to increased state-level economic freedom. A third showed that states using "redistribution" to address economic inequality may fall into a "vicious circle of high-income inequality and heavy redistribution."
It's tragic that, as 114 nations improved their EFW scores last year and 43 reached new highs, the U.S. has dropped from the top 10 for the first time. The policies of Barack Obama, Harry Reid and other statists are causing economic stagnation, low employment and deteriorating social conditions. They're badly damaging the public interest.
Ron Knecht is an economist, law school graduate and Nevada higher education regent.