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For more freedom

How can state help economy? by David Mitchell Special to the Democrat-Gazette | September 19, 2015 at 2:53 a.m. | Updated September 19, 2015 at 2:53 a.m.

Why has the United States struggled to exit this last recession? Why are many Arkansans struggling so much? Why does the U.S. labor force participation rate continue to shrink? One big reason is that economic freedom in the U.S. is declining.

Since 1996, scholars at the Fraser Institute have been measuring the economic freedom of people in 102 countries, with data going back to 1980. This Economic Freedom of the World Index (released this week) now includes 157 countries. The index measures five broad categories and scores (out of 10) range from Hong Kong's 8.97 to Venezuela's 3.23.

The good news is that the world remains significantly more economically free than three decades ago. As large countries like China and India have become more economically free, their people have seen increased wealth. China has become much freer than India and, in doing so, has become much wealthier, even as China struggles right now.

The bad news is that the U.S. has fallen in both absolute terms and in our ranking. In 2000 we were second only to Hong Kong (which is not a country but an autonomous economic zone). Back then, America held an economic freedom rating of 8.65 compared to Hong Kong's 8.95. Now the U.S. ranks 16th in the world and our score dropped to 7.73.

The U.S. economic freedom score declined most from the previous year in terms of Size of Government, Legal System and Property Rights, and Freedom to Trade Internationally. A smaller government, better property protection, and freer international trade would improve our score and our lives.

Over 2,000 published academic journal articles show the strong relationship between economic freedom and economic growth. Places that are more economically free are also wealthier.

People in countries with the most economic freedom earn more income than in places with less freedom. Economic freedom helps more than the rich; the poorest 10 percent of the population in economically free countries significantly out-earn the poorest 10 percent of the population in countries with little economic freedom. The higher incomes also lead to longer life expectancy. People in economically free countries outlive people in the least free countries by about 17 years.

Economic freedom is even more important for developed countries because developed nations need to find ways to innovate. Using others' technology and foreign capital, developing nations can grow quickly with even slight changes to economic freedom. This catch-up growth is possible with small changes to corruption, taxation, and regulation.

Developed nations, like the U.S., need to create new ways of doing things. We need innovation.

Those who favor big government try to think of different ways to divide the pie. With economic freedom, you don't create prosperity by dividing the pie; prosperity is created by increasing the size of the pie.

That's difficult for developed nations because it means coming up with new and better ways of doing things. We need to let entrepreneurs come up with new ways to cooperate with their customers and bring new products to market. Business is not a zero-sum game. Buyers and sellers can both gain.

Regulatory compliance cost is one of the worst burdens for businesses, both large and small. In order to innovate, we need to let individuals start, expand, manage, staff and restructure businesses relatively free of unnecessary burdens imposed by government.

Those who favor big government say they want to use regulations and taxes to help the disadvantaged; perhaps they do want that. In reality, taxes and regulations can harm everyone and some more than others. Cronyism is the art of using big government to help its friends. That doesn't help the disadvantaged.

The problem for Arkansans is that D.C. policies such as the rapid run-up in federal spending and an erosion of property rights are increasingly antagonistic to economic freedom. Those of us in Arkansas are forced to bear this burden even as we push against it.

Still, there are lessons Arkansans can learn. We can control what we do here in Arkansas. Keeping our own taxes and regulations low helps businesses stay here instead of leaving for competing states. Reducing the occupational licensing burden would help, as well.

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David Mitchell is an associate professor of economics at the University of Central Arkansas. He is also the director of the Arkansas Center for Research in Economics (ACRE).

Editorial on 09/19/2015

Print Headline: For more freedom

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