The Fraser Institute’s 2022 Economic Freedom of the World Index report has been released. This year’s report covers the year 2020. The index development was led by Dr. James Gwartney in the late 1980s and early 1990s as a way of measuring economic freedom in each country.
Countries are rated on the basis of several categories and are put in four groups (quartiles) ranging from “most free” to “least free.”
The index calculates the score every year since 2000, and in five-year intervals as far back as 1970. The index rates 165 jurisdictions in the most recent report.
The report on the year 2020 is bad news for lovers of freedom in the United States. The U.S. fell in the rankings from the 6th freest country economically to the 7th. And while that fall represents only falling by one rank, the actual decline in economic freedom is quite large.
Measuring economic freedom
To understand why economic freedom is falling in the U.S., we need to consider how the index authors measure economic freedom. They do this by considering five categories.
1. Size of government. The first category is the size of government. The logic is straightforward—the more resources which are controlled by government, the less individuals can access resources freely. The category measures the size of government by looking at government taxes, spending, and the amount of industry controlled by government, among other things.
In this category, the U.S. declined in freedom. The index measures each category from 1 to 10. Getting a score of 10 means your country is the freest possible for that measure. In other words, a “10” in the size of government category would mean you have a relatively small government. A “1” would mean the government spends and taxes at very high levels.
In this category, the U.S. fell from a score of 7.32 to 6.79. This is a decline of over half a point which is very significant for a 10-point scale. The government increased in size significantly from 2019 to 2020 due, in part, to massive spending increases.
2. Legal system and property rights. Central to economic freedom is the ability of individuals to rely on courts for impartial decisions relating to property disputes. The extent to which government can enforce property rights and contracts in an unbiased manner is key to economic freedom.
How did the U.S. fare? Over one year, the U.S. didn’t have much change. The score for the legal system fell slightly, from 7.64 to 7.56.
3. Access to sound money. The authors of the index recognize a key aspect of property rights is access to a currency that enables exchange. When government prevents access to solid currencies and engages in policies that cause the value of a national currency to fluctuate wildly, they are hampering access to sound money and impeding mutually beneficial exchange.
The authors measure money supply changes, inflation variables, and access to foreign currencies
The U.S. is historically very high on this measure. The fact that the U.S. dollar is the world’s reserve currency should tell us something about its soundness. In 2020 the sound money score fell from 9.75 to 9.63.
This may seem like a small change, but readers should note that this score is for 2020—before massive inflation began. The rapid expansion of the U.S. currency started in 2020 but didn’t conclude until March 2022. So while this decrease is certainly picking up some of the currency expansion of 2020, the high inflation we’re experiencing and continued money-printing in 2021 won’t be factored in until future years.
One last thing of note is that even though this seems like a small decrease, the sound money score for the U.S. hasn’t been this low since 2009, the beginning of the financial crisis.
4. Freedom to trade internationally. Economic freedom includes the ability to voluntarily exchange your property with whoever you want—regardless of national borders. The well-being gains which spring from specialization enabled by international trade have long been recognized by economists.
Tariffs, quotas, and other restrictions on international trade are considered in this category. Again, the U.S. saw a slight decline in economic freedom here, with the score falling from 7.83 to 7.77.
Although slight, this decline is part of a much larger and protracted trend in which the U.S. has declined from a score of 8.81 in 2000.
5. Regulation. The last category of the index is regulation. Regulatory labor laws, restrictions on capital mobility (such as investing), and cumbersome licensing laws are a barrier to a truly free market. Laws that make certain contracts illegal because of their terms or the alleged qualifications of the participants are barriers to voluntary trade.
This category, like the size of government category, is where the U.S. took a nosedive. From 2019 to 2020, the U.S. fell from a score of 8.68 to 8.11. This sharp decline, over half a point, represents a massive increase in regulations.
In fact, this is the largest one-year increase in regulations in the U.S. in this century, according to the Economic Freedom Index rankings.
The fact that the U.S. became so much less free in the areas of “size of government” and “regulation” in 2020 should be no surprise. The rollout of massive COVID-19 spending policies and government interference in industry throughout 2020 represented a large growth of government that future taxpayers will feel for years to come.
At the same time, business regulations increased as the government attempted to use its power to stop COVID.
The author of the index, Dr. Gwartney, put it succinctly in saying, “people will continue to debate the appropriateness of the pandemic policies, but there is no question that they reduced economic freedom. The danger now is that many of these policies will remain in place in the future.”
Why economic freedom?
A critical reader might wonder why this matters. What’s the big deal if economic freedom falls?
Theoretically, the argument for freedom is clear. When people are free to own and exchange property, they work to improve the value of their property. Allowing for exchange enables individuals to trade things they value less for things they value more.
There’s much to be said for why free markets are good in theory, but the Economic Freedom Index also makes the point that freer countries do better in practice. In other words, the theory works.
The authors find consistently that the “most free” countries are wealthier, live longer, have more civil rights, and are more literate. Furthermore, the poorest in the most economically free countries are richer than the poorest in less free countries. In other words, economic freedom isn’t just good for the rich.
Critics may argue that the fact that the freest countries are better off on all these margins doesn’t prove that freedom is the cause, but when paired with a logically consistent theory for why economic freedom leads to economic growth, there is a very robust case that economic freedom is the cause.
Author Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics.