Expand Economic Freedom in 2009

The onset of 2009, with a new president taking office, is a good time to reconsider the benefits of economic freedom. Contrary to what partisans of big government claim, the empirical case for economic freedom has grown much stronger in the last 10 years, due to the development of objective measures.

In 1995 the Heritage Foundation and Wall Street Journal began publishing an Index of Economic Freedom that ranked the nations of the world, and soon after other pro-market organizations followed suit. The rankings have slight differences in criteria and the weight attributed to specific factors, but they yield comparable general results.

By focusing on such factors as a country’s tax burden, government spending as a share of the overall economy, and monetary stability, the rankings render a quantitative measure of the amount of economic freedom in more than 100 countries across the globe. Relying on this relatively new treasure trove of raw data, economists have begun studying the relationship between economic freedom and various aspects of the quality of life.

This growing body of empirical work is summarized in The Sizzle of Economic Freedom, a new study from the Pacific Research Institute. This work acknowledges the moral and philosophical case for limited government and individual liberty, but it focuses on something too often forgotten: the tangible benefits.

The Sizzle of Economic Freedom cites peer-reviewed academic papers to document the strong correlation between freedom and economic growth and personal income. The empirical results are quite clear that the biggest and fastest growing economies tend to be the ones with minimal government interference. Investors and entrepreneurs are willing to take more risks and work harder, when they are assured that they will retain the fruit of their efforts.

The benefits of economic freedom also include lower unemployment rates and more macroeconomic stability. This finding is no surprise to economists because flexible wages and minimal red tape allow displaced workers to quickly find new jobs after a major disruption. The decentralized market economy relies on millions of professionals “on the ground” to make business decisions, and so it can adapt to changing circumstances much more smoothly than a country relying on top-down planning by the government.

The new PRI report also summarizes other findings that may not be so obvious. For example, recent studies have shown that freer countries tend to have less income inequality and more economic opportunities for women and minorities. People living in countries with more economic freedom also typically boast higher rates of literacy and childhood vaccination, and they live longer. The latest research also suggests that economic freedom, not democracy per se, is a better predictor of peaceful relations between neighboring regions.

Because of their rich heritage, Americans support the abstract ideals of limited government and individual liberty. There is nothing abstract, however, about the benefits of economic freedom. The Sizzle of Economic Freedom charts those benefits, but also warns that there is a price to be paid for curtailing economic freedom.

Economists since Adam Smith have understood that government interventions — whether price controls, high taxes, or other paternalist regulations — can cause more problems than they solve. However, especially during the 20th century Americans tolerated huge growth in government power because they believed such compromises were necessary to achieve a prosperous and secure nation.

According to The Sizzle of Economic Freedom, this apparent tradeoff is spurious. A sluggish economy is no excuse for further expansion of government and curtailment of economic freedom. On the contrary, the time is right to trim government and let economic freedom ring. If federal and state legislators take that path, all Americans will enjoy the benefits of richer, healthier, and more secure lives.
Robert P. Murphy is a Senior Fellow in Business and Economic Studies at the California-based Pacific Research Institute. He is author of The Politically Incorrect Guide to Capitalism (Regnery 2007) and “The Sizzle of Economic Freedom.” Contact him at [email protected].

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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