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January 03, 2005

This is embarrassing...

Today the latest edition of one of my favorite studies was published by the Heritage Foundation: the Index of Economic Freedom 2005. I immediately looked at the rankings, and was immediately disappointed. Out of the top 15 most free economies in the world, the "vanguard of global capitalism," the good ol' USA, was ranked 12th.

Here are the rankings:

1 Hong Kong
2 Singapore
3 Luxembourg
4 Estonia
5 Ireland
New Zealand
7 United Kingdom
8 Denmark
10 Australia
11 Chile
12 Switzerland
United States
14 Sweden
15 Finland

Sure, the US ahead of Sweden as far as economic freedom is concerned, but just barely: only .04 points more free than Sweden. According to the Wall Street Journal

In 1998, the U.S. was the fifth freest economy in the world, in 2001 it was sixth, and today it sits at 12th, tied with Switzerland.

There are some problems with their calculations, though... According to the Index, US government expenditures consumed 35.9% of GDP, compared to Sweden, whose government consumed 59% of GDP. However, for some reason they gave Sweden a fiscal burden rank of 3.9 out of 5 (5 being the worst ranking, 1 being the highest), and the US got a fiscal burden rank of 4 out of 5. There is no explanation from what I can tell (although I haven't been able to read much of the report yet) as to why a government that consumes 59% of their GDP has a lesser fiscal burden than a government that consumes just under 36% of GDP.

Perhaps it has something to do with corporate tax rates? While Sweden's top corporate tax rate is 28%, the US' top rate is 35%. However, a bill passed last October cut our top corporate tax rate to 32%; still too high in my opinion, but it shows that they didn't bother to edit the Index for this, or even make an addendum. The Wall Street Journal article previously cited seems to think this is the reason why the US got a bad score in this area.

Most alarming is the U.S.'s fiscal burden, which imposes high marginal tax rates for individuals and very high marginal corporate tax rates. In terms of corporate taxation as an element of economic freedom, the U.S. ranks a lowly 112th out of the 155 countries scored, and its top individual tax rate ranks only slightly better at 82nd.

But this still doesn't explain that problem with their calculations... now, this is not to say that I'm being an apologist for my country's abysmal economic policies, and as I noted last year,

When countries like Ireland, Slovakia, Hungary, Poland, Germany, Austria, and Russia have tax rates of 13%, 19%, 16%, 19%, 25%, 25%, and 24%, respectively, we must continue to cut corporate taxes in order to increase our attractiveness to multinational corporations.

If the fiscal burden score is adjusted from 4 to 3, the resulting score is .10 points lower than the current 1.85 score being assigned to the US, which would put us as equal to the UK with a score of 1.75 and would rank us as # 7 instead. The only reason I can think of that they did this is to punish this administration for its lack of decent economic policies (like balancing the budget, cutting government spending, modernizing regulatory structures, etc.) and hoping that it overlooks the fiscal burden score in comparison to other countries.

Look at the nice things they had to say about Sweden!

The Economist Intelligence Unit notes that the free market is the main force in the economy, though 25 percent of Sweden’s business sector is still state-owned. Over the past decade, however, Sweden has encouraged competition and has deregulated major sectors such as electricity, telecommunications, banking, and parts of transport. Market deregulation, which put Sweden far ahead of the European Union, has contributed to faster growth in GDP per capita than the Organisation for Economic Co-operation and Development’s average in recent years. In September 2003, Swedes voted against adopting the euro, citing concerns over sovereignty, democracy, and national control of interest rates.

Hey, that's great in my opinion! I wish we'd learn a bit from Sweden when it comes to free-markets; there are still tons of regulated electricity markets and transport services in the US. Here's what they say about the US:

Government spending, however, expands without constraints. The massive farm subsidies of 2002 were followed by the massive Medicare prescription entitlement of 2003. Increased regulatory laws in the securities field have raised compliance costs in capital markets, forcing some firms simply to buy back their stock and retreat from public markets. Anti-dumping trade barriers are growing, and inflation rose following the steep plunge in the dollar. In short, the United States, while still a vibrant country, is at a crossroads: It will either continue to be a leader in economic freedom or idly watch other countries pass it by.

I can't say I disagree with them. In fact, I completely agree! The fact that we're supposed to be the "vanguard of global capitalism," means we should be the most capitalist country on earth, and we're not. Even if you adjust the scores, we'd still have an ugly rank of 7, putting us equal to a country that 30 years ago was a socialist state (the UK, of course). It's embarrassing...

Posted by Arcane at 10:26 PM