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The State of Economic Freedom in the United States and the World, Part 1

Monday, August 5, 2013

The developing world is increasingly embracing economic freedom, and reaping the benefits. So why are the United States and the EU heading in the opposite direction?

Earlier this summer, the Bradley Foundation convened a panel of distinguished individuals on the occasion of the Foundation’s awards ceremony in Washington, D.C. All the panelists were past recipients of the Bradley Prizes given for “strengthening the institutions, principles, and values that nurture and sustain the American Experiment and the West.” Below, we excerpt their responses to the first question moderator Clint Bolick proposed about the state of economic freedom here and abroad. In a second installment tomorrow, we will excerpt their responses in conversational form to a question about economic freedom success stories around the globe and the lessons we can learn from them.

-The Editors

Clint Bolick: What do you believe the state of economic freedom is in the United States and in the world today compared to what it was ten years ago?

Arnold Harberger: I’m on the optimistic side of things because I specialize in the economies of developing countries. Whereas the advanced countries of the world have had slow growth since 2000, many of the developing countries are incredible. The poorest group of countries has grown overall at an average of 6 percent per year, and the next group at about 5.5 percent. I reviewed a list of the developing countries for a monograph, and 4 percent growth was really an outlier. The performance of these countries was outstanding, and the purpose of the monograph was to understand why. They were usually of limited period. In this case, there are more than 60 developing countries that averaged more than 4 percent growth over the entire period, so good ideas seem to be seeping down and even being picked up by countries that wouldn’t be amenable to market institutions. Market institutions seem to creep in by the backdoor.

"Overall, the countries that have been the most free economically are becoming less free and many of the countries that have not been not very free economically are becoming more free."
-Gary Becker

Gary Becker: There’s been an erosion of economic freedoms in the EU and the United States – partly because of the great recession and partly because there has been a long-term trend in that direction. And so that’s the depressing news. In many other countries there has been a movement in the opposite direction. Countries you wouldn’t have anticipated doing this a decade ago. Take Rwanda, a country that experienced a genocide a decade ago. It’s been introducing gradually the rule of law, private enterprise, and the like. Take China. China moves erratically, but it is generally moving in the direction of greater economic but not political freedom. Our neighbor Mexico has moved in that direction. The prime minister of Japan is now calling for greater competition and openness. Whether Japan will be able to do it, it’s too early to say. Overall, the countries that have been the most free economically are becoming less free and many of the countries that have not been not very free economically are becoming more free. Is that an optimistic view or a pessimistic view? It depends what part of the world you’re looking at.

Victor Davis Hanson: The biggest change in my adult life is that for the first time, the United States is no longer – at least from Washington – the moral, ethical, or philosophical spokesman for free market capitalism. I’m optimistic, too, but from a negative sense. I just got back from the southern Mediterranean. I toured Spain, Italy, Portugal, and France, and when you see these economies that have embraced statism and you talk to young people especially, there’s nobody any longer who thinks everything is going well. They’re looking for alternatives. They’re not yet free market capitalists, but they’re looking at it in a way that’s more sympathetic than I have seen in my lifetime. I’m from California, a state which has embarked on this experiment in statism for the last 30 years and is in full enjoyment of it now. We have one third of all welfare recipients, we’re 49th and 48th in math and science in the United States, we have the highest bundle of gasoline, sales, and income taxes, and we’re rated 42nd in infrastructure even though we have the highest gas taxes. While you may find people who embrace that in the Bay area or Newport, in the other California where I live, we have a 17 percent unemployment rate. When you are sitting on enormous timber, agriculture, and shale and you have restrictions on the free market, it’s very depressing. Why am I optimistic? Because I don’t think anybody in California or Southern Europe or in the EU is standing up and saying this is the model for the 21st century. That was true 15 or 20 years ago, but when people get what they want, they suffer as they should and things change.

"The biggest change in my adult life is that for the first time the United States is no longer – at least from Washington – the moral, ethical, or philosophical spokesman for free market capitalism."
-Victor Davis Hanson

Allan Meltzer: While I don’t necessary disagree with Arnold and Gary about what’s happening in the developing world, I am much more pessimistic about the United States and the developed world. I am very interested in doing something which is an analog, in a different way, of what Clint Bolick and his colleagues have been so good at doing at the Institute for Justice, and it involves regulation and the rule of law. We are losing, and may have lost in many respects, the rule of law. We are getting the rule of regulators. The rule of regulators is a rule which encourages corruption, crony capitalism, and circumvention.

Here’s a little story which illustrates a part of that. A few years ago, I gave a talk at the Council on Foreign Relations in New York. The audience was full of people from Wall Street firms. I talked about corruption, circumvention, and regulation. The first person who responded said, “I’m a lawyer on Wall Street. Who do you think shows them how to do the circumvention? We do, with pride.” That told me how general it was. We are losing what is an American tradition of a government of laws, not of men. We are becoming a government of regulators. It has terrible effects. It’s anti-competitive – large firms can pay the costs of meeting the regulation standards (and often they don’t really object to them), things such as Too Big To Fail, which gives big banks big advantages that are very much against the interests of the medium-sized banks. They sell out to the big banks because the big banks get protected and have very low capital ratios. I’ve worked with Senator Vitter and now Senator Brown on their bill to try to raise the capital standards to 15 percent minimum. We need to do things which change the way we regulate.

It is not a question of being against regulation. We know as economists that there are divergences between private and social costs. What we need to do is get back into regulation the concept that most economists preach but don’t practice: incentives. The way we want to regulate is so that the people providing social costs have an incentive to do the things which close the gap between private and social costs. It’s a big project. Many people tell me I’ll never succeed. But if you never try, you surely will never succeed. This is a fundamental problem not only in the United States, but also in Europe and in Japan and in the developed world generally. We have to try to point the arrow in the other direction.

"We are losing, and may have lost in many respects, the rule of law. We are getting the rule of regulators. The rule of regulators is a rule which encourages corruption, crony capitalism, and circumvention."
-Allan Meltzer

John B. Taylor: I see a quite remarkable conflicting set of trends, whereby the United States is going down with respect to economic freedom and many other developing countries are going the opposite direction. It’s dangerous, not only for the United States but also for the rest of the world, because the United States has so long served as a model and led to some of the changes for the rest of the world. Last year, I wrote a book that documents these trends of deterioration of economic freedom. I looked at the rule of law, predictability of policy, reliance on markets, focus on incentives, and most important, the limited role of government. The United States has always been good at these. That’s why the country has done so well over the centuries, but in the last few years we’ve slipped. But what I think is remarkable if you look at the last 50 years is you can see some trends that point towards optimism. In the late 1960s and 1970s, we were moving in the wrong direction. In macro policy, we had a lot of interventions, regulations were increasing, we had a go-stop monetary policy – all the things which are against the direction of economic freedom. And in the 1980s and 1990s, we tended to go in the other direction. It’s just in the last few years that we’ve slipped back again, whether it’s back to regulation or macroeconomic policy. So the optimistic aspect of that is eventually people get sick of it, as they did in the 1970s, and there are changes. But we can’t be complacent. It requires pointing it out, doing the research, and communicating about it.

Clint Bolick is Director of the Center for Constitutional Litigation at The Goldwater Institute in Phoenix (Moderator); Gary Becker is Professor of Economics and Sociology at The University of Chicago; Victor Davis Hanson is the Martin and Illie Anderson Senior Fellow at the Hoover Institution; Arnold Harberger is Professor of Economics at the University of California-Los Angeles; Allan Meltzer is Allan H. Meltzer University Professor of Political Economy and Public Policy, Carnegie Mellon; and John B. Taylor is Mary and Robert Raymond Professor of Economics at Stanford University.

FURTHER READING: At the 2013 Bradley Foundation awards, Yuval Levin spoke about “Conservatism and Gratitude.” Alan W. Dowd delves into “Measuring Freedom Around the World.” Arthur C. Brooks explains “Why the Competition of Ideas Matters,” says “Entrepreneurs: It’s Time to Stand Up for Free Enterprise,” and writes “Margaret Thatcher Was a Powerful Voice for Free Enterprise and Liberty.” Christopher J. Conover analyzes “Economic Freedom’s Impact on Health Care, Coffee, and Garbage Collection” and Roger Bate says “Economic and Political Freedom Drive Prosperity.”

Image by Fred Wollenberg/Bergman Group

Published with the permission of the Bradley Foundation.

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