The world’s economic locomotive chooses stagnation

Posted by Eric Grover on 17/02/14

Economic stagnation is a choice, a choice America and much of Europe, alas, are making.

For twenty years the Heritage Foundation and Wall Street Journal have produced an Index of Economic Freedom ranking countries based on: adherence to the rule of law, limited government, regulatory efficiency and open markets.  Economically-freer countries enjoy more robust growth and greater prosperity.

* 2014 Index of Economic Freedom The Heritage Foundation and WSJ

Economic freedom also correlates strongly with innovation, democratic governance and human development.

2014 Index of Economic Freedom The Heritage Foundation and WSJ

The argument for economic liberty however is not simply that it works. Freedom is a positive value and an end in and of itself. Economic liberty means individuals can make their own choices and pursue their dreams.

The contrast between the world’s six economically-freest countries: Hong Kong, Singapore, Australia, Switzerland, Canada and New Zealand, and the six most economically-repressed countries: Iran, Eritrea, Venezuela, Zimbabwe, North Korea and Cuba, is stark and vividly illustrates the point.

A good litmus test of countries’ nature, consistent with the Index of Economic Freedom, is to look at which way people run at the border and whether fences are built to keep people in or out. If Zimbabwe shared a border with Australia millions of Zimbabweans would vote with their feet for Tony Abbot and economic freedom over Robert Mugabe and repression. During the Cold War Germans climbed west over the Berlin Wall. At the DMZ Koreans fled south. And, during Mao Tse-tung’s Cultural Revolution Chinese escaped to British Hong Kong.

Tellingly 5 of the 6 countries ranked “economically free” were once ruled by Great Britain.

For the seventh consecutive year America’s economic-freedom ranking slipped. Only Argentina, which at the beginning of the last century was as prosperous as any country on the planet, has suffered a longer decline. The erosion of economic freedom in the U.S. started under “compassionate conservative,” i.e. big-government, President George W. Bush and accelerated under etatist President Barack Obama. On the 2014 Index of Economic Freedom the US is ranked twelfth and as only “mostly free.”

Consequently, the world’s economic locomotive America continues to sputter along.  Nobel economics laureate Edward Prescott and economist Lee Ohanian lament new business creation 28% lower than in the 1980s “thanks in large part to regulations enacted in the wake of the 2008 financial crisis favoring big companies.” Productivity growth since 2011 has averaged a dismal 1.1% – “less than half its historic rate.”

With policies eerily similar to FDR’s, Obama’s economic recovery has been the weakest since the Great Depression.

* U.S. Bureau of Labor Statistics

Burt Folsom Jr in New Deal or Raw Deal, Amity Shlaes in the Forgotten Man: A New History of the Great Depression and Jim Powell in FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression cogently describe how FDR’s full-throated assault on the private sector prolonged and deepened the Great Depression.

Harding and Coolidge’s and Reagan’s handling of the 1920-21 and 1981-82 recessions, respectively, are the gold standard of what to do and what not to do.

In 1921 unemployment peaked at 11.7%. The economy contracted 6.9%. Automobile production dropped 60% and overall industrial production fell by 30%. Harding declared “The excess stimulation …is to be reckoned a cause of trouble rather than a source of cure.” Harding and Coolidge slashed income tax rates from 73% to 25% and Federal spending and debt. By 1923, unemployment had plummeted to 2.4%. With budget surpluses, from 1921 to 1929, GNP increased 48%, the “average annual earnings of employees” rose 34%, and almost one-third of the national debt was retired.

Historian Burt Folsom Jr. hails the twenties as a boom time for invention and creating businesses. U.S. patent numbers were higher in 1929 than in every year thereafter until 1965. During Coolidge’s six years in the White House unemployment averaged 3.3% and inflation less than 1%– the lowest misery index of any president in the 20th century.

During the 1981-82 recession unemployment soared to 10.8%. Reagan cut taxes and regulation. Fifty-five months after the recession started in July 1981, the Reagan recovery had created 7.8 million jobs, and real per capita gross domestic product was up by $3,091. During the Reagan recovery from 1981 to 1986, real median household income rose $3,380. In stark contrast, 55 months after the Great Recession beginning December 2007, there were four million fewer Americans working and real per capita GDP was down $803.

Policy matters.

President Obama and his Jacobins have their boots on the throat of the naturally resilient American economy. Its ability to eke out weak growth albeit better than Europe’s, is despite not because of his economic policies.

The New World’s Pied Piper of Statism has battered the US economy with: (1) higher income, capital gains and payroll taxes, (2) a regulatory tsunami, (3) creeping state takeover of the healthcare sector, (4)a campaign to increase energy prices, (5) rules promoting unionization,(6)  foot-dragging on trade liberalization, (7) extending unemployment insurance benefits, (8) the politicization of regulation and law enforcement, (8) soft money, and is (9) attempts to boost the minimum wage.

America’s 62.8% labor-force-participation rate is at a 35-year low. The 58.6% employment-to-population ratio is hovering near a 35-year low.  Real median income has fallen since the start of the recession and since the start of the recovery. Joe and Sally Sixpack would call this economic malaise, not a recovery.

* NYT

Economic freedom is just as critical in the Old World.

While Switzerland is the only European country ranked economically free, 10 of the world’s 20 economically-freest countries are in Europe.  Ranked “mostly economically free,” Ireland, Denmark and Estonia are the second, third and fourth freest economies in Europe.

The fifth-freest European economy the U.K’s economic-freedom index declined by 3 points over the last 20 years – the second worst performance among advanced economies. Britain is ranked 5.5 points lower than 2006 when it was “economically free.”

Europe’s big sclerotic “moderately free” Latin economies continue to suffer high unemployment and anemic growth. The EC forecasts lame .9%, .7% and .5% real GDP growth respectively for France (70th freest globally), Italy (86th freest) and Spain (49th freest).

The UK scored roughly ten times the overseas investment that France did in 2013. A Deloitte Consulting survey found  27% of young French university graduates wanted to work abroad. French talent in droves is fleeing good wine, stinky cheese and cradle-to-grave welfare to London and Silicon Valley. Why? They’re economically freer. Opportunity beckons.

London is Europe’s economic capital and vies with New York as the world’s financial capital. And notwithstanding California being ranked as the second least economically-free state in the Union by George Mason University’s Mercatus Center, the Silicon Valley/San Francisco corridor enjoys the world’s most powerful network of entrepreneurs, technologists, venture capitalists, supporting legal, accounting and consulting services, and the best business culture nurturing innovation and wealth creation and welcoming and harnessing talent from the worldover.

Europe’s five most-repressed economies Moldova, Greece, Russia, Belarus, and Ukraine, not surprisingly, are among the continent’s poorest.  A number of polling agencies estimate a whopping 40% of Russians between the ages of 18 and 35 are contemplating emigrating.

* 2014 Index of Economic Freedom The Heritage Foundation and WSJ

While the average freedom-index globally has improved, notable disappontments include the US, Britain, France, Italy and Spain, and the BRICs. Four and a half billion people live in economically unfree countries, half in China and India. Deng Xiaoping initiated vital economic liberalization but his recent successors are backsliding. India has a better underlying legal system, but its real Socialists and Communists and low-trust culture are a huge impediment to growth. Free-market capitalism is the best prescription to better their lives.

Economic malaise is a choice. Freedom is moral and it works. It’s time for a policy course correction, foremost in Washington, but also in London, Paris, Rome, Madrid, Moscow, Beijing, New Delhi, and Brasilia.

One Response to The world’s economic locomotive chooses stagnation »»

  1. Comment by Rodney | 2014/02/19 at 12:17:52

    By “economically free countries” you mean countries where the business sector has large influence over national politics and where those business push policies that enable them to make more profit over the backs of the working class? While at the same time those businesses push for policies that let them evade responsibility and liability?


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