Regs, Spending Sink U.S. to 10th Place on Index of Economic Freedom

Jan 12, 2012, 00:01 ET from The Heritage Foundation

Nation's global score slips for fourth straight year

WASHINGTON, Jan. 12, 2012 /PRNewswire-USNewswire/ -- Sharp increases in government spending and more costly regulations contributed to another decline in the United States' ranking in the annual Index of Economic Freedom published by The Wall Street Journal and The Heritage Foundation.

A growing sense that policymakers put special interests above the public interest also was a factor as the U.S. score for economic freedom dropped by 1.5 points in the 2012 Index, to 76.3 on a 0-100 scale. When compared to its competitors, the U.S. ranking fell from ninth to 10th among 179 countries.

It was the fourth straight year of decline on the Index for the United States. As recently as 2008, the U.S. ranked seventh worldwide, earned a score of 81 and was considered a "free" economy. Today, the U.S. is only a "mostly free" economy, placing it in the Index's second-highest category.

The United States continues to score far above the world average of 59.5 and the regional average of 73.8. It also remains in second place among the three countries in the North America region – ahead of Mexico but behind Canada.

For the 18th straight year, the Index ranked Hong Kong as the world's freest economy. Its score of 89.9, a slight improvement over 2011, was enough to outdistance runner-up Singapore by more than two points. Australia, New Zealand, Switzerland, Canada, Chile, Mauritius and Ireland also were ranked above the United States.

Launched in 1995, the Index evaluates countries in four broad areas of economic freedom: rule of law; regulatory efficiency; limited government; and open markets. Based on its aggregate score, each of 179 countries was classified as "free" (i.e. combined scores of 80 or higher); "mostly free" (70-79.9); "moderately free" (60-69.9); "mostly unfree" (50-59.9); or "repressed" (under 50).

The U.S. drop of 1.5 points fueled a regional decrease for North America of 1.3 points, the largest decline among six regions in the world. North America also was the only region in which every country registered a decline in economic freedom. Canada slipped from "free" into the "mostly free" category, and Mexico lost ground in six of 10 measures.

The Index's editors attributed about half the U.S. decline to increases in government spending and another third to the explosive growth of intrusive regulations, particularly in health care and finance.        

The United States now ranks 127th in the world in government spending. Spending by government consumes 42.2 percent of gross domestic product (GDP), and total public debt now is larger than the entire economy. The U.S. tax structure – which leans heavily on taxes on capital and investment that restrict growth – also contributed to the falling scores.

The regulatory burden continues to grow and hinder the economic recovery, the editors noted. More than 70 major rules imposed since 2009 cost Americans nearly $40 billion last year.  These factors led to a loss of five full points – the largest U.S. decline in any category. As a result, the U.S. placed 133rd in the world in fiscal freedom.

Perhaps most worrisome, however, is the four tenths of a point drop in the category of freedom from corruption. Index editors said this stems from both the growing perception of corruption in government bailouts of troubled industries, including automakers and investment houses, and regulatory exemptions granted to politically well-connected companies and special-interest groups. More than 1,100 companies won exemptions from provisions of the Patient Protection and Affordable Care Act, President Obama's signature health care legislation.

"Corruption is a growing concern as the cronyism and economic rent-seeking associated with the growth of government have undermined institutional integrity," the editors wrote.

The United States continues to enjoy the best score in the world on labor freedom – 95.8. Its trade scores were unchanged. Improvement in trade is difficult because of "Buy America" restrictions and other legislative measures, the editors said.          

The U.S. scores reflect broad global trends. Worldwide, overall scores for economic freedom slipped from 59.7 to 59.5. Freedom dipped globally in the categories of property rights (-0.2 points), freedom from corruption (-0.1) and trade (-0.3), and climbed in the categories of investment (+0.5), business freedom (+0.4), financial freedom (+0.1) and fiscal freedom (+0.6). The big swings came in monetary freedom (+1) and government spending (-4.1).

Index editors said the policies needed to improve U.S. scores – lowering taxes, broadening the tax base, curbing rent-seeking – also were critical for bringing down high unemployment rates and reducing public debt to manageable levels.

"Restoring the U.S. economy to the status of a 'free' economy will require significant policy changes to reduce the size of government, overhaul the tax system and transform costly entitlement programs," the editors wrote.

The 2012 Index was edited by Ambassador Terry Miller, director of Heritage's Center for International Trade and Economics; Kim Holmes, Ph.D., Heritage's vice president for foreign policy studies and director of the Davis Institute for International Studies; and Edwin J. Feulner, Ph.D., Heritage's president. Copies of the Index (484 pages, $24.95) may be ordered online at or by calling 1-800-975-8625. The full text, including charts and graphs, is available online.

About The Wall Street Journal
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About The Heritage Foundation
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SOURCE The Heritage Foundation