The Decline in US Economic Freedom

Since 1995 the Heritage Foundation and the Wall Street Journal have monitored the economic freedoms of countries around the world and have published their results in the 2010 Index of Economic Freedom. Ideas like "economic freedom" are a little subjective, but I like the stated view of the publication. According to the editors, economic freedom is defined as "the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself."

As far as methodology, the editors "measure ten components of economic freedom, assigning a grade in each using a scale from 0 to 100, where 100 represents the maximum freedom. The ten component scores are then averaged to give an overall economic freedom score for each country. The ten components of economic freedom are: business freedom, trade freedom, fiscal freedom, government spending, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption, and Labor Freedom."

We Americans like to believe that we live in the "land of the free and the home of the brave." Yet, most Americans note that our country is in decline. The top ten list of the 183 considered in the survey, gives you an idea of how bad it has become.

The US does not appear in the top five. Using school standards and 90 plus is an "A," no country on the list meets that criteria. With that, number 1 goes to Hong Kong at 89.7, declining 0.3 percent from 2009. The country reached this high status because of its "competitive tax regime, respect for property rights, and flexible labor market, coupled with an educated and highly motivated workforce, have stimulated an innovative, prosperous economy. Hong Kong is one of the world’s leading financial and business centers, and its legal and regulatory framework for the financial sector is transparent and efficient. Business regulation is straightforward. Despite the global economic slowdown, Hong Kong has maintained its status as Asia’s second-largest destination for foreign direct investment, attracting over $60 billion in 2008."

The other countries in the top four are Singapore (number 2 at 86.1 percent, down .1 percent), Australia (number 3 at 82.6 percent, with no change), New Zealand (number 4 at 82.1 percent, up.1 percent), and Ireland (number 5 at 81.3 percent, down .9 percent). New Zealand is only one of two countries in the top ten list to go up. According to the editors, "New Zealand continues to be a global leader in economic freedom, performing well on most of the components measured in the Index. The economy has an impressive record of market reforms and benefits from its openness to global trade and investment. The banking sector is characterized by sound regulations and prudent lending practices, and well-implemented structural reforms have allowed the New Zealand economy to weather the recent global financial and economic crisis relatively unscathed."

Countries six and seven round up the top tier of economic freedom (those with a "B"). The US fails to show up again. Switzerland (number 6 at 81.1 percent, up 1.7 percent) and Canada (number 7 at 80.4 percent, down 0.1 percent) occupy those spots. Switzerland is the other in the top ten to actually go up over the last year.

The United States (number 8 at 78.0 percent, down 2.7 percent) is one of three countries that rounds up the top ten with Denmark (number 9 at 77.9 percent, down 1.7 percent) and Chile (number 10 at 77.2 percent, down 1.1 percent). These countries did not even make it to the top tier, being below 80 percent and the United States had the dubious distinction of seeing the biggest decline in the past year (2.7 percent) among the top ten. In the arena of economic freedom, the US has a low score of "C+" at 78.0 percent.

The study notes that the "U.S. government’s interventionist responses to the financial and economic crisis that began in 2008 have significantly undermined economic freedom and long-term prospects for economic growth. Economic freedom has declined in seven of the 10 categories measured in the Index." It also states that "Uncertainties caused by ongoing regulatory changes and politically influenced stimulus spending have discouraged entrepreneurship and job creation, slowing recovery. Leadership in free trade has been undercut by 'Buy American' provisions in stimulus legislation and failure to pursue previously agreed free trade agreements with Panama, Colombia, and South Korea. Tax rates are increasingly uncompetitive, and massive stimulus spending is creating unprecedented deficits. Bailouts of financial and automotive firms have generated concerns about property rights."

Imagine, the US is a "second tier country" on the fast track of decline after only one year of one of the most anti-free market Administrations in US history. It will be interesting to see if the US is still in the top ten after the Obama presidency comes to an end.

The Truth About Trade Deficits.

The dreaded "trade deficit" is shrinking...let's celebrate! Wait a minute, this is happening in the context of the worst unemployment in a quarter of a century, a jump in inflation, and a period of protracted economic decline.

The balance of trade -- the amount of goods imported versus goods exported -- has been a tool used by those who are shallow in their economic knowledge and deep in their fear of competition. We are told by many politicians that trade deficits (importing more than we export) is a "terrible" thing and demonstrates an economy in decline. As a result of decades of trade deficits, the US is a "debtor" nation, we are told.

So the recent news stories should be good news: "Trade Gap Continues to Narrow." This narrowing is because the amount of goods we are importing each year is actually shrinking. There are few, if any, who would argue that this economy is anything but weak and has been in a downward spiral. This reality should not be a surprise to any student of history. When the economy is weak, we can't afford to buy. Our trade deficit shrinks with our spending power.

In 1928 Republican Herbert Hoover was running for President of the United States against Democrat Al Smith of New York. Hoover, the Secretary of Commerce under one of the most successful Presidents in US history, was running against a very popular governor. It was easy for Hoover to defend the record of the President he served, Calvin Coolidge, as virtually every indicator pointed to an administration noted for its prosperity. "A chicken in every pot and a car in every garage" was a message that rang true to most voters.

During the 20s, Coolidge and his allies took a tax rate that was as high as 70 percent under their predecessor and lowered the top rate to a low of 5 percent. Coolidge opened economic trade with countries and unleashed a level of prosperity we had not seen in generations. The number of people who made six digits (a very high income in the 1920s) increased four fold. Inflation was less than 2 percent and unemployment was at a comparable amount. They called it the "Roaring Twenties" for a reason.

In spite all the glitter, there were signs of "rust" for those who cannot look beyond the surface. That was the trade deficit that grew rapidly during his administration. This area fell under the Secretary of Commerce and Hoover was taunted by his opponent through out the race as the man who over saw this area of "decline." Finally Hoover got on the protectionist bandwagon and told voters that if Smith or he were elected, there would be quotas and tariffs placed on trade. Hoover won and by the Fall of 1929, he was sticking to his guns and pursuing protectionism in the form of the Smoot-Hawley Tariff Act.

That law did exactly what it intended to do -- slash the import of goods. Within a few years, the US had its first trade surplus in decades and also one of the highest unemployment rates in history. The Stock Market crash that proceeded the Depression was fueled by this trade protectionism. Wall Street knew that, if we penalized imports, foreign countries would retaliate. That led to the Market crash because investors knew that the value of goods would decline as the trade markets would shrink.

The high unemployment rate was associated with the trade surplus for a very simple reason. We imported more goods than we exported because our buying power had declined dramatically. Through out our nation's history over the last century, our periods of highest prosperity were accompanied by eras of trade deficits. Meanwhile, trade surpluses accompanied economic decline. In our prosperity we were buying more, from everywhere.

Today, the trade deficit is shrinking because the economy is weak. Our national buying power is in decline. Trade deficits continue to do what they have done for centuries -- indicate strength and not weakness.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

Developing Countries Need Free Trade and So Do We

I am tired of the hypocrisy. I'm tired of the pleas by bleeding heart liberals about the need to send aid to developing countries on the one hand, but have vehement opposition to providing free trade, which is by far the most effective means of creating worldwide prosperity. The great thing about free trade, is that it also benefits our consumers too.

International aid often cripples developing countries by providing cheap agriculture products that makes it impossible for poorer countries to develop agriculture of their own. Often such aid never gets past the hands of corrupt governments who oversee the distribution of goods. The bottom line, traditional aid in its best implementation and intention always fosters long term dependence.

Free trade, on the other hand, fosters interdependence. The United States, which is the most prosperous country on the face of the earth, desires affordable goods. We want every economic group to be able to afford items that in the past was only afforded the most wealthy. This is achieved through "cheap labor." Meanwhile, poor countries want to improve their economic situation and see the jobs Americans won't do as a means towards that end.

Fundamentally, everything comes back to supply and demand. Developing countries have the supply of people, we have a demand for goods. Our disdain for "exporting jobs" to these developing companies goes back decades. I recall the song by Paul Revere and the Raiders, Cherokee Nation, which states:

"They took away our native tongue
And taught their English to our young
And all the beads we made by hand
Are nowadays made in Japan"

Cheap goods made in Japan? Not anymore and it is no longer a developing country, but one of the richest in the world that has to export jobs to Malaysia in order to satisfy Japan's consumer demand. We pulled Japan out of Post World War II poverty and devastation voluntarily while enjoying an improvement in our own quality of life. It is difficult to find the down side.

The jobs we are discussing as "exported" through cheap labor are largely mythical. I guess if we lived in a pure free market and applied the "quick as hell" employment theory (if we got rid of every government program, people would get a job....I think you get it), these jobs would be filled by fellow Americans. That is certainly a noble goal and one I could support, but don't see happening. So in the interim, Americans are able to enjoy a higher quality of life at a lower cost and foreign countries are becoming more prosperous, advanced, and free without a single taxpayer dollar. In essence, we can have our cake and eat it too.

The myth of trade deficits being damaging continues to persist in the context of this discussion. We are told that the silver lining to our declining economy is the fact the trade deficit is shrinking. That is because the US can't afford to buy as many goods as it did in the past. Where is the upside to that? Free trade benefits everyone by making rich countries richer and poor countries richer too.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

US is the "Source of Cheap Exports"

I was listening to the news this morning and I heard an interview about "cheap US imports" having a negative role in the expansion of the free trade agreement through out Central America. Cheap US imports? Who would have ever thought?

The imports these countries worry about are our agriculture products. Simply put, the US is a machine when it comes to producing such goods. We are more efficient than any country in the world when it comes to agriculture. Cheap labor can't always compete against excellent organization, fantastic machines, and superior supply chains.

We complain about other countries and their unique advantages. It goes back to a concept in classical economics, which is the "law of comparative advantage." Some times economics works better for some countries than others. Such advantages are some times driven by geography (mainly what David Ricardo had in mind when he first discussed it), but it is also driven by the economic policies of the country and other factors.

The beneficiaries of our cheap goods in Central America will be the consumers. The same type of people demanding affordable goods here in the US as they hurry off to Walmart in the quest for value. I say let consumers have their cheap goods. Doing such only makes all businesses more competitive and that benefits all consumers.

When government tries to sort these issues out in the name of fairness the results are arbitrary, tensions between countries become stronger, businesses are closed, and consumers are punished. Let the market win, so we can all win.

Walmart's Continued War on Poverty

I'm an unashamed Walmart fan and have sung its praises in numerous blog posts over time. The company's latest ad campaign only continues to highlight the positive impact the company is having on the personal economies of people everywhere.

Why do I love Walmart?

* Because it is the country's largest employer with over 1.3 million receiving paychecks thanks to the company personified with a smiley face.

* It reduces poverty in developing countries without spending a single US tax dollar, thanks to job creation by the business super power around the globe. Walmart pays more than the industry norm in those countries and are developing the future consumers of US products. Americans like to complain about the jobs we export and goods we import. The reason the US imports more than we export is because we can afford to. The last time we had a long term trade surplus was during the Great Depression, which is not an attractive proposition. If we want foreign countries to buy our goods, they will have to be richer. Walmart is leading that effort.

* The result of making goods at a price that is a fraction of what they would cost in other parts of the world saves US consumers $2,500.00 a year on average (see video). This is an incredible savings for US consumers. Furthermore, Walmart keeps competitor prices in check as well.
Walmart remains my hero in the market place.

I get tired of the negative remarks against the retail giant and appreciate saving every dollar I can when I go shopping there.

Duncan Hunter for President?

Duncan Hunter is an old friend of mine and, as many of you know, is running for President. He's not taken seriously by most and he seems to be playing the role of reminding the other major candidates what Conservatives should believe.

I believe Hunter, who has a son who is serving in the military in Iraq and running for Congress himself, is the strongest and most credible candidate when it comes to nationl security issues. A Vietnam veteran himself who has his own sone on the front lines, his message is very powerful and he cannot be accused of hyprocisy. Unfortunately, popular support for the war is in continued decline and in message in support of it falls on deaf ears.

Other key issues that he stands on is a staunch position against illegal immigration and opposition to free trade. I agree, illegals need to be brought out of the darkenss in order to protect our citizens. However, I also believe this economy needs the help of these immigrants. They make our economy grow. Furthermore, free trade has been fundamental cornerstone of Republican economic philosophy. Herbert Hoover, the last Republican candidate to support protectionism, propelled the into the Depression with such policies. Protectionism makes domestic companies soft, forces consumers to pay higher prices, leads to tensions between countries (as Fredric Bastiat like to say, "if goods are not crossing borders, troops are"), and is funamentally bad policy.

On Monday's Houston Business Hour (August 27, 2007 at 7 AM) Duncan Hunter will be on my program to discuss these and other issues. I believe it will be a very interesting program.

US-China Trade War?

I'm a very strong advocate of free trade between nations and absolutely despise protectionism. Free trade encourages competition and forces companies to produce the best products at the best prices. Protectionism is anti-consumer, causing higher prices for consumers and is a form of corporate welfare and indirect taxation. Protectionism usually destroys more jobs than it creates, because so many domestic jobs depends on imports. With 4.4 percent unemployment, what are we protecting the US from? The typical argument for protectionism is the lost of jobs due to unfair trade practices, this certainly isn't the case now.

Furthermore, the reasons for protectionism never make sense. Historically, our economy is doing best when we have high trade deficits. Why? Because we are able to afford more goods -- including foreign -- when our economy is doing well. The period of our strongest trade surpluses was during the Great Depression, because the US couldn't afford to buy foreign goods. Trade deficits and prosperity or trade surpluses and depression? Tough choice. Instead of being seen as a negative, I actually see trade deficits as an economic positive, because of the other indicators associated with such.

I do, on the other had, have problems with China. China uses slave labor to create its goods (e.g., political prisoners) and it is a consistent violator of intellectual property rights. But it isn't in these areas that the US wants to punish China. Rather, it wants to put tariffs on goods that we know are subsidized by the Chinese governments. Let's see, China wants to help us get stuff cheaper? Isn't that the same as foreign aid? The US, meanwhile, wants to penalize our consumers who will suffer from the higher prices that the tariffs will carry. Furthermore, our struggling airplane builders that need cheap steel in order to compete internationally will probably have to layoff employees when the price of steel goes up after the tariffs go into effect. Trade wars don't happen in a vacuum, they happen in the real world with real consequences.

Furthermore, trade wars typically go both directions, with countries retaliating against each other, further negating any economic benefit to protectionism.

But protectionism also creates conflict. Frederic Bastiat (photo), the great economist, pointed out that "when goods do not cross borders, soldiers will." Many believe that the tariffs of the 1930s fueled the fires that lead to World War II.

Any question on what I feel about free trade? If the US is going to punish China for behaving badly, penalties need to relate to the specific areas of violation and not be some excuse to apply protectionist measures. The best ways to protect the US economy is to keep costs for consumers down, create a tax and regulatory environment in which our businesses can perform, and to make sure US businesses must compete in order to make the best products for the price These objectives are best pursued in an environment of free trade and not protectionism.

The Rise of Pessimistic "Conservatives"

Having cut my political teeth on the philosophy of Ronald Reagan, I have a hard time seeing "pessimistic" and "conservative" in the same sentence, but such a group is quickly on the rise. What's most interesting about this group is that they claim Ronald Reagan as their philosophical ancestor. I think the former President would be rolling in his grave if he knew that those claiming his mantle have become xenophobic about immigration and anti-free trade. But those are the exact positions many on the Right are proclaiming.

Pat Buchanan was the first conservative to get on this bandwagon back in 1992 when he ran as an alternative to Bush I and in direct opposition to the North American Free Trade Agreement. At the time, only hard left, pro-labor, candidates (remember Dick Gephardt) adhered to such positions. Slowly, but surely, it is becoming conservative dogma. I'm afraid that, in another decade or two, it will be on the same level of common held Republican beliefs as tax cuts generally are. Unfortunately, undermining free trade has a very different result than cutting taxes.

The reason people are opposed to free trade is because other countries (whom we trade with) don't practice it and it results in the "exportation" of jobs. There is no doubt that other countries are protectionist, but those countries suffer from extremely high prices and fewer choices than we enjoy. Are you ready to pay multiples more for the type of goods we buy from China in order to artificially prop up the prices of goods from more friendly nations? Punishing our trade partners with tariffs or quotas, punishes our consumers more than it hurts competitive nations and it leads to a reduction in the quality of goods we produce while "enjoying" such "protection." People advocate eliminating free trade because of "jobs" being exported to these countries? What jobs? The unemployment is this country is 4.5 percent, which is considered almost zero (four percent is the actual number) by most economists when you factor in voluntary unemployment, illegal activity, seasonal unemployment, etc. Protectionism will not only fail to protect jobs, but destroy them; because so many jobs (sales, marketing, legal, import, etc.) are created by trade into this country. In the end, attacking free trade will attack our prosperity and our jobs.

Regarding immigration, I understand the concern of conservatives wanting to protect our country, but te populist view does nothing to help the problems coming from it. The problem is that the system doesn't offer hope to people who want to contribute to this nation of immigrants, much opportunity to do so legally. Rather, they force people underground and allows those of us who have been here longer to act holier than thou and call them criminals. I, in particular, find this offensive. My mother was born and raised in England, met my father during World War II and came to this country, eventually giving birth to me. I know I'm the child of an immigrant. It just happens I'm one that our country finds attractive. You, too, are a descendent of immigrants unless you are a Native American. It is by luck I'm a citizen of the greatest country of the world, not by any effort on my part. We must offer opportunities to others, but they must make sense. Here are a few ideas:

* Require people to be in this country for an extended period time (minimum of ten years) before they are allowed to become citizens. This, in my opinion, should be the case regardless of where they come from.

* Provide a fast track program for those from foreign countries willing to serve in our military. Over 60,000 people serve in the US military from foreign countries. That kind of sacrifice deserves special consideration. We should consider expanding this program, especially during these times.

* Allow a long term separate status of people who never get citizenship, but work, send some money home, and eventually return there. That is the desire of many, if not most of them.

* Curtail welfare programs for immigrants, placing severe restrictions.

* Move away from an income tax and go towards a consumption tax, to make sure everyone is paying for the blessings of liberty with every purchase they make.

These are just a few things we can do to keep valuable labor important to this country (again, at 4.5 percent unemployment, there are many jobs Americans don't want to do) here, without compromising our security. In fact, it will make us more secure than ever to know who these persons are, where they live, and what they are doing here. America is a nation of immigrants. Reforms like this will make them legal ones.