Why "Economic Freedom" Is Just Another Way of Saying "Headed for a Cliff"

By John Miller, Dollars and Sense. Posted September 29, 2009.

In "Capitalism in Crisis," his May op-ed in the Wall Street Journal, U.S. Court of Appeals judge and archconservative legal scholar Richard Posner argued that "a capitalist economy, while immensely dynamic and productive, is not inherently stable." Posner, the long-time cheerleader for deregulation, added, quite sensibly, "we may need more regulation of banking to reduce its inherent riskiness."

That may seem like a no-brainer to you and me, right there in the middle of the road with yellow lines and dead armadillos, as Jim Hightower is fond of saying. But Journal readers were having none of it. They wrote in to set Judge Posner straight. "It is not free markets that fail, but government-controlled ones," protested one reader.

And why wouldn’t they protest? The Journal has repeatedly told readers that "economic freedom" is "the real key to development." And each January the Journal tries to elevate that claim to a scientific truth by publishing a summary of the "Index of Economic Freedom," an annual report put out by the Heritage Foundation, Washington’s foremost right-wing think tank. But Heritage’s index turns out to be a barometer of corporate and entrepreneurial freedom from accountability rather than a guide to which countries are giving people more control over their economic lives and over the institutions that govern them.

This January was no different. "The 2009 Index provides strong evidence that the countries that maintain the freest economies do the best job promoting prosperity for all citizens," proclaimed this year’s editorial, "Freedom is Still the Winning Formula." But with economies across the globe in recession, the virtues of free markets are a harder sell this year. That is not lost on Journal editor Paul Gigot, who wrote the foreword to this year’s report. Gigot allows that "ostensibly free-market policymakers in the U.S. lost their monetary policy discipline, and we are now paying a terrible price." Still, Gigot maintains that "the Index of Economic Freedom exists to chronicle how steep that price will be and to point the way back to policy wisdom."

What the Heritage report fails to mention is this: while the global economy is in recession, many of the star performers in the Economic Freedom Index are tanking. Fully one-half of the ten hardest-hit economies in the world are among the 30 "free" and "mostly free" economies at the top of the Index’s ranking of 179 countries.

Here’s the damage, according to the IMF. Singapore, the Southeast Asian trading center and perennial #2 in the Index, will suffer a 10.0% drop in output this year. Number 4 Ireland, the so-called Celtic tiger, has seen its rapid export-led growth give way to an 8.0% drop in output. The foreign-direct- investment-favored Baltic states of Estonia (#13) and Lithuania (#30) will each endure a 10.0% loss of output this year. Finally, the economy of Iceland (#14), the loosely regulated European banking center, will contract 10.6% in 2009.

As a group, the Index’s 30 most "free" economies will contract 4.1% in 2009. All of the other groups in the Index ("moderately free," "mostly unfree," and "repressed" economies) will muddle through 2009 with a much smaller loss of output or with moderate growth. The 67 "mostly unfree" countries in the Index will post the fastest growth rate for the year, 2.3%.

So it seems that if the Index of Economic Freedom can be trusted, then Judge Posner was not so far off the mark when he described capitalism as dynamic but "not inherently stable." That wouldn’t be so bad, one Journal reader pointed out in a letter: "Economic recessions are the cost we pay for our economic freedom and economic prosperity is the benefit. We’ve had many more years of the latter than the former."

Not to Be Trusted

But the Index of Economic Freedom cannot and should not be trusted. How free or unfree an economy is according to the Index seems to have little do with how quickly it grows. For instance, economist Jeffery Sachs found "no correlation" between a country’s ranking in the Index and its per capita growth rates from 1995 to 2003. Also, this year’s report cites North America as the "freest" world region, but it logged the slowest average growth over the last five years, 2.7% per year. The Asia-Pacific region, rated "less free" than every other region except Sub-Saharan Africa, posted the fastest average growth over the last five years, 7.8% a year. That region includes India, China, and Vietnam, among the world’s fastest growing economies, which ranked 123, 132, and 145 respectively and were all classified as "mostly unfree." And there are plenty of relatively slow growers among the countries high up in the Index, including Switzerland (#9).

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