Carolina Journal News Reports

Friday Interview: The Importance of Economic Freedom

SMU economist Lawson discusses his work with worldwide freedom index

Apr. 6th, 2012
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Robert Lawson

RALEIGH ó The United States has been slipping in recent international rankings of economic freedom, including the Fraser Instituteís widely publicized Economic Freedom of the Word annual report. Robert Lawson, Jerome M. Fullinwider chair in economic freedom at Southern Methodist University, co-authors the Fraser Institute report. During a recent visit to North Carolina, he discussed key findings with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

Kokai: First of all, when we say ďeconomic freedom,Ē what are we talking about?

Lawson: Economic freedom goes by a lot of other names. You can call it capitalism. You could call it free markets, or just market-oriented economies. But what it really means, when you boil it down, itís about private property, free trade, freedom of exchange ó that kind of stuff. So itís about living in a market economy where people are free to buy and sell things without interference.

Kokai: Why is economic freedom so important?

Lawson: I think there are two answers to that. One answer is that I think as human beings we like freedom. We like to be free. Nobody likes to be messed with. No one likes to be interfered with. So on one level, economic freedom is, I think, a core value. As human beings, we like to be able to make our own decisions. But the second answer is that it looks like, [from] the evidence that we have from the project that I work on, it looks like places that are more economically free do a lot better in many, many dimensions than places that are less free.

Kokai: You mentioned a project. What is it?

Lawson: I produce something called the Economic Freedom of the World Index. Itís an economic freedom index, and we measure economic freedom for 141 countries. So we collect data on property rights, tax policy, regulatory policy, free-trade policies ó things like that. And itís kind of complicated, but we put it all into a sort of a number line ó a zero-to-10 number line, and so we have a scale that measures how free-market a place is.

Kokai: And after that work, you come up with a list of countries that are free, somewhat free, not so free?

Lawson: Sure. Well, itís a zero-to-10 scale, and at the top of the scale is Hong Kong. By far, Hong Kong is the freest economic country on earth. They have very good private property, no tariffs at all, very few regulations. They just passed their first minimum wage, which is like $2 an hour. Itís nothing, really. So Hong Kong is No. 1, but then from there, you go down to Singapore. The United States is ranked 10th, and you go all the way down through the scale. You see China, India down in the 90s, and at the very bottom of our index we have countries like Zimbabwe and Venezuela. We donít rate North Korea or Cuba, so we know theyíd be even lower.

Kokai: You touched on this, but letís mention it again. What is it about Hong Kong that makes it so economically free?

Lawson: Well, if you think, first of all, one of the cornerstones of economic freedom is free trade, and they have no tariffs, no quotas whatsoever. They have zero. Itís complete free trade. Every other country in the world, except for maybe Singapore, has some tariffs, some quotas, some restrictions on trade. They have extremely good English common law and property rights systems.

If you and I have a dispute ó a contract dispute ó you and I would be very comfortable, I think, going to a Hong Kong judge and getting that dispute adjudicated. Iíd probably feel better in a Hong Kong court than in a Texas court, to be honest. And so in area after area, they do very well. Their regulations are minimal. The top tax rate is 15 percent. So if you want to open a business, hire and fire workers, produce a product, sell that product, and keep most of what you earn, Hong Kong is No. 1, by far.

Kokai: The U.S. ranks 10th. How does that ranking compare to past years?

Lawson: The real big news in the index the last year or so has been the decline in the ratings for the United States. It actually began in the year 2000. In 2000, the U.S. was third. It was Hong Kong, Singapore, United States. And we would have been easily the largest ó the most economically free large economy. Today, weíre 10th. It was sixth last year, 10th in the most recent report. Itís almost certainly going to be going down as reports come out in the next few years.

Kokai: Why has the U.S. fallen so far in the ranking?

Lawson: Some of it is the increase in government spending, and it started again in 2000, so it started under the George W. Bush administration, and it has, of course, continued under the Obama administration. But spending is really only a small part. The biggest decline is in our area of property rights. Now, we have seven different indicators from three different sources, and all of them are in very serious decline for the United States. To give you an idea of the scale, some of the numbers we had in 2000 were nines out of 10, and now theyíre fours out of 10 ó not just small declines. On a 10-point scale, going from a nine to a four is a huge drop.

Kokai: Why are property rights such an important component in economic freedom?

Lawson: Private property is, I think, the bedrock of any market economy. If you donít have private property, you just ó nothing else that you think of when you think of capitalism really works. What are you buying and selling? Youíre buying and selling property. You need to know who owns it, who gets a return from value creation from that property, and that concept of private property is the cornerstone. If you donít have that, itís awfully hard to have markets. There were attempts, like in the old Yugoslavia, there were attempts to have government property ó but markets ó and it just doesnít work very well.

Kokai: So is the U.S. decline based on something like the Kelo case, when the Supreme Court expanded governmentís eminent domain powers?

Lawson: The property rights declines for the United States are a little hard to identify the exact causes because most of those indicators that we use are surveys, and itís not easy to know what is in the minds of the survey respondents. But I do think the Kelo decision ó the idea that the government can take someoneís property and just hand it over to a private developer ó is a real cornerstone threat to economic freedom and private property.

But I think itís a lot of other things. I think itís the war on drugs, where police can take $10,000 that they happen to find in your car, and they just take it. You have never been convicted of a crime. They just take your $10,000 because it might or might not have been associated with drugs. I think itís taking your shoes off at the airports. I think itís a lot of little things where people are saying, ďIím not as secure in not just my business, but Iím not as secure in my person and my papers and my places as I used to be.Ē

Kokai: Should the U.S. decline from third to 10th raise some red flags, signal that we need to shift gears?

Lawson: I think it should raise some flags. I donít know if I hope one way or the other. As a scholar who just basically studies economic freedom, I really donít think too much about impacting the world. I think itís worth doing this just to measure it. But I do think that it is a problem, and if economic freedom continues to decline at the pace itís declining in the United States, I think our standard of living ó our growth rates ó are really in jeopardy because we have a lot of evidence from the project that economic freedom generates really good results.

Kokai: How important is economic freedom to our economic growth?

Lawson: In the long run, I think it has tremendous importance. Thereís no question that in very long time frames, like 20-, 30-, 40-year time frames, countries with more economic freedom grow much more rapidly. In the short term, itís hard to say. I think every country in the world has ups and downs. Weíre currently going through a down. And how long weíre going to be down ó I donít know that economic freedom in the short term tells us much about the business cycles that weíre going through.

But Iím more worried about the long term. We are responding to this short-term crisis with a lot of policies that weíre going to have to live with forever, and so I think that weíre jeopardizing the long-run growth of this country in order to try to fight this recession that weíre in right now.

Kokai: What about those who say more economic freedom just leads the rich to get richer? No one else benefits.

Lawson: There are two ways to think about that. First of all, income inequality is high in some places and low in other places. The important thing to know is that it doesnít really correlate at all with economic freedom. Places that have more economic freedom donít have more inequality than places with less economic freedom.

In terms of treatment of the poorest of the society, though, itís much better to be in an economically free country because economically free countries are richer. The poor are richer, too. You look at the bottom 10 percent of any country ó the poorest 10th of the United States ó the poorest 10 percent of the United States has an income level of about $8,000. Thatís more than the average person in India. So if youíre more economically free, your poor are going to be much better off, no doubt about it.