A key ingredient of economic success is economic freedom. Scott Beaulier, executive director of the Manuel H. Johnson Center for Political Economy at Troy University, recently made that argument during a presentation at Campbell University titled “The Institutional Foundations of Economic Freedom.” Beaulier also discussed the topic 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, what do we mean by economic freedom?
Beaulier: Economic freedom is the idea that government should be constrained, that people should be free to exchange, that people should be able to freely move, and that in societies where we have this, you tend to get better results overall in terms of economic performance and just in terms of happiness of the population. It can be broken down into five components: fiscal policy that’s restrained; monetary policy that’s restrained; borders that are open, and you don’t have a lot of protections and tariffs that are preventing the movement of goods and services as well as people — you could be closed to immigration, and that would make you less free; regulation, how much regulation do you have in your country; and then the fifth one is the rule of law and whether or not you respect your constitution, whether you respect due process when it comes to the courts.
Kokai: You mentioned several keys to economic freedom. Let’s start with fiscal policy.
Beaulier: Fiscal policy is extremely important because if your government is engaging in excessive spending it can lead to kind of external effects on the other components of economic freedom. When your government’s spending a lot of money, it may mean more taxes for your people, or it may mean that there’s pressure to inflate. We’re actually seeing some signs of this in the United States right now. So the fiscal policy measure of economic freedom mainly deals with spending and taxes.
Kokai: What about monetary policy?
Beaulier: That mainly is how independent your central bank is. And what we mean by independence is whether or not your central bank is kind of controlled or maybe — let’s not say controlled — but influenced heavily by your legislators, or is it independent, its own entity, making its own decisions. In the United States, we have a pretty independent Fed. It’s influenced by the Treasury a little bit, but it’s not bad in terms of independence.
But then in addition to independence, you can look at whether or not they’re printing a lot of money and what the variance in money creation is. If they’re one year cutting the money supply by 10 percent and the next year increasing it by 30 percent, that’s a much more unpredictable central bank than one that’s just kind of going slow and steady. The ones that are just gradual with their monetary policies are going to get more favorable rankings in the economic freedom index. They’re just freer, more predictable places to live.
Kokai: Some people ask, “Why do we need a central bank at all?”
Beaulier: What you want with your monetary regime is something that credibly commits to sound money, and you can get that in a lot of different ways. You can get it with a gold standard. You could basically outsource your central banking to another country by pegging it. Some Latin American countries have done that. You can create a currency board. All of those are aiming to tie the hands of the regime, and I think that all of those would be more in the direction of more economic freedom. You’re trying to take discretion out of the equation. And actually, if you remember Alan Greenspan, during his tenure, he went to Russia at one point and was asked, “What do you think of central banking in Russia? What should we do?” And he said, “Don’t create a central bank,” because he just knew it’s an institution that can easily be corrupted and just do a lot of other things that are detrimental to economic freedom.
Kokai: How about another key area, Scott — regulation.
Beaulier: Regulation in terms of how many rules governing our behavior are out there and whether or not they’re general or specific in nature. If you have a bunch of regulations that are very nitpicky — like you can only cook food at this temperature and it can only stay in holding bins for this long, or you have all kinds of regulations on airlines — all of this makes it much more costly to do business. And it’s paralyzing. You don’t know if you’re engaging in appropriate action or not, so what you have to do is hire lawyers, hire accountants, hire a lot of additional staff. So it raises the cost of doing business and just creates uncertainty.
So countries where you have a lot of regulation tend to also have a lot of corruption. You need to resort to bribery sometimes to get what you want, or you go under the radar and you just say, “I’m going to avoid regulation all together.” You see this in developing countries a lot, where they don’t abide by the regulations by being in the underground economy. Well, if they’re in the underground economy, that’s problematic because you don’t really know if you’re engaging in a credible exchange or not.
So countries where there’s a lot of regulation, and [where] it’s unpredictable and seemingly arbitrary, get pretty low scores. Many sub-Saharan African countries have low rankings and aren’t very free in this area. The United States is creeping up and not doing a great job with regulation. The Federal Register is much larger today than it was 20 years ago, or 50 years ago for that matter, and that just raises the cost of doing business.
Kokai: What about the rule of law?
Beaulier: Well, the U.S. has slipped here a little bit, and a lot of that slip actually can be attributed to George W. Bush. He was using executive power a lot and kind of overriding the Constitution. And it’s mainly a survey that determines our rule of law score. So if your constitution is perceived to not be respected as much, then you get a lower score. It’s still been trending a little bit lower because [President] Obama has been engaging in some of the same behaviors. It’s kind of a continuation of Bush. He went in and basically brokered a deal with BP as to how the oil spill would be handled. He brokered a deal with GM, and I believe it was Chrysler that — “We’re going to save you, but you’re going to basically give us ownership in your company.” These are things that are overriding traditional corporate processes and are just bad in terms of whether or not people are playing just on a level playing field, by the rules of the game.
So that’s what we mean by economic freedom. Do you have a constitution that’s worth more than the paper it’s written on? And countries that respect their constitutions and their laws — not all places have great constitutions but there’s a legal framework that they respect — those countries score pretty well and are more economically free. The last area is freedom of trade. Countries where you can freely move and freely exchange are more free than countries that have a lot of protections and engage in manipulation of currencies and whatnot.
Kokai: Some people say government has had to step in during the past couple of years to correct problems associated with the free market.
Beaulier: Actually, what’s been going on for the last 30 years has just been a steady and slow march toward bigger government. And now what we see, instead of big government, which is what we saw under George W. Bush, is really big government. It’s not [that] there was this period of free markets and now we have government intervention. It’s just big or bigger government.
Kokai: How would we get back on the right track?
Beaulier: Well, I think there are some encouraging signs. I think that the election was a nice indication of people just irritated and frustrated with the course that we’re on, and it’s going to create gridlock again. I don’t care what party’s really in power, but I sure like a divided government over one that just has free reins. Blank-check governments are pretty scary to me because it’s a blank check in a direction pretty forcefully that maybe we don’t want to go. There’s potential for a lot of error when that happens.
I think that to get back on track, though, there needs to be a return not only to an appreciation of the economic arguments for freedom. The economic argument for freedom is overwhelmingly clear and straight-cut. It just provides a lot more stuff, and you can see this again and again. It’s much better to live in the United States than in sub-Saharan Africa, and the difference is economic freedom. But above and beyond the consequences, I think something that has been lost is that you also need to recognize the morality of free societies, in that it’s not only something that leads to a lot of stuff, but it’s the right way to be allowing your people to live.