Over the past several decades, poverty has decreased the world over. Many people, however, are unaware of this face. Moreover, American citizens are equally unaware of where the credit for this progress belongs. Much of the credit for this achievement belongs to the principles of economic freedom associated with American democracy. The much-maligned American political right has largely been responsible for championing these freedoms, with President Ronald Reagan’s achievements deserving particular credit.
However, the news for America is not all good. The “wrong” in the title, refers to the more recent drift away from (and in some cases, outright abandonment of) the principles of economic freedom that spurred American historical progress. There are many causes for this drift from America’s principles, with plenty of blame to go around. America’s problems span multiple facets: education, demographics, fiscal irresponsibility, undue political influence of special interests, an overly intrusive government, and others. This post will investigate and show evidence for examples of this drift. It will also propose some solutions.
Conservative principles offer an effective solution to the problems America currently faces, but conservative thinkers and leader have not effectively communicated the narrative regarding the drivers that brought the nation to where it currently stands nor have they effectively advocated the right’s solutions. That conservatives can and should better articulate this narrative is the essential thesis of this post.
Like America’s Declaration of Independence, conservative principles can be outlined in several concise statements. However, just as the Constitution embodies the Declaration’s implementation of the ideals, so too this post will formulate and show how conservative principles, form a solid, moral and proven basis in addressing the many problems confronting America.
Addressing these problems will take more than one post. Accordingly, this post is a prelude to a series of perhaps a dozen illustrating how the aforementioned principles can guide the nation in addressing the top dozen or so problems currently confronting it. More specifically, today’s post focuses on the principles of economic freedom (i.e., capitalism), and seeks to illustrate the broad swath of progress which it has carved out for America – and increasingly in recent decades – the rest of the world. Economic freedom’s impact has been wide-ranging. It has increased democracy, reduced poverty, curbed hunger, and fostered other critical elements advancing humanity’s pursuit of happiness.
This discussion will organize the key issues using a fictional “newspaper headline” framework and consistent elements for each problem / solution discussion as per the format below.
The Global Impact of Freedom
A notable, but often missed, impact of economic freedom is the decades-long, ongoing decline in the percentage of the world’s population living under $1 a day (see chart below).
Few stress this remarkable improvement, though the data analysis is complicated because not all countries maintain equivalent statistical histories. Nevertheless many economists have compiled variations of this data and adapted it to provide others with an encouraging picture. This post will address some of the uplifting elements of this story. Generally, one might define economic freedom as bringing social gains to lower-income populations across the globe. One might capture its effects by examining metrics in areas such as: education, health, democracy, trade freedom, labor freedom, and other aspects of economic well-being and political freedom.
Reduced Government Regulation of Business
There has also been global progress on reducing government intrusion. The World Bank has documented 1,835 privatizations between 2000 and 2008 at a total value of $453 billion. Business restrictions have eased in 153 countries vs. worsening in only 20. Three out of four countries have made it easier to start a business. China has gained by increasing its electric generation capacity.
While global progress is something for Americans to cheer about, the news is not without its downside. One negative element is that while other countries are lifting themselves up, America has lost sight of the lessons that have facilitated its progress; namely: individual responsibility, limited government, a private sector free to innovate and prosper – in other words, its economic freedom.
Index of Economic Freedom
“As Friedrich A. Hayek foresaw decades ago, ‘The guiding principle in any attempt to create a world of free men must be this: a policy of freedom for the individual is the only truly progressive policy.’ Thus, the battle of ideas must also be a battle for the meaning of the very words with which we debate. Is it ‘progressive’ to utilize the coercive power of the state to redistribute and level incomes within a society? Is it ‘liberal’ to build a massive state apparatus to regulate conditions of employment, usage of energy, and access to capital? The answers to such questions will determine how we live as individuals in the 21st century.”
The following section is adapted from the Heritage Foundation and its Index of Economic Freedom (IEF).
- Each “person controls the fruits of his or her own labor and initiative. Individuals are empowered—indeed, entitled—to pursue their dreams by means of their own free choice.”
- Individuals “succeed or fail based on their individual effort and ability.”
- The “institutions of a free and open society do not discriminate either against or in favor of individuals based on their race, ethnic background, gender, class, family connections, or any other factor unrelated to individual merit.”
- “Government decision-making is characterized by openness and transparency, and the bright light of equal opportunity replaces the shadows where discrimination can be most insidious.”
- “In an economically free society, the power of economic decision-making is widely dispersed, and the allocation of resources for production and consumption is on the basis of free and open competition so that every individual or firm has a fair chance to succeed.”
The ten weighted elements of the Heritage Foundation’s calculation of its Index of Economic Freedom include:
- Business freedom
- Investment freedom
- Trade freedom
- Financial freedom
- Fiscal freedom
- Property rights
- Government freedom from spending
- Monetary freedom
- Labor freedom
According to the Heritage Foundation:
“The Index results, when compared with data about changes in economic and social conditions in societies around the world, provide strong empirical evidence that the free-market system remains not only viable—with the value of its core features such as private property rights, openness, and flexibility almost unquestioned—but uniquely able to promote economic dynamism and long-term prosperity.”
The 2012 Index confirms the positive relationship between economic freedom and prosperity yet again.
“GDP per capita is much higher in countries with greater economic freedom.” The chart above “shows a strong positive relationship between the level of economic freedom and GDP per capita.”
The IEF index exhibits a strong negative correlation to public debt as a percentage of GDP. One can draw two conclusions from this finding:
- The “accumulation of debt appears to have a negative impact on economic freedom. Countries with higher levels of debt tend to have lower levels of economic freedom, and it is very hard for countries with debt levels of 70 percent or higher as a percentage of GDP to be considered even moderately free.”
- “The level of economic freedom appears to play a critical role in determining the economic impact of debt. Where economic freedom is high, debt may be sustainable even at higher levels. Where economic freedom is low, the impact of even moderate levels of debt is likely to be negative.”
The Index has documented the “steady progress in global economic freedom” until the mortgage crisis of 2008.
“Rapid expansion of government, more than any market factor, appears to be responsible for flagging economic dynamism. Government spending has not only failed to arrest the economic crisis, but also—in many countries—seems to be prolonging it. The big-government approach has led to bloated public debt, turning an economic slowdown into a fiscal crisis with economic stagnation fueling long-term unemployment.”
“For governments that increasingly are constrained by budget deficits and rising debt, the disconnect between past promises and the capability to fulfill them, and between financial assets and liabilities, has become difficult to ignore. A fundamental rethinking of the social contract, the basic and proper relationship between government and citizen, has become not just an academic exercise, but a political debate that in some countries has spilled into the streets.”
The empirical evidence above and economic theory support the thesis that more economic freedom will result in faster economic development.
Why? Free trade allows for all countries to benefit from the principle of comparative advantage – that is countries can specialize in economic activities where they have a particular cost or quality advantage. Low taxes provide people with incentives to work hard and invest wisely. Private firms driven by profit maximization will have a greater incentive to run a business efficiently than state-owned businesses.
Further Evidence of Success
Economic Freedom is improving world poverty and hunger. Countries with the highest income growth are also the countries where the incomes of the poor grow the most. Strong growth over the last three decades has lifted almost a billion people out of extreme poverty. This trend is well illustrated in the figure below
As a share of world population, the overall data from the Adam Smith Institute documents a poverty decline from 42 to 21 percent between 1981 and 2005. The World Bank predicts that poverty will continue to fall to 11 percent in 2020.
Economic freedom is increasing world democracy. Economic growth also improves the political arena; there is a strong association between economic development and democracy. Jacob Lundberg of the Adam Smith Institute notes:
“Dictatorships are more likely to democratize the richer they become, and democracies are less likely to collapse the richer they are. Bearing in mind that the world has become considerably richer under capitalist principles, it is not surprising that democracy is expanding globally.”
The above figure shows that a wave of democratization started in the 1980s; more than 50% of the world’s population now live in democracies.
The rise in democracy also has had positive effects in other areas. Many accept the “democratic peace theory”, the contention that two true democracies have never waged war against one another in world history (possible exceptions are marginal cases with disputes whether the countries were democracies or whether the conflict was in fact a war.) Reasons for the democratic peace trend may include:
- Those in power are held responsible by its citizens for costly wars;
- Governments that respect the rights of their own citizens also respect the rights of others.
Economic freedom is leading to better health. Global life expectancy continues to increase – benefiting men, women and children.
As the chart from the Adam Smith Institute above shows, it is now 69 years. This life expectancy growth reaches even into sub-Saharan Africa. It has increased despite the AIDS epidemic in some countries. The situation of women has improved dramatically over the last few decades: fewer women marry before age 18 and maternal mortality has decreased by over a third since 1990. The trend is similar for child mortality: since 1970, it has halved in Africa, declined by 2/3 in India and by 5/6 in China. Globally, child mortality has fallen by 57 percent.
Economic Freedom is increasing global literacy. World literacy has been increasing for a long time and the positive trend is expected to continue. Lundburg points out that more than 9 out of 10 children attend elementary school in almost every part of the world. Even in sub-Saharan Africa 76 percent of children go to school. Moreover, urban growth contributes to social progress. Twice the percentage of children attend school in urban areas than in non-urban. Male-female enrollment disparity is also lower in cities. Children in developing countries are now educated for 10.4 years on average (up from 9.1 years in 1999); children in developed countries are educated for 15.8 years (up from 15.2 yrs)
Recent Trends in America?
By any measure, the last 4-5 years in America cannot be deemed a great success. The bursting of the “mortgage bubble” exposed some growing problems that had been ignored for several decades. In broad terms, these have resulted from a slow evolution toward bigger government and increasing interference with the private sector. In the last three years, the trend has been accelerated, due to the White House’s strong leftward tilt. The chart below highlight some key differences in right and left-wing philosophies.
Moreover, the culmination of long-growing fiscal issues has left the country with a mountain of problems that it must address before they get worse. For the moment, it is sufficient to offer a tentative matrix (see chart #35) and to seek reader thoughts regarding both the vertical list of problems and the horizontal list of root causes. The objective is to help brainstorm the key problems and their root causes.
Economic freedom is expanding throughout the world and is improving the lives of over a billion people. However, America, which used to lead the way, isn’t paying attention and is at risk of forfeiting its prosperity and liberty. Conservative principles can help the country regain its footing. Nevertheless, conservatives must do better at explaining why and how. In part, they must explain and prove that the principles of limited government, supporting the Constitution, and allowing individual initiative to flourish are elements of a practical and effective solution.
In contrast to the rather spectacular success record of private enterprise, the “let the government do it” approach has a fairly dismal record. To select just a few examples:
Big government solutions may have good intentions, but they rarely lead to their intended outcomes. Moreover, they can sometimes lead to immoral outcomes. Since when is it moral to address the issue of poverty, but yield a result which leaves the indigent worse off? When is it moral to mislead people that their savings are being held for their retirement, and then abscond with and spend the money on other things? This leaves the system without the ability to fulfill its promise. Moral? Of course not. The “moral” approach is to have the government focus on its primary, narrowly proscribed Constitutional functions, balance its budget with a spending plan designed to accomplish its objectives, and manage that plan in a careful and attentive way.
As noted earlier, this post is the first in a series that will address twelve major problems facing America and show the application of our ideas and ideals. Additional reader suggestions are welcome. Your voice is important to our nation. Citizen interest, dialog and data are critical to good civic outcomes, and that includes outcomes which simply assure proper conditions for the free market to work. So please participate in the “pop quiz” of chart #35 and other suggestions.