America Takes a Nose Dive in Economic Freedom of the World Index

Economic freedom in the United States has plummeted to an all-time low. According to the Economic Freedom of the World: 2012 Annual Report, co-published today with the Fraser Institute, the United States’ ranking has dropped to 18th place after having ranked 3rd for decades up to the year 2000. The loss of freedom is a decade-long trend — the United States ranked 8th in 2005 — that has accelerated in recent years.

Virtually every U.S. indicator has seen a deterioration. Government spending and regulations have grown, the rule of law and protection of property rights have weakened, and foreign investment and non-tariff barriers have increased. Authors James Gwartney, Robert Lawson, and Josh Hall note some of the reasons for the decline, including the war on terror and the growth of crony capitalism.

As the graph below shows, the United States now has a lower economic freedom rating than it did in the 1970s.


The United States’ fall is alarming not only because it’s the most important economy in the world, long associated with market-liberal policies, but also because economic freedom is strongly correlated with prosperity, higher growth, and improvements in the entire range of standard-of-living indicators, so a decline negatively affects those outcomes. The authors calculate, for example, that the loss of economic freedom will cut long-term U.S. growth by half to about 1.5 percent per year.

Another country that has seen a notable, steady drop in its economic freedom is Venezuela, now ranked last in the index. Other countries have been on an upward trend. Chile is now ranked 10th and China, while still largely unfree, continues to head in the right direction (see graph).

Below are the top ten countries in this year’s index. You can see a full listing here on page 10.


A version of this article originally appeared on the Cato Institute's Cato@Liberty blog.

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Ian Vasquez

Ian Vásquez is the director of the Cato Institute's Center for Global Liberty and Prosperity. He is a member of the Mont Pelerin Society and has been a term member of the Council on Foreign Relations. Prior to joining the Cato Institute in 1992, Vásquez worked on inter-American issues at the Center for Strategic and International Studies and Caribbean/Latin American Action. His articles have appeared in newspapers throughout the United States and Latin America including the Wall Street Journal, the Washington Times, the Miami Herald, the Financial Times, Investors' Business Daily, El Comercio (Peru), El Economista (Mexico), El Mercurio (Chile), and El Nuevo Herald (U.S.). Vásquez regularly appears on CNBC, NBC, C-SPAN Washington Journal, CNN en Español, Telemundo, Univision, and Canadian Television, as well as NPR and Voice of America. He received his bachelor's degree from Northwestern University and his master's degree from the School of Advanced International Studies at Johns Hopkins University.

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