The axis of economic freedom has shifted from the Western world to southeast Asia and Oceania, according to a new report from the Heritage Foundation. The economies of Hong Kong, Singapore, Australia and New Zealand ranked highest in the think tank's annual Index of Economic Freedom.
But what is economic freedom exactly, and how should we measure it? I spoke with Heritage fellow and co-author Anthony B. Kim about the foundation's surprising and controversial report. Our conversation appears below the gallery:
Why did the U.S. fall in this year's ranking?
There are two reasons why the U.S. is falling behind. First, a lot of other countries are doing good reforms while we're standing still. Second, we have lingering government interventionist policies and spending is growing. We need to cut spending to make our fiscal future more reasonable, more viable.
Did financial regulation and health care reform hurt the United States?
Financial regulation was not factored into our analysis. The law was passed in July, and our data cycle ended in June 2010. But health care reform has price controls and invites more government spending, so those hurt our ranking in the categories of government spending and monetary freedom.
What were the major movers on the list?
Ireland's overall rating slipped a bit, since government spending had to step in and bail out big banks [with huge debt obligations].
It seems to me that Ireland might be an example of a country that was too economically free. Their low corporate tax rate and liberal monetary policy arguably invited a real estate bubble that has consumed the country.
A lower corporate tax rate attracted a lot of foreign investment. But [their ranking fell because] repeated government attempts to fix the financial market resulted in unnecessary government spending.
To push back a little: A lot of people would say that lax economic policy, which Heritage celebrates, created the crisis; whereas the government bailout, which Heritage criticizes, was the proper response.
You raise a fair point. But we have to separate the tax rate from unnecessary government spending. Look at Switzerland. They did their bailout swiftly. Ireland has prolonged its crisis and uncertainty. That's why I think we see this decline of economic freedom in Ireland.
The United States ranks in the top three in only one category: labor freedom. Why labor freedom?
Compared to other developed countries, we have flexible labor laws. In Europe, minimum wages are high, the hiring and firing process is cumbersome, and benefits like paid vacations are very generous. We don't have that in the U.S. We have more reasonable benefits. We don't argue that there shouldn't be benefits. But once you cross a certain point, you lose your competitive edge.
Why is Canada ranked higher than the U.S. if they have expensive social services like universal health care?