Rule of law, limited government key to economic freedom in the U.S. and around the world

The Fraser Institute, a Canadian-based think-tank, recently released its annual Economic Freedom of the World report. Based on data from 2016 (the latest year of available comparable statistics), the report measures the ability of individuals to make their own economic decisions by analyzing the policies and institutions of 162 countries and territories—government regulation, freedom to trade internationally, size of government, the legal system and property rights, and government spending and taxation.

This year the United States ranked 6th overall. The top three countries are Hong Kong, Singapore and New Zealand while Venezuela, Libya and Argentina occupy the cellar. Reliable data are not available to measure despotic countries such as North Korea and Cuba.

So why are some countries more economically free than others? How can governments reduce or increase freedom?

For starters, the size of government is crucial. Large governments reduce space for free exchange among citizens. Restrictions on free trade and unnecessarily or uncertain regulation limits economic freedom. As does lack of “sound money,” which erodes property value. And most importantly, the least economically-free countries embrace a weak or biased rule of law, which allows governments and greedy elites to attack the economic freedom of the weak, poor and unpopular.

Conversely, rich advanced industrialized countries typically establish and enforce a sound rule of law.

To further illustrate this point, consider the Nordic countries of Sweden and Norway, which respectively rank 43rd and 27th overall in this year’s report. While they rank low in size of government (Sweden at 161st, Norway at 153th—meaning they have large governments relative to the other 162 ranked countries and territories), they score well in rule of law (Sweden at 15th, Norway at 3rd), which partly accounts for their high overall rank.

Yet other advanced industrialized countries such as France and Italy also have large governments (ranking 152nd and 122nd respectively on size of government) but perform relatively poorly on the rule of law (23rd and 60th), which partly explains their low overall ranking (France 57th, Italy 54th). Nearby Switzerland, which has a relatively small government and sound rule of law, ranks 4th overall.

The U.S. is an outlier. In size of government, where most advanced industrialized countries rank poorly, it ranks 86th, trailing only five advanced jurisdictions—Australia, New Zealand, Switzerland, Hong Kong and Singapore. But in rule of law, where advanced countries rank at the top, the U.S. ranks 19th, ahead of only a handful of advanced countries including Belgium, Portugal, Spain and France.

Herein lies the story of economic freedom in the U.S. Since 2000, the U.S. has seen the size of government grow and trade freedom diminish. But its fall in rule of law has been most dramatic, from a rank of 10th in 2000 to 30th in 2013 before recovering slightly over the last few years.

The report’s rule of law scores are based on surveys, expert opinions and analysis from the World Bank’s Doing Business and Governance Indicators, the Global Competitiveness Report and the International Country Risk Guide. While the data do not fully explain the U.S. decline, the international and expert reputation of the rule of law in the U.S. clearly deteriorated under the Bush administration and much of the Obama administration, again, with some recovery in the latter part of President Obama’s final term.

The future trajectory of economic freedom in the U.S. remains unknown. On size of government, government spending is a greater determining factor than taxation, so big spending deficits negate the benefits of tax cuts, a key tenet of the Trump administration’s fiscal reforms. As the Trump administration wages trade wars with tariffs and other barriers, U.S. trade freedom will likely decline. And crucially, if other countries (include Canada and China) continue to react with trade barriers of their own, the decline could be global. Only deregulation will have an unambiguous positive impact on economic freedom in the United States.