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The Importance of International Trade to the Canadian Economy: An Overview

In 2015, exports accounted for 31.5% of GDP, up from 25% before Canada signed a series of free trade agreements starting in 1988. Exports were 36% of GDP before the global recession began in 2008. Value-added exports, which subtract the imports embedded in exports, represented 22.2% of GDP.

Exports directly and indirectly accounted for 2,942,400 jobs in Canada in 2011 according to Statistics Canada, or 16.7% of all employment.

Imports were the equivalent of 33.8% of GDP in 2015. About 26% of imports are used as inputs into production in Canada, notably in export-intensive sectors like autos and high-tech. The effective tariff rate on imports is 1%, down from 3.5% before the push to more free trade began in the late 1980s.

Trade overwhelmingly is still oriented to the United States. The stagnation of exports to Europe and Japan in recent years was offset by increases to Asia. Because Canada exports to Asia, notably natural resources, it has a relatively small trade deficit with Asia compared with the US. Canada has little direct trade with Mexico.

Both exports and imports are beneficial to economic growth, largely by boosting productivity. Firms in Canada that export have significantly higher productivity than firms that do not export. Imports of intermediate inputs contributed over half of Canada’s recent productivity growth. However, trade does create winners and losers, which has fuelled protectionist sentiment.

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Intellectual Property Rights and the Promotion of Biologics, Medical Devices, and Trade in Pharmaceuticals

The prices of prescription drugs and medical devices have been a long-standing and controversial public policy issue in both developed and developing countries. One particular focus of the controversy is the “appropriate” degree of intellectual property (IP) protection that governments should provide manufacturers of innovative prescription drugs and medical devices. Stronger IP protection (say in the form of a longer allowable time period before patents expire), can be expected to encourage the discovery of new drugs and medical devices that improve the quality of medical care and, in many cases, reduce the overall long-run costs of treating specific medical conditions. At the same time, stronger IP protection can mean longer periods of higher prices for patented drugs and devices that have already been introduced to the marketplace. Policymakers therefore face a trade-off between encouraging innovation in the longer-run and promoting increased access to existing drugs and devices through lower prices. Policy choices with respect to this trade-off will reflect the economic and political circumstances of individual countries, as well as the dynamics of political lobbying that take place within those countries.

This book presents several papers that focus on different aspects of the environment surrounding IP protection for prescription drugs and medical devices. In particular, the chapters make a collective argument that the current IP regimes of national health care systems likely provide too little IP protection from the standpoint of overall economic welfare. An implication is that initiatives by governments to strengthen IP protection will likely convey benefits on society in the form of increased rates of innovation that exceed any related costs resulting from reduced access to already developed drugs and medical devices due to higher prices.

One reason for the net benefits of strengthening IP protection of biopharmaceuticals is the emergence of biologic or large molecule drugs for which strong and effective IP protection is particularly important to encourage innovation. A second is the emergence and growth of advanced manufacturing and automation that makes it possible for imitators or counterfeiters to quickly and cheaply design (or reverse engineer) drugs and devices, thereby reducing the expected returns to risky innovation. A third is a public goods problem whereby individual countries have incentives to limit their spending on patented drugs and devices and “free-ride” on the spending of other countries. This public goods problem argues that there will be too little innovation from an efficiency perspective absent collective efforts to strengthen IP protection regimes.

The way forward for producers of prescription drugs and medical devices is challenging. Critical public attention to “high” prices for prescription drugs and medical devices has been promoted by several well publicized efforts by specific producers to increase substantially the prices of individual products, such as Mylan’s recent announcement of a new price increase for its EpiPen device to address allergic reactions. Growing public concern about high prices for drugs and medical devices is leading to charges of drug company greed by government officials—a development that does not create a favourable environment for arguing for stronger IP protection.

The outlook for strengthening IP protection through trade agreements is not looking promising, particularly given the criticism of the Trans-Pacific Partnership by the two main candidates for the US presidency in 2016, as well as by many members of the US Congress. A movement on the part of national health care systems to implement cost-effectiveness criteria to guide decisions about paying for specific drugs and devices is also a likely bias against companies being adequately rewarded for innovative products.

Against this background, companies might want to focus on encouraging government policies that would lower the overall costs to companies of developing new drugs and devices. Relevant initiatives might include shortening the length of time it takes for patent and regulatory approvals, as well as providing for simultaneous approvals across multiple national markets through increased government regulatory cooperation.

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Leaving Canada for Medical Care, 2016

In 2015, an estimated 45,619 Canadians received non-emergency medical treatment outside Canada. Physicians in British Columbia reported the highest proportion of patients (in a province) receiving treatment abroad (1.5%). The largest number of patients estimated to have left the country for treatment was from Ontario (22,352).

Across Canada, urologists reported the highest proportion of patients (in a specialty) travelling abroad for treatment (1.6%). The largest number of patients (in a specialty) also travelled abroad for urology procedures (4,974).

One explanation for patients travelling abroad to receive medical treatment may relate to the long waiting times they are forced endure in Canada’s health care system. In 2015, patients could expect to wait 9.8 weeks for medically necessary treatment after seeing a specialist—almost 3 weeks longer than the time physicians consider to be clinically “reasonable” (7.1 weeks).

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Understanding the Increases in Education Spending in Public Schools in Canada, 2016 edition


  • Education spending on public schools in Canada increased by $18.2 billion (41.1%) between 2004/05 and 2013/14, from $44.3 billion to $62.6 billion.
  • Compensation (salaries and wages, fringe benefits, and pensions) accounts for most of the increase, growing from $32.1 billion in 2004/05 to $46.4 billion in 2013/14. Salaries and wages increased by 39.2%, from $26.5 billion in 2004/05 to $36.9 billion in 2013/14.
  • Fringe benefits increased 52.6% from $3.4 billion in 2004/05 to $5.2 billion in 2013/14.
  • Teacher pension costs increased 91.5% from $2.3 billion in 2004/05 to $4.3 billion in 2013/14. Pension costs increased as a share of total education spending on public schools from 5.1% in 2004/05 to 6.9% in 2013/14. Ontario, Saskatchewan, and Alberta account for over three-quarters of the increase in pension spending between 2004/05 and 2013/14.
  • Capital spending increased 60.1% over this period, increasing from $3.1 billion in 2004/05 to $4.9 billion in 2013/14. As a share of total education spending in public schools, capital spending increased from 6.9% in 2004/05 to 7.9% in 2013/14.
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New Homes and Red Tape in Ontario: Residential Land-Use Regulation in the Greater Golden Horseshoe

As an increasing number of people move to major Canadian cities, housing prices have continued to rise in its most desirable markets. With growing concern about housing availablility and prices, understanding how public policy affects the supply of new homes is critical. The Fraser Institute’s survey of housing developers and homebuilders provides new insight into this issue. This report is part of a series tallying survey data to represent industry professionals’ experiences and opinions of how residential development is regulated in cities across Canada. This report presents survey results for cities in Ontario’s Greater Golden Horseshoe (GGH).

Estimates of typical project approval timelines in GGH cities range from 14.4 months in Burlington and 15.1 months in Barrie, to 22.3 months in Clarington and 24.3 months in Georgina. Toronto’s estimated timeline is shorter than the regional average, at 17.7 months. Timeline uncertainty’s deterrent to homebuilding is strongest in Barrie.

Reported compliance costs and fees add up to a low of $21,000 per home built in Hamilton and a high of $60,500 per home in Oakville. Reported compliance costs in Toronto average $46,570 per unit.

The survey reports that zoning classifications need to be changed to accommodate more than 50% percent of new residential development in 28 out of 32 cities. Estimates of rezoning’s effect on approval timelines range from under one additional month in King Township to 11.25 months in Hamilton.

Council and community opposition to residential development is perceived as strongest in cities where dwelling values are highest, raising questions about the causes and consequences of local resistance to new housing. The strongest opposition is reported in King Township, Toronto, and Oakville. This opposition is typically not perceived as a significant deterrent to building in Brampton, Oshawa, and Burlington.

While market forces tend to dominate development decisions, industry professionals also expressed a range of specific policy concerns. For example, survey respondents indicate that increasing stringency in municipal and provincial regulation limits consumer choice, and forces smaller builders out of the marketplace. The need for numerous reviews and permissions from various parties, rather than a single streamlined process, is another commonly expressed concern, and one that has grown in recent years. Finally, local real estate professionals suggest that housing affordability may be adversely affected by provincial land-use policies in years to come. The 7,200 km2 of rural land virutally withdrawn from development by Ontario’s Greenbelt can pose unique challenges to future growth in the Greater Golden Horseshoe.

The publication provides a summary index of residential land-use regulation that is calculated by tallying across five key components of regulation’s impact—Approval Timelines, Council and Community, Cost and Fees, Rezoning Prevalence, and Timeline Uncertainty—in the 23 cities that generated sufficient survey responses. This index ranks Burlington as the least regulated and the King Township as the most. Toronto, the GGH’s core, ranks worse than most at 20th of 23 municipalities.

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Economic research indicates that tax rates affect people’s behaviour, with higher taxes contributing to lower rates of economic growth, personal income growth, capital formation, and entrepreneurship. Research on taxation also finds that different taxes impose different costs on the economy. Specifically, production or capital-based taxes impose much higher costs on an economy than do less costly taxes such as consumption taxes. Unlike the consumption-based Harmonized Sales Tax (HST), the Provincial Sales Tax (PST) is partly a consumption tax and partly a tax on production. Restoring the PST has therefore increased the cost of investing in British Columbia and undermined the province’s economic competitiveness.

Primarily due to the re-implementation of the PST, BC’s tax system poses a challenge for the province in terms of attracting investment and facilitating economic growth. Without a more competitive system, BC risks losing entrepreneurs and investment that may gravitate elsewhere. Inaction ultimately means fewer opportunities and less prosperity for British Columbians.

This submission examines BC’s performance relative to other provinces in three key areas of taxation (business taxes, property taxes, and personal income taxes) and provides reform options for each area.

To mitigate the negative effect on the provincial investment climate of restoring the PST, BC could:

  • Introduce a complete sales tax exemption on all business inputs including machinery and equipment. Because sales taxes on capital goods are economically damaging taxes, this is a high priority reform option.
  • Reduce the general corporate income tax rate to 8% from its current 11% rate, encouraging business investment and giving BC a marked advantage over other provinces.

Another important business tax reform is to reduce the disincentive for small businesses to grow. A less ideal but still practical option is to increase the threshold of income eligible for the preferential small business tax rate of 2.5% from $500,000 to $1 million.

When it comes to property taxes, BC appears to have a serious problem in its treatment of certain business classes as municipalities subsidize low residential rates with relatively high rates on business property. Two options could rectify this problem:

  • Equalize property tax rates across business classes.
  • Determine ranges of fairness and thresholds based on average property tax rates in municipalities for different major classes and require all tax rate changes to move toward this range.

To attract and retain highly skilled workers, BC could make the province’s middle and top marginal income tax rates more competitive. Specifically, BC could gradually collapse its top three marginal rates (14.7%, 12.3%, and 10.5%) with the ultimate goal of moving toward a single tax rate on personal income.

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A frequently heard complaint is that for the past several decades middle-class workers and families in Canada have stagnated economically. A typical rendition of this claim appears in the 2016 federal budget from the Department of Finance in Ottawa: “The net result is that even though there has been economic growth over the past three decades, it hasn’t much benefitted the middle class. Too often the benefits have been felt only by already wealthy Canadians, while the middle class and those working hard to join it have struggled to make ends meet.”

If it is true that over the previous thirty or forty years the material welfare of ordinary Canadians has remained stagnant, then this would indeed be a troubling state of affairs. But despite being incessantly repeated as if its truth were incontestable, the assertion of middle-class stagnation is a myth.

Like all widely accepted myths, this myth rests on superficially plausible foundations. Some data for Canada do tell a tale of stagnation or even decline. The inflation-adjusted median income of Canadian families before taxes was 7.0 percent lower in 2011 than it was in 1976. It’s easy to conclude from such a statistic that, over the past several decades, middle-class Canadians have indeed not gained economically.

But statistics, although invaluable, are notorious for their potential to mislead the unwary. Great care must be exercised when assembling, interpreting, and drawing conclusions from them. Statistics emphatically do not speak for themselves.

The statistics that suggest stagnation suffer several problems, including:

  • failure to adjust income for changes in taxes and government transfers;
  • failure to adjust family income for changes in the number of people in the typical Canadian family;
  • an overestimate of the amount of inflation suffered by the Canadian dollar.

First, instead of pre-tax income, looking at family income after taxes and government transfers reveals that, rather than falling by 7.0 percent between 1976 and 2011, real median income rose by 5.6 percent. This figure is more relevant for a family’s economic well-being, because what a family cares about in the end is how much it has available to spend (and to save) after it has paid all taxes and received all transfers.

Next, consider the effects of changes in the average size of families. In 2011, the average number of people in a Canadian family was 2.3, which is 19 percent lower than the 1976 figure of 2.9 persons per family. This difference is not small. It means that the seemingly meager 5.6 percent increase in real median post-tax and -transfer family income becomes a 30.7 percent increase—in per-family-member income—once the data are adjusted for family size.

Finally, consider the distorting effects of over-estimating inflation. The income and wage figures that tell the tale of stagnation are adjusted for inflation using the consumer price index (CPI). But researchers have found that this common inflation adjuster erroneously overestimates inflation of the dollar by about 0.45 percentage points annually.

This error seems small, but over the course of 35 years its distortion looms large. Adjusting for inflation by correcting for this bias in the CPI, we find that in 2011 the income per member of the Canadian family earning the median after-tax and -transfer income was 52.1 percent higher than in 1976. This figure suggests impressive economic improvement, not stagnation. It is all the more marked when compared to the initial 7.0 percent decline cited above over the same period.

An alternative way to gauge changes over time in ordinary people’s standard of living is to calculate how much time an ordinary worker must work today to earn enough income to buy a variety of goods compared to the amount of time an ordinary worker in the past had to work in order to buy the same goods. If the amount of work-time required to buy typical middle-class goods remains unchanged over time, then a conclusion of stagnation is warranted. But if work-time costs have fallen for most such goods, then a conclusion of stagnation is mistaken.

An examination of a wide variety of goods sold by Sears in 1976 and their counterparts sold by Sears today shows that the average Canadian wage earner today works fewer hours than he or she did in 1976 to earn enough income to buy almost all goods. For example, it took the typical Canadian worker 90 percent fewer hours to purchase a colour television and 84 percent fewer work hours to earn enough to purchase a refrigerator in 2011 than in 1976. These findings are yet further evidence that ordinary Canadians have enjoyed significant economic improvement since the mid-1970s.

The bottom line is that the myth of middle-class stagnation is just that: a myth.

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Less Ottawa, More Province: How Decentralization Is Key to Health Care Reform

Despite high levels of public spending, Canada’s health-care system consistently performs more poorly than a number of peer jurisdictions with universal health-care systems. Governments across the country must address this policy challenge in a context of constrained resources, as the federal government and a number of provinces currently face increasing debt loads and other significant fiscal challenges. This paper considers the extent to which policy lessons from Canada’s past can help governments in Canada address the dual challenges of an underperforming health-care system and growing fiscal pressure on governments. Specifically, it considers the extent to which Canada’s experience with reform of federal-provincial transfers and welfare during the 1990s provides lessons that can be applied to the process of reforming Canadian health care.

During the 1990s, the federal government transformed its approach to providing financial assistance to the provinces to support their welfare and social assistance programs. Specifically, the federal government reduced transfers to the provinces but, in exchange, removed a number of “strings” previously been attached to federal funding that prohibited certain types of policy reform. For example, the provinces were permitted to create work requirements for receipt of welfare payments, which previously would have triggered the withholding of federal transfers.

The reform of federal transfers to the provinces led immediately to a wave of policy innovation and reform at the provincial level, as governments across the country pursued various policy paths designed to improve their welfare programs, create solutions that actually addressed local problems, and reduce program costs. Many of these reforms had the intended effects, as there was a marked decline in welfare dependency and government spending on public assistance in subsequent years.

However, no similar wave of policy innovation occurred following the 1990s transfer reforms in Canadian health care. This is largely because the government maintained the various “strings” that were attached to health spending transfers and, specifically, the terms and conditions of the Canada Health Act. As a result, health-care policy in the Canadian provinces has since the 1990s generally been largely characterized by policy inertia while spending on health care has increased considerably.

Canada’s experience with welfare reform provides a model with important implications for how to begin reforming and improving Canadian health care. By reducing transfers in real terms while amending specific provisions of the Canada Health Act that inhibit reform, the federal government can partially address the fiscal challenges it faces today while providing provinces with the freedom to innovate and pursue policy reforms to improve their health-care systems.

Such changes would allow for greater experimentation by each province as they seek out what policy arrangements have the best possibility of improving health-care performance. For instance, provinces would be well served to examine the introduction of cost-sharing arrangements (co-insurance, deductibles, and co-payments) used in most other universal health-care countries to ensure more efficient use of the health-care system by patients. Provinces might also look at removing regulations that currently prevent a greater supply of needed health-care professionals and investment within the health-care sector.

It is uncertain exactly what reforms different provinces would choose and this paper does not weigh the advantages and risks of specific reform options in detail. Instead, based on Canada’s experience with welfare reform, this paper recommends a crucial change, the devolvement of decision--making powers to the provinces, with the federal government permitting each province maximum flexibility (within a portable and universal system) to provide and regulate health-care provision as they see fit.

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Independent Schools in British Columbia: Myths and Realities

Calls for reductions to or elimination of funding for independent schools in British Columbia are based on misperceptions, specifically, that parents choose independent schools because public schools are underfunded; that independent schools are "elite" and that government funding of independent schools drain public expenditures.

The evidence demonstrates a contrasting reality. First, spending on public schools increased by 19.8% between 2004/05 to 2013/14, from $5.3 billion to $6.4 billion (an increase of 7.1% when price changes are considered).

Second, when the decline in enrolments in public schools is taken into account, per-pupil spending in public schools increased over the decade (2004/05 to 2013/14) by 18.3% from $9,971 to $11,797 (adjusted for inflation, in 2014$).

Third, over the decade (from 2003/04 to 2012/13) the vast majority of the increase in spending (61.3 %) went to staff compensation.

Fourth, enrolments in independent schools increased nearly 18% over the decade 2004/05 to 2013/14 and waitlist evidence from 2012 shows that increases may well have been higher had spaces been available. During the same period public school enrolments declined by 8.5%.

Fifth, the elitist caricature of independent schools does not hold. Most exist to serve other parental preferences in education. More than 55% are religiously-oriented and 20% have a specialty teaching or learning emphasis.

In 2015/16, the government spent an average of $8,288 per public school student for operational expenditures while it granted an average of $3,911 per independent school student. If funding were eliminated and more than 37,464 students migrated back to public schools, provincial expenditure on education would increase, further straining finances.


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Economic Freedom of the World: 2016 Annual Report

The index published in Economic Freedom of the World measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are per-sonal choice, voluntary exchange, freedom to enter markets and com-pete, and security of the person and privately owned property. For-ty-two data points are used to construct a summary index and to meas-ure the degree of economic freedom in five broad areas: 

  • size of government: expenditures, taxes, and enterprises;
  • legal structure and security of property rights;
  • access to sound money;
  • freedom to trade internationally; and
  • regulation of credit, labor, and business.

Since our first publication in 1996, numerous studies have used the data published in Economic Freedom of the World to examine the im-pact of economic freedom on investment, economic growth, income levels, and poverty rates. Virtually without exception, these studies have found that countries with institutions and policies more consistent with economic freedom have higher investment rates, more rapid eco-nomic growth, higher income levels, and a more rapid reduction in poverty rates. 

The EFW index now ranks 159 countries and territories. Data are available for approximately 100 nations and territories back to 1980, and many back to 1970. This data set makes it possible for scholars to analyze the impact of both cross-country differences in economic free-dom and changes in that freedom across a time frame of three and a half decades. 

Economic freedom around the world in 2014 

Average chain-linked rating
The average chain-linked economic freedom rating for advanced coun-tries with ratings since 1985 has increased from 6.9 to 7.7 in 2014. The average chain-linked economic freedom rating for developing countries with ratings since 1985 has increased from 5.0 to 6.7 in 2014. 

Top-rated countries
Hong Kong and Singapore, once again, occupy the top two positions. The other nations in the top 10 are New Zealand, Switzerland, Canada, Georgia, Ireland, Mauritius, the United Arab Emirates, and Australia and the United Kingdom, tied for 10th.

Other major countries
The rankings of some other major countries: the United States (16th), Germany (30th), Japan (40th), South Korea (42nd), France (57th), Italy (69th), Mexico (88th), Russia (102nd), India (112th), China (113th) and Brazil (124th).  

Lowest-rated countries
The 10 lowest-rated countries are: Iran, Algeria, Chad, Guinea, Angola, the Central African Republic, Argentina, the Republic of the Congo, Libya and, lastly, Venezuela.

Nations that are economically free out-perform non-free nations in indicators of well-being
Nations in the top quartile of economic freedom had an average per-capita GDP of $41,228 in 2014, compared to $5,471 for bottom quartile nations (PPP constant 2011 US$).

In the top quartile, the average income of the poorest 10% was $11,283, compared to $1,080 in the bottom quartile in 2014 (PPP constant 2011 US$). Interestingly, the average income of the poorest 10% in the most economically free nations is twice the average per-capita income in the least free nations.

Life expectancy is 80.4 years in the top quartile compared to 64.0 years in the bottom quartile.

Political and civil liberties are considerably higher in economically free nations than in unfree nations.

Chapter 1: Economic Freedom of the World in 2014
The authors of the report, James Gwartney, Robert Lawson, and Josh-ua Hall, provide an overview of the report and discuss why economic freedom is important. 

Chapter 2: Country Data Tables
The chapter provides detailed historical information for each of the 159 countries and territories in the index.

Chapter 3: Gender Disparity in Legal Rights and 
Its Effect on Economic Freedom
by Rosemarie Fike
The EFW index uses many objective measures that implicitly assume that all members of society have equal access to economic institutions. This is not a reality for many women across the world. Formal legal re-strictions to the economic rights of women in many countries prevent a significant portion of the population from engaging in mutually beneficial exchanges. In addition, social norms can place very real barriers in front of women wishing to own property, operate a business, and engage in voluntary exchange. This chapter considers several alternative methods of adjusting the EFW index to account for gender bias present in the data used in its construction.

National Case Studies
Three case studies examine the profound effect of major shifts in eco-nomic freedom in three countries: Venezuela, Ireland and the United States. In each, the authors of the chapter explain the causes and re-sults of the changes in economic freedom.

Chapter 4: The Critical Role of Economic Freedom in 
Venezuela’s Predicament
by Hugo J. Faria and Hugo M. Montesinos-Yufa
Venezuela has been trapped in a lengthy decline in economic freedom that started long before Hugo Chavez assumed the presidency in 1999. But Chavez, his United Socialist Party of Venezuela, and successor, Nicolás Maduro, have presided over a continued, stunning slide in economic freedom that landed Venezuela in dead last place among approximately 150 countries from 2010 to 2014. The economic consequences have been disastrous and, if anything, are getting worse.

Chapter 5: Economic Freedom and Growth in Ireland, 1980 to 2014
by Robbie Butler and John Considine
Ireland has had a moderately high level of economic freedom back to the initial year of the EFW data in 1970. In the 1970s and 1980s, its score was typically around 6.5 out of 10 and its rank around 20th. Ireland entered the top 10 in 1995 and has remained there except for a couple of years following the financial crisis of 2008. Since 2010, Ireland has regained its momentum in both economic freedom and economic growth, as the authors show. It re-entered the top 10 in economic freedom in 2012.

Chapter 6: Economic Freedom in the United States, 1980 to the Present
by Dean Stansel and Meg Tuszynski
While the reduction in economic freedom of the United States has been moderate relative to that of Venezuela, nonetheless the decline has been substantial. The United States’ high-water mark in economic freedom came in 2000 with a score of 8.65 and a rank of second place. The decline has been steady since and, in 2010, the United States fell out of the top 10. The recent economic performance of the United States has been sub-par and its recovery from the Great Recession has been the slowest since World War II.

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