Freedom & our faltering economy

Which candidate, President Obama or Mitt Romney, has the right prescription for what ails the US economy? It’s a question — maybe the key question — that every voter should ask. But first you need the answer to a different puzzler: What went wrong?

Why did the US economy surge in the 1980s and 1990s, only to stagnate and sink in the 2000s?

Imagine if you could time travel back to 1999 and tell people then what the next unlucky 13 years held. The ’99ers might well guess the Y2K problem really had crashed all the world’s computers at midnight. But once you informed them the Millennium Bug was a bust, what would you say next?

Barack Obama would tell them a story. A liberal fantasy, really. It would be a tale about how the Long Boom was manna for Wall Street but a mirage for Main Street. And finally over the past decade, all the tax cuts and deregulation and inequality finally caught up with the US economy and led to a financial crisis and Great Recession.

As Obama told a crowd in Osawatomie, Kansas, late last year, “There is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune. ‘The market will take care of everything,’ they tell us. If we just cut more regulations and cut more taxes — especially for the wealthy — our economy will grow stronger. But here’s the problem: It doesn’t work. It has never worked.”

And how would Mitt Romney explain why from 1981 through 2000, the US economy grew at an average annual rate of 3.4 percent and created some 42 million jobs — but from 2001 through 2011, it grew at less than 2 percent, creating no net new jobs?

Since Romney is famous for loving deep dives into data, he should check out a new study from the Fraser Institute. Obama, too, for that matter.

Every year, the Canadian think-tank ranks the world’s nations on how free their economies are (or aren’t) based on factors such as size of government, security of property rights and freedom to trade. In the 1980s and 1990s, it listed the United States consistently as one of the freest economies in the world, typically ranking 2nd or 3rd through that entire period.

Since then, however, the US economy’s freedom ranking had steadily eroded — to 8th in 2005, 15th in 2009 and 18th in 2010. The United States is now nestled between Qatar and Kuwait.

One problem is weakened property rights, the institute notes, “such as the increased use of eminent domain to transfer property to powerful political interests . . .[and] the violation of the property rights of bondholders in the bailout of automobile companies.”

Another drag is bigger government, with Fraser noting that “government consumption, transfers and subsidies, and government investment all rose during the [last] decade, while their private-sector counterparts were lower.” And unless America’s slide down scale is reversed, research suggests, the future annual growth of the US economy might be half its historic average.

Other studies hint Fraser is on target. The Heritage Foundation’s Index of Economic Freedom also shows stagnation and erosion the past decade.

And a well regarded study by two Swedish economists found a negative correlation between government size and economic growth. Where government size grows by 10 percentage points, annual growth rates fall by 0.5 to 1 percent. In 2000, US federal spending was 18 percent of GDP. This year, it’s 24 percent.

So if too much government and not enough freedom are a big part of America’s economic woes, then the candidate with the right solution is the one promising less government and more freedom.

Maybe that’s both of them. Maybe it’s neither of them. But if you can answer the economic-freedom question, you’ll know which lever to pull in seven weeks.

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About the Author


  • James Pethokoukis is a columnist and blogger at the American Enterprise Institute. Previously, he was the Washington columnist for Reuters Breakingviews, the opinion and commentary wing of Thomson Reuters.

    Pethokoukis was the business editor and economics columnist for U.S. News & World Report from 1997 to 2008. He has written for many publications, including The New York Times, The Weekly Standard, Commentary, National Review, The Washington Examiner, USA Today and Investor's Business Daily.

    Pethokoukis is an official CNBC contributor. In addition, he has appeared numerous times on MSNBC, Fox News Channel, Fox Business Network, The McLaughlin Group, CNN and Nightly Business Report on PBS. A graduate of Northwestern University and the Medill School of Journalism, Pethokoukis is a 2002 Jeopardy! Champion.


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