Donald Trump pulled off an historic upset to win the Presidency. How big of an upset? Betting markets in England offered 3-1 odds against him on Election Day. Nate Silver at Five Thirty Eight gave Hillary Clinton around a 70 percent chance to win, with many criticizing him for giving Mr. Trump too great of a chance. The Iowa Electronic Market, which is normally quite accurate, gave Ms. Clinton almost an 80 percent chance of winning.
Mr. Trump’s campaign slogan was “Make America Great Again.” Now he must set about restoring America’s lost greatness. In looking to the past, we should remember that America, like every person and nation, has never been perfect. Our history includes slavery, Jim Crow segregation, and broken promises to and mistreatment of Native Americans. By taking the best of the past and omitting the regrettable things, we could make America greater than before.
I think that renewing freedom, and specifically economic freedom, would make a great start. Freedom has been America’s distinctive element, the cause that led the colonists to take up arms against England. America’s founding documents offer great statements of the principle of liberty.
We have lost ground on economic freedom. Canada’s Fraser Institute and Southern Methodist University’s O’Neil Center compile the Economic Freedom of the World (EFW) index annually. Economic freedom means the ability of individuals and businesses to engage in voluntary transactions and make decisions about their property and wealth. The index measures how closely a nation approaches the ideal of a market economy. The EFW index allows economists to test whether free markets and competition are truly indispensable for a prosperous economy.
Studies using the EFW index have documented the link between free markets and prosperity. GDP per capita, how economists measure the standard of living, and growth in inflation-adjusted GDP per capita are both substantially higher in nations with more economic freedom. And economic freedom does not merely benefit the rich: the incomes of the poorest 10% are also much higher in the freest nations.
The 2016 EFW ratings were released last month, and the United States ranked 16th, unchanged from the previous year. Currently the index rates 157 nations, so we make the top 10%. But between 1980 and 2000, the U.S. was one of the three freest nations in the world. Our economic freedom has declined notably.
What can we do to increase economic freedom? The index measures freedom in five broad areas: the size of government (meaning tax rates and spending), legal structure and the enforcement of property rights, sound money, freedom for international trade, and regulation. Each component is evaluated using internationally available data.
Our worst score, both absolutely and relatively, is in the size of government component, while we score highest in sound money and rank highest in regulation. Income tax rates are the size of government component with our lowest score. President-Elect Trump’s proposed tax cuts could be a first step toward increasing economic freedom. In addition, the U.S. has one of the highest corporate income tax rates in the developed world, even though many companies secure exemptions from the tax. Our corporate income tax combines high rates, which deter productive economic activity, and little revenue generation due to loop holes rewarding unproductive political lobbying.
Regulation is another area ripe for improvement. We score well on labor market regulation because the U.S. does not penalize businesses for dismissing workers like many European nations do. But several recent policy measures have increased the cost of hiring. Two of note are the Affordable Care Act, which increased the cost of employee benefits, and the new overtime rule raising the annual earnings threshold for paying salaried workers.
Economic freedom drives prosperity and creates opportunity for individuals to live their lives on their own terms. Restoring America’s leadership in economic freedom would be an important step toward delivering on President-Elect Trump’s campaign pledge.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The Economic Freedom of the World report is available at www.freetheworld.com. The opinions expressed in this column are the author’s alone and do not necessarily reflect the views of Troy University.