In case you were asleep in geography and civics classes, Estonia is a Baltic state and was, twenty years ago, a communist country. COMMUNIST. Now its economic policies are declared to be more free than are those of the USA. We should be ashamed.
For the first time in the 11 years that the Heritage Foundation and The Wall Street Journal have been publishing the Index of Economic Freedom, the U.S. has dropped out of the top 10 freest economies in the world.
In 1998, the U.S. was the fifth freest economy in the world, in 2001 it was sixth, and today it sits at 12th, tied with Switzerland. The U.S. drop in ranking is explained in part by a slightly lower score, but mostly by the good performance among its competitors. The lesson? Stand still on the highway to economic liberty and the world will soon start to pass you by.
The 2005 Index, released today, ranks Hong Kong once again as the world's freest economy, followed by Singapore and Luxembourg. But it is Estonia at No. 4 that makes the point. This former Soviet satellite is a model reformer, setting the standard for how fast countries can move ahead in the realm of economic liberalization. Ireland, New Zealand, the U.K., Denmark, Iceland, Australia and Chile, all relatively recent converts to free markets, also outpace the U.S. this year. (link)
How could this be?
The most deflating aspect to this story is that the situation here is only going to worsen. Both Republicans and Democrats now enjoy legislating nifty new regulations and creative corporate tax burdens. And everyone knows, we hate the rich. So we have fallen behind Estonia. And Iceland for God's sake.
The Index scores economic freedom in 10 categories, ranging from fiscal burdens and government regulation to monetary and trade policy. The U.S., with its strong property rights, low inflation and competitive banking and finance laws, scores well in most. But worrying developments like Sarbanes-Oxley in the category of regulation and aggressive use of antidumping law in trade policy have kept it from keeping pace with the best performers in economic freedom.
Most alarming is the U.S.'s fiscal burden, which imposes high marginal tax rates for individuals and very high marginal corporate tax rates. In terms of corporate taxation as an element of economic freedom, the U.S. ranks a lowly 112th out of the 155 countries scored, and its top individual tax rate ranks only slightly better at 82nd. U.S. government expenditures as a share of GDP increased less in 2003 than in 2002, but the rise since 2001 is what explains the U.S.'s decline in score over the period.
Zimbabwe is only a year or two away.