Reclaiming Economic Freedom
Every year, the Heritage Foundation, in conjunction with the Wall Street Journal, dutifully churns out its annual Index of Economic Freedom, a ratings guide to countries’ relative corporate hospitality.
The book-length report makes a quite modest global media splash every year. A Lexis search shows the 2008 report, issued last week, garnered (mostly quite short) stories in New Zealand, Australia, China, Russia, Thailand, Bahrain, the United Kingdom, India, Ireland, the Philippines, Poland, Singapore, Ukraine, Taiwan, Korea, the United States, Zimbabwe, and various wire services. If past years are any guide, over the course 2008, the report will likely be referenced several times in the Wall Street Journal editorial pages, and in various other publications. Not bad, but not earth-shattering.
The Index of Economic Freedom is significantly more important than this news coverage suggests, however.
For the last several years, the report has been subtitled "The Link Between Economic Opportunity and Prosperity," and a central thesis of the report is that removing controls on corporations will create economic wealth. When apples are compared to apples — that is, when countries of similar economic development are compared — this claim is revealed to be nonsensical, as various studies from the Center for Economic and Policy Research and many others have shown.
But more important than the asserted connection between removing corporate restraints and prosperity is the report’s definitional maneuver. It claims "economic freedom" — and all of the justifiably positive connotations with freedom — as part of the corporate agenda. It equates "economic freedom" with corporate superiority to popular control.
The Index of Economic Freedom is not the only tool to spread this propaganda, but it is among the most influential. The idea has seeped deep into the culture.
The Millennium Challenge Corporation (MCC), which was supposed to be the major Bush administration anti-global poverty innovation (but has in fact failed to distribute more than a tiny fraction of funds allocated to it) by statute selects recipient countries in large part based on measures of their "economic freedom." The MCC actually relies on the Heritage Foundation’s Index of Economic Freedom for determining a component (countries’ trade openness) of the MCC’s economic freedom rating.
Members of Congress have introduced dozens of bills and resolutions referencing "economic freedom" over the last decade. One small example: Senator Barack Obama, along with Senators Chuck Hagel, R-Nebraska, and Maria Cantwell, D-Washington, in 2007 introduced the Global Poverty Act of 2007. (A version in the House of Representatives, introduced by Adam Smith, D-Washington, has 84 co-sponsors.) The bill would require the President to develop a strategy to meet the Millennium Development Goal of reducing the number of people in the world living in extreme poverty by one half. Although the bill is mainly aspirational — operationally, it doesn’t require anything than development of a strategy — it embraces a noble goal, and the world would be a better place if the legislation became law. But it is noteworthy that a "finding" of the bill is that "Economic growth and poverty reduction are more successful in countries that invest in the people, rule justly, and promote economic freedom."
The Global Poverty Act does not specify what "economic freedom" means, and the sponsors of the bill would almost certainly disagree with some of the detailed definition supplied by the Heritage Foundation. But they have, at least in passing, adopted the framework.
Just what exactly does the Heritage Foundation mean when it says "economic freedom?" The Index of Economic Freedoms contains a preposterously precise formula for measuring and comparing so-called economic freedoms, based on the following 10 factors: business freedom, trade freedom, fiscal freedom, government size, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption and labor freedom.
OK, that’s not much of an answer to the question. What do these grand phrases mean when Heritage translates them into concrete terms?
Here are some examples:
* "Trade freedom" measures not just how low tariff rates are, but the extent to which a country maintains "non-tariff trade barriers," such as "safety and industrial standards regulations" and "advertising and media regulations." Heritage considers national restrictions on biotechnology products — which apply equally to domestic and foreign genetically modified foods — as trade restrictions.
* "Fiscal freedom" is simply code for how low tax rates are. This includes corporate tax rates — which the Heritage formula weighs as heavily as taxes on individuals.
* Countries are awarded more points the smaller the size of the government relative to national economic output. The most points are awarded for a government with zero size!
* "Investment freedom" actually has almost nothing to do with the ability of people in a country to make investments. Heritage defines investment freedom as whether there are restrictions on foreign investment, including whether any industrial sectors are off limits for security reasons, and whether expropriation is permitted — even with compensation paid to investors.
* "Financial freedom" means whether banks and high finance are unregulated. The United States is apparently penalized for the various modest Sarbanes-Oxley rules passed after the Enron and related debacles.
* Heritage contorts "labor freedom" to mean the ability of corporations to fire workers without restraint and the absence of any minimum wage rules (with countries penalized the higher their minimum wage relative to average value added per worker).
The successful effort by the Heritage Foundation and its allies to capture the term "economic freedom" is not just a propaganda coup, it is a heist.
Heritage and its collaborators have stolen and debased the grand and noble vision of Franklin Roosevelt. They explicitly state that they are carrying out a project initiated by Milton Friedman (author in 1961 of Capitalism and Freedom, among many other works) to define economic freedom in terms of individual economic actors’ — typically corporations, though they often prefer to glorify individual entrepreneurs — ability to escape public control. This ideal is held out against Roosevelt’s idea of a caring and sharing society, where the crucial economic freedom is freedom from want.
In his famous 1941 "Four Freedoms" speech, Roosevelt offered a vision of a world defined by four freedoms (freedom of speech, freedom of religion, freedom from want, and freedom from fear).
"Translated into world terms," Roosevelt proclaimed, freedom from want "means economic understandings which will secure to every nation a healthy peacetime life for its inhabitants — everywhere in the world."
His specific 1941 agenda, unfortunately, remains a suitable elaboration for the present day of this more appealing, democratic and humane concept of economic freedom.
"The basic things expected by our people of their political and economic systems are simple," Roosevelt declared.
* Equality of opportunity for youth and for others.
* Jobs for those who can work.
* Security for those who need it.
* The ending of special privilege for the few.
* The preservation of civil liberties for all.
* The enjoyment of the fruits of scientific progress in a wider and constantly rising standard of living."
"These are the simple, the basic things that must never be lost sight of in the turmoil and unbelievable complexity of our modern world. The inner and abiding strength of our economic and political systems is dependent upon the degree to which they fulfill these expectations."
"Many subjects connected with our social economy call for immediate improvement. As examples:
* We should bring more citizens under the coverage of old-age pensions and unemployment insurance.
* We should widen the opportunities for adequate medical care.
* We should plan a better system by which persons deserving or needing gainful employment may obtain it."