Economic freedom hit a record high in 2019—but then came 2020. That’s when government shutdowns limited economic freedom, with devasting impacts to people’s lives and livelihoods.
According to the 2021 Economic Freedom of the World Report, which measures economic freedom according to a number of economic variables, the global average for economic freedom hit a new high at 7.04 out of 10 in 2019, the most recent comprehensive data. But that’s going to fall in 2020 data from COVID-related restrictions and sky-high government spending.
Let’s first consider the benefits of economic freedom.
The top quarter freest nations have annual GDP per person over $50,000 (purchasing power adjusted), compared to under $6,000 in the quarter least free nations. The average income of the poorest 10% in the freest nations is more than $14,000, compared to the least free nations at under $1,600. In the least free nations, one out of every three people lives in extreme poverty ($1.90 a day) compared to less than 1% in the most-free nations.
And economically free nations have increased life expectancy, better health care, more educational achievement, and higher levels of happiness. Research has shown that happiness is driven even more by economic freedom than the increased prosperity it generates. People care about self-sufficiency, and the opportunities to attain it are more plentiful in places with more economic freedom.
During the financial crisis of 2007-2008, economic freedom declined globally. Governments responded with increased spending (as they would later respond to the COVID-19 pandemic), though with noticeable differences between advanced and emerging economies. For example, from 2007 to 2010, advanced global spending increased by 16% compared to 53% in other economies.
As the financial crisis receded, economic freedom recovered and moved to new heights. In 2007, the average economic freedom score was at its highest level ever, 6.90. It fell to 6.86 in 2009 as governments expanded their powers and spending in response to the crisis. By 2011 it had recovered to 6.93, edging out the score at the beginning of the crisis, and continued to increase.
Global growth resumed as economic freedom recovered.
While comprehensive 2020 data aren’t available yet, fiscal projections by the International Monetary Fund (IMF) indicate economic freedom took a huge hit from the extraordinary actions by governments.
Excessive government spending reduces economic freedom by crowding out people’s decisions in the productive private sector. To fund deficits now or later, governments consider raising taxes or just printing more money. Unfortunately, these actions make the problem worse, especially to the neediest among us, as the answer should be more opportunities to prosper through less spending—the true burden of government.
The IMF’s data show advanced economies being more profligate than other economies in spending this time around. Average spending increased by 28% between 2019 and 2021 in advanced economies while developing economies lagged at 12% for a world average of 21%.
Overall, government deficits increased by 280% in the advanced world, and 71% elsewhere, doubling global deficits. Gross government debt rose from 104% of GDP to 123% in advanced economies and from 54% to 64% elsewhere. These results threaten human flourishing worldwide.
In the U.S., America had a record low poverty rate and record high median household income in 2019. This was a result of increased economic freedom from the last administration’s deregulatory and tax cutting efforts. The unemployment rate reached new lows for almost every demographic and the overall rate was at 3.5% in February 2020.
As shutdowns happened across the country, the national unemployment rate skyrocketed to 14.8% in April 2020 and remains higher at 5.2% today. And many of those who have a job have seen their purchasing power fall due to higher inflation. Costly shutdowns and excessive spending have hit Americans’ lives and livelihoods hard, and these will have long-lasting effects.
Clearly, control by government through shutdowns over the last year caused much economic destruction. The already-passed $6 trillion in spending since the shutdown recession started is more spending than every economy except the U.S. and China. And this excess spending already contributed to a tripling of the deficit to $3.1 trillion in 2020.
After the Biden administration passed its excessive $1.9 trillion American Rescue Plan Act, it’s calling for an additional $6 trillion in “infrastructure” proposals (something Americans can’t afford).
Fortunately, we have a sound blueprint of what works well for increased opportunities to let people prosper: economic freedom through free-market capitalism. We need more of it now.