It's Economic Freedom Stupid

One of the most memorable and successful campaign slogans in a Presidential election has been ‘It’s the Economy Stupid’. In 1992 it was a variation of a phrase coined by campaign strategist James Carville of then presidential candidate Bill Clinton. It worked to defeat the incumbent President George H. Bush by portraying him as not adequately addressing the economy. 

For the 2012 presidential election the key issue should be ‘Its Economic Freedom Stupid’. This encompasses more than only the economy and is not just a political slogan for a candidate.  It is an issue that has to be addressed to ensure that America wins and returns to the path of prosperity rather than continue in decline for the 21st century.

Economic freedom involves the free movement of capital, labor and resources to areas where they promote greater economic prosperity. Economic freedom- empowers individuals to be productive, protects property rights, expands freedom to trade internationally, minimizes government regulation of business, supports sound money and relatively low taxes, enforces the rule of law, encourages entrepreneurship but allows freedom to fail and fosters voluntary exchange. The American Idea of liberty derived from our creator and the economic freedom it nurtures gave birth to the American Dream. These principles have motivated individual upward mobility, inventions and attracted ambitious talent from all over the world to America.

However, we cannot maintain our leadership in the world by having leaders who are complacent in the decline of America as we have now. Despite the ‘blame someone else’ rhetoric from President Obama his record as President has diminished America’s standing in economic freedom. His economic and other policies such as Obamacare Bill no matter how they are spun will continue to undermine economic freedom. This becomes more evident as designed, as the details will kick in at the politically convenient time after the 2012 election. The recent controversial contraception mandate is only the tip of what is to come in 2013.

In 2000 the U.S was ranked 3rd in the world behind only Hong Kong and Singapore in the Index of Economic Freedom which is published annually by the Heritage Foundation and the Wall Street Journal. In the latest 2012 publication released last month by Heritage and WSJ, the U.S has further declined and now we are tenth behind countries such as Australia, New Zealand, Canada, Ireland and Mauritius. While most of the attention is on the unemployment rate, the Index of Economic Freedom is an important analysis about the future of America. It has received little attention in the media but should be in the conversation during the election about which path we should choose.

Last year, the U.S was ranked ninth. It is the fourth consecutive year that the U.S has declined on the index. Countries such as the U.S and Europe that historically led the world in economic freedom now led the global decline due to excessive government regulation and stimulus spending. Edwin Feulner president of the Heritage Foundation and co-editor of the 2012 Index of Economic Freedom wrote in the Wall Street Journal explaining the new publication: A Step Backward for Economic Freedom in 2012.

The good news from this publication is that economic freedom has continued to increase in Asia and Africa.  Mr. Feulner notes in the WSJ article the vital linkage between advancing economic freedom and eradicating poverty. This observation complements the fact that economic freedom has successfully increased human prosperity, extended life spans and improving quality of life in exponential ways in the U.S and throughout the world in the last 200 years. In 1800, 85% of everyone alive lived on less than $1 per day (measured in 2000 dollars). Today only 17% do.

In the last 30 yrs. as more countries were transitioning to more free economies the global surge in growth spread wealth from rich to poor countries and created greater equality in global markets. This was NOT because governments took measures to guarantee these end results through redistribution of wealth, instead the presence of less government made way for economic freedom that increased the potential of equal opportunity for individuals to succeed. President Obama would like Americans to think the opposite will work to help the U.S economy grow. There is a correlation during that period with the growth of these countries. They either distanced themselves from a socialist style government or former communist countries moved towards free market policies.

During that time developing countries grew two to three more times than developed countries. The share of world GDP held by emerging markets increased to 22% from 13% as the U.S share remained at about 26%. The global middle class increased by 600 million-800 million people in China, India, Brazil and other developing countries.

Conversely, a decline in economic freedom will lead to a lower standard of living and slow growth in developed countries like the U.S and some in Europe. Last month 9 countries in the European Union mired in debt and slow growth lost their triple- A rating from Standard and Poor’s. The decline of Economic Freedom in America also reversed a little noticed trend from 1980 to 2007-the middle class was shrinking not because it was getting poorer but rather because it was getting richer. Per capita income increased by 65% and household income went up substantially in all income categories. During that period the percentage of households making $35,000 remained the same while those making $105,000 in inflation-adjusted dollars more than doubled to 24% from 11%. President Obama often repeats the line that the ‘rich are getting richer’ to justify higher taxes, however at the time there was an increasing number of ‘rich people’ earning more, the rest of the population was also experiencing an increase in income in that period but that trend …ended in 2007. President Obama believes he guarantee an increase in income for the middle class and poor by controlling or redistributing the income and growth of the so-called ‘rich’. It is oblivious to him that the same factors that promote economic freedom also cause the increase of income for everyone and results in an increase in tax revenue. There will not be enough ‘rich’ to tax to suit his liberal spending appetite. See Millionaires Go Missing.

The decline in economic freedom is normally synonymous with the growth of government.  Expansion of government hinders the mobility and vitality of capital as it seeks more control of them through taxes and regulations. If the U.S continues its path away from limited government and economic freedom, there will be a transition to a more limited people and limited potential as a nation. This undermines the first words in the preamble of the Constitution ‘We the People’

The transition to a bigger government and away from a limited government has been the case under President Obama. He wants Americans to think that the economy would be better if the government could increase taxes on the rich and have more control on the mobility of capital. This has never worked to increase revenue long term. Lower tax rates have proven to broaden the tax base because it expands economic freedom, investment and growth. The question that needs to be constantly asked of Mr. Obama is ‘Why should the government take more of other peoples’ money when government has been so inept in managing or ‘investing’ what it already takes?

Mr. Obama likes to say that his policies would work if the GOP did not obstruct them, however when he came to office his Democrat Party had leadership of both the House and Senate. He was able to unleash a barrage of Keynesian high tax and spend policies mainly through the stimulus package and expansion of government regulations including his signature Health Care bill. What did America get for it? A change towards the same path of countries where these high tax and spend policies have failed such as in Europe and Japan and created unsustainable debt.

When Mr. Obama became President there were three trade treaties waiting for him to send to Congress. These were free trade treaties with Panama, Columbia and South Korea, which would enlarge the market for American made goods and create jobs. For over 2yrs. he blamed Congress for not passing them even though the passage could only occur if he sent them over to be passed. In the meantime Canada and other countries passed trade deals with the three countries.

More recently, President Obama blocked the Keystone pipeline deal with Canada that would not almost instantly create at least 20,000 American jobs but would make us less reliant on Mid-East oil. This despite studies for over three years by his State Department that revealed that there would be little or no impact to the environment and supported by the President’s own Jobs Council. The Canadian Prime Minister since that has visited China to make deals on selling oil via a pipeline that would instead go to the Pacific coast of Canada. China is also making deals with Brazil to buy their oil, some of which has been extracted due to loans to that country by the Obama administration. Brazil has increased their oil production by 186% in the last 20yrs. This while his policies deters the expansion of oil drilling in the U.S on federal lands. The President’s regulatory bias against fossil fuel extraction in the U.S has made us less competitive in a world when other countries are trying to extract theirs.

Our energy industry is probably the most affected by less economic freedom. It is also one of the highest taxed and revenue generating industries. This while favorite industries of liberals such as for alternate energy often pays little or no taxes and is largely subsidized by taxpayers. Again government policies suppress economic freedom and the free market in the effort to guarantee outcomes with other peoples’ money. President Obama has tried to fulfill the liberal ideology by under minding fossil fuel exploration and use in order to ‘fix’ the market to be more reliant on alternative fuels.  This has been a major assault on the free market and personal choice.  The President had warned that under his policies ‘energy prices would necessarily go up’ to deter fossil fuel use. This shows no regard of how the economy would be affected and the cost of living for Americans. His Energy Secretary Steven Chu also said he “would like to see energy prices similar to those in Europe”.

 Coal is still a major source of electricity in the U.S, but the administration has implemented policies that force coal plants to close despite new technologies that make it cleaner than before. This has put into question the reliability of the national grid, because wind and solar energy cannot suffice for lost output due to less coal power.  This while the administration wants more people to drive subsidized and limited use expensive electric cars. Ironically these cars are often twice the cost of market favored, more widely available and practical fuel-efficient cars driven by mainstream Americans.  The drivers of the subsidized electric cars are mostly of upper income. The administration through the EPA has tried to create a market for these cars with CAFE standards and mandates.

By far most of the increases in oil, gas and coal production in the last few years have been on private lands and not due to Obama policies as he touted in his SOTU address. See: 10 Dubious Claims From Obama’s State of The Union.The oil and gas exploration boom in North Dakota has mainly been on private lands. That state has one of the lowest unemployment rates and a growing economy.

One of the greatest ways expansion of government under President Obama has constrained economic freedom has been through the appointments of officials or Czars with vast powers that affect the economy with little or no accountability to elected members of Congress and to American taxpayers. These include appointees to the National Labor Relation Board (NLRB), the EPA, and more recently the controversial and possibly illegal appointment of Richard Cordray as the first chief of the new Consumer Financial Protection Bureau.

The conversation about this last appointment missed the main reason he was not confirmed with Republican support. The Republicans had written the President last May to express concern that this position should have greater accountability and a budget overseen by elected officials. The President did not respond but blamed the Republicans for blocking his appointment and hindering protection of consumers. This is just one example of how limited government principles under President Obama has been ignored as to cater to his liberal ideology of a bigger government. It also illustrates one reason why the expansion of economic freedom under this President is unlikely. Through his regulations and appointees he has enacted rules that may not be based on their viability or to facilitate economic growth but satisfy the ideological fantasy of a few in government and those that fund their campaigns such as labor unions and special interests. Picking winners and losers with this philosophy significantly inhibits the potential of economic freedom and feeds crony capitalism that the President pretends he fights against. See: A Fairness Quiz for the President.

Probably the greatest threat to economic freedom in America will come in 2013 as taxes on investment and dividends are set to increase to help pay for Obamacare while more mandates from that legislation comes into effect. In addition the Bush tax cuts are set to expire which will affect many small businesses and thus job creation. The U.S has already the highest corporate taxes in the world at 39.2%. The average corporate tax rate in the 15 highest industrialized countries is 26%. To be more globally competitive some conservatives and GOP candidates have proposed tax reform with a low flat tax while eliminating most deductions and corporate loopholes. This has been proven in other countries such as Hong Kong (Ranked number #1 on the Index of Economic Freedom) to be fairer and increase overall revenue while stimulating growth and jobs.

States have proven to be experiments of economic policies. There is no better proof that lower taxed states with lower and predictable regulations but more economic freedom such as Texas and Indiana are doing better than high taxed and regulated states like California and New York. See: ‘The Heartland Tax Rebellion’– WSJ that compares high and low tax states.

According to the Small Business Administration the total regulatory costs amount to $1.75 trillion annually, which is almost twice as much as all individual income taxes collected in 2010. To improve economic freedom in the U.S, there is a need for reforms with cost-benefit analysis of regulations to reduce those that are more of a burden. Instead more are added every year.

In the 21st century America will not only have to compete with traditional major industrialized countries but also have to compete with increasingly economically free and growing economies such as BRIC countries (Brazil, Russia, India and China) and possibly CIVET countries (Columbia, Indonesia, Vietnam, Egypt, Turkey and South Africa) and many more. Not only in trade and industry will America have to compete, but also for scarce resources such as energy and human skills such as engineering, science and entrepreneurial investors who often become pioneers.

America has been the ‘brain drain’ magnet for talent when it was by far the most economically free destination with opportunities for ambitious talent. Now we have competition and are less attractive for those talents. This point highlights why there needs to be education and immigration reform to attract those with advanced degrees and allow those trained here at universities in science and engineering to stay. Steve Jobs once told Mr. Obama that Apple employs 700,000 factory workers in China because it can’t find 30,000 engineers in the U.S that it needs on site at it’s plant. See Steve Job’s Advise to Obama, (which he did not take).

These challenges amplify the reasons why we need a new president who can lead on promoting economic freedom. America needs a better business climate where private enterprises strive, create jobs and flourish.  Restoring strong economic freedom allows the competitive environment where capital such as investment or human and natural recourses from other countries gravitate to America to maximize prosperity and jobs. Simply put, leading on economic freedom is conducive to economic growth, and empowers the upward mobility and standard of living of individuals especially the middle class and the poor. It is a sharp contrast to President Obama’s vision of big government that seeks to redistribute wealth through class warfare, higher taxes and sewing resentment of success.