We interviewed Prof. James Gwartney, one of the authors of the “Fraser Institute’s Economic Freedom of the World: 2012 Annual Report” the other day and along with enjoying the conversation, Gwartney made an important observation about the current poor state of the US economy.
The Fraser report shows that the US has dropped significantly over the past years in level of economic freedom, from third place behind Hong Kong and Singapore in 2000 to 18th place this year.
Since we’ve got another $1 trillion deficit this year — making it four years in a row — we asked Gwartney whether there was connection or relationship between these two data points.
A professor of economics at Florida State University, Gwartney explained that the connection between the two can be understood by looking at one of the 42 components used to measure the 100 countries for economic freedom in the Fraser report: degree of credit extended to the private sector.
“[When there is] more credit [going] to public sector…..[it is] directly related to size of budget deficit,” Gwartney said. A measure of 10 on a scale of one to 10 means more economic freedom. But if you look at this measure over time, it “spiked downward as of the financial collapse in 2008,” Gwartney explained. Not all of the movement in President Obama’s fault, Gwartney made clear. The movement of credit from the private sector to the public sector began with the larger deficits of the Bush administration, says Gwartney. “But this variable was a 10 in 2000. Overwhelming credit went to private sector and now it is 0.08 indicating that high percentage is allocated to government sector relative to the private sector.”
This is only one single measure, of course, but it does point to the overall problem which is that government is sucking up too much of the money and the energy that should be going toward the private economy.
Instead the government is taking all the air out of the private economy which explains why economic growth is not only slow now, but it being projected to remain where it is or lower for the foreseeable future.
This suggests that there may in fact be a “new normal” in America, one of high unemployment, low wages and low growth.
This country has never experienced an extendde period of such economic hardship and Gwartney for one does not look forward to the result of heading down this road. As he put it, “1.5 percent growth for the next decade [is] based on [the] decline in economic freedom that’s already occurred.”