The United States’ economic freedom score is 77.8, making its economy the 9th freest in the 2011 Index. Its score is 0.2 point lower than last year, reflecting deteriorating business freedom, trade freedom, government spending, and monetary freedom. The U.S. is ranked 2nd out of three countries in the North America region, and its overall score is well above the world and regional averages.
The U.S. economy faces enormous challenges. The government’s recent spending spree has led to fragile business confidence and crushing public debt. Interventionist responses to the economic slowdown have eroded economic freedom and long-term competitiveness. Drastic legislative changes in health care and financial regulations have retarded job creation and injected substantial uncertainty into business investment planning.
Ongoing regulatory changes, coupled with fading confidence in the direction of government policies, discourage entrepreneurship and dynamic investment within the private sector. Leadership and credibility in trade has been also undercut by protectionist policy stances and inaction on previously agreed free trade agreements with South Korea, Panama, and Colombia.
The U.S. economy is the world’s largest. While services account for more than 70 percent of economic activity, the U.S. remains the world’s largest producer of manufactured goods. A federal form of government that reserves significant powers to states and localities has encouraged diverse economic policies and strategies. However, the national government’s role in the economy has expanded sharply in the past two years, and the federal budget deficit is extremely large, with gross public debt approaching 100 percent of GDP. Passage in March 2010 of a massive health care bill significantly expanded the federal government’s control of the health care industry, but a proposed climate change bill that would have imposed federal constraints on energy use has been stalled. Elections in November resulted in a Republican Party takeover of the U.S. House of Representatives.
Here are explanations behind the grade given for each type of economic freedom within the United States:
The overall freedom to create and run a private enterprise, regulated primarily at the state level, is strongly protected. However, new regulatory uncertainty hampers business expansion and employment creation.
The weighted average U.S. tariff rate was 1.8 percent in 2009. Anti-dumping and countervailing duties laws, “buy American” procurement rules, high out-of-quota tariffs, services market access restrictions, import licensing, restrictive labeling and standards, and export-promotion programs and subsidies add to the cost of trade. Ten points were deducted from the U.S. trade freedom score to account for non-tariff barriers.
U.S. tax rates are burdensome. The top income and corporate tax rates are 35 percent. Other taxes include an estate tax and excise taxes. Additional income, sales, and property taxes are assessed at the state and local levels. In the most recent year, overall tax revenue as a percentage of GDP was 26.9 percent. Should authorities choose not to extend tax cuts enacted in 2001 and 2003, the tax rate on the top individual income bracket will jump to 39.6 percent beginning in 2011, and the top capital gains tax rate will increase from 15 percent to 20 percent.
In the most recent year, total government expenditures, including consumption and transfer payments, equaled 38.9 percent of GDP. Spending increases totaled well over $1 trillion in 2009 alone, an increase of more than 20 percent over 2008. Stimulus spending has hurt the fiscal balance and placed federal debt on an unsustainable trajectory. Gross government debt exceeded 90 percent of GDP in 2010.
Inflation has been low, averaging 1.4 percent between 2007 and 2009. Price controls apply to some regulated monopolies and the health insurance sector; certain states and localities control residential rents; and the government influences prices through subsidies, particularly for the agricultural sector, dairy products, and some forms of transportation. Government interventions in housing, automotive, health, and financial markets have substantially increased price distortions. Fifteen points were deducted from the U.S. monetary freedom score to account for measures that distort domestic prices.
INVESTMENT FREEDOM75.0No Change
Foreign and domestic enterprises are legally equal. Foreign investments face screening only if perceived as a potential threat to national security. Foreign investment in banking, mining, defense contracting, certain energy-related industries, fishing, shipping, communications, and aviation is restricted. Regulations are generally transparent; individual states may impose additional restrictions. There are few controls on currency transfers, access to foreign exchange, or repatriation of profits. Foreign investors may own land.
FINANCIAL FREEDOM70.0No Change
The U.S. financial sector has undergone far-reaching changes since the sub-prime mortgage crisis in 2008. A number of prominent financial firms or banks failed or were bailed out, and the government has intruded on firms’ management in unprecedented ways. The damage caused by mortgage guarantors Fannie Mae and Freddie Mac remains largely unabated. Concerns continue over the intrusive nature and cost of the 2002 Sarbanes–Oxley Act, which increased disclosure and internal control requirements to the detriment of smaller firms. The impact of a sweeping overhaul of financial regulations passed in July 2010 is yet to be measured, though it appears to do little to reduce the chances of future government bailouts.
PROPERTY RIGHTS85.0No Change
Property rights are guaranteed. Contracts are secure, and the judiciary is independent. A well-developed licensing system protects patents, trademarks, and copyrights. Government interventions in financial markets and the automotive sector have raised concerns about expropriation and violation of the contractual rights of shareholders and bondholders. The individual health insurance mandate passed by Congress in 2010 raised serious constitutional questions regarding whether government could require the spending of private funds.
FREEDOM FROM CORRUPTION75.0+2.0
Corruption is perceived as minimal. The U.S. ranks 19th out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009. The U.S. government has become part owner or effective operator of several “too-big-to-fail” companies, and the impartiality of subsequent regulatory efforts is seen by some as corrupted.
U.S. labor regulations are highly flexible. The non-salary cost of employing a worker is low, and the severance payment system is not burdensome. With private-sector union membership steadily shrinking, more union members currently work for the government than for private businesses.
Both the Obama administration and the democratic majority congress's policies expanded the size of government, promoted more government intrusion into our lives, anti-business policies, along with excessive spending and debt has led to this nation being economically less free. We, the American people, must keep vigilant and make sure that the new congress lowers the debt, reverses past government intrusion, and fights against present and future government intrusion attempted by the Obama administration.