The Decline of U.S. Economic Freedom Will Lower Our Living Standards
June 17, 2015
Freedom capital — a fourth capital stock that explains why some economies are so much better than others at amassing capital and using it effectively to raise productivity and living standards.
Economic Freedom of the World (EFW) scores are used to measure each nation's freedom capital stock. Hong Kong and Singapore have the highest freedom capital stocks, followed by the United States. Economic freedom impacts living standards in two fundamental ways.
- First, a legacy of economic freedom forges long-term incentives to build physical capital in the first place.
- Second, today's economic freedom directly shapes the incentives that push countries to use existing capital effectively and productively.
Worldwide, economic freedom has been rising in recent decades. However, since 2000, U.S. economic freedom has been faltering, declining to 7.74 from 8.65 in 2011 and dropping the United States out of the Top 15 from the second place in the worldwide rankings.
The long-run expected consumption per capita is estimated with economic freedom scores to measure future living standards. The estimation for the United States is $25,460 a year — a striking 22.2 percent below today's actual figure. We are living above our means, just as many Americans have sensed without any real reason — until now.
For Americans, the impact on living standards will most likely be gradual rather than sudden, perhaps manifested in sluggish income growth or masked by higher inflation. The country still has a large capital stock per capita, amassed over the decades of very high economic freedom, providing Americans a cushion to maintain living standards or even continue to raise them at a slow rate. However, unless the United States reverses its decline in economic freedom, the best Americans can hope for is middling growth in living standards, and they may not even get that.
Source: W. Michael Cox and Richard Alm, "Economic Freedom Made America Rich - But It's Falling," Investor's Business Daily, June 12, 2015.
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