Politics & Policy

No. 12 in the Index of Economic Freedom

We rank behind Estonia, but if we had a true accounting, we’d be even lower on the list.

Down, down, down she goes. For the first time in the 20-year history of the annual Heritage Foundation–Wall Street Journal ranking of economic freedom, America hasn’t a place among the top ten nations. A continuous, nearly decade-long slide leaves the U.S. economy at number twelve, just ahead of Bahrain and right behind Estonia. Blame “large losses in property rights, freedom from corruption, and control of government spending” for the steady erosion of America’s free-enterprise system. Blame Obamanomics — that, of course, is the unsubtle subtext here.

Both that analysis and the ranking itself are far too charitable toward the current American economy. They’re also too harsh toward the president. Consider social-democratic Sweden, which comes in at number 20. When we look at the Index of Economic Freedom’s ten subcategories, we see that Sweden bests the United States in seven, offering slightly stronger property rights and higher levels of freedom in areas such as trade and investment. Where the U.S. scores big over Sweden is in the subcategory of government expenditure. Spending at all levels of American government consumes 42 percent of our GDP, considerably less than Sweden’s 51 percent.

But that nine-point spending gap between the two nations — equal to $1.4 trillion from the U.S. perspective — is an accounting trick that masks the true size of the vast American welfare state. Start with health care. In Sweden, health-insurance premiums come from taxes. In the U.S. — at least until Obamacare subsidies take effect — they’re mostly deducted from paychecks or contributed directly by employers. Either way, workers have less after-tax income. And when those employer-sponsored premium payments are accounted for, according to the Manhattan Institute, total U.S. spending amounts to roughly 48 percent of GDP.

#ad#Then there are all manner of tax subsidies that aren’t counted as spending. According to Pew Charitable Trusts, in the U.S., aggregate housing-tax subsidies alone were $304 billion in 2010. This includes the value of deductions for mortgage interest and property taxes, as well forgone tax revenue on imputed rental income — essentially the value of housing services provided by homeowners to themselves. That works out to two percentage points of GDP for a government “program” that subsidizes bigger, or at least more costly, homes for relatively high-income Americans at the expense of everyone else.

The ten biggest “tax expenditures,” as classified and measured by the Congressional Budget Office, are collectively worth nearly $1 trillion. But more than half of the combined benefits accrue to households with income in the top fifth of the population, with 17 percent going to the top 1 percent. Not only does America have market-distorting government as big as Sweden’s, it runs a welfare state that’s heavily targeted toward the top rather than the middle or bottom. If government spending were calculated in this more transparent way, the U.S. would fall to Swedish levels of economic freedom, if not a bit lower. Likewise, if Sweden spent the way the index thinks the U.S. does, it would take America’s spot behind Estonia.

The combination of America’s progressive tax code — the most progressive, in fact, among advanced economies — and its large, “mortgage Keynesian” welfare state by which it subsidizes housing leads Northwestern University social scientist Monica Prasad to conclude in her book The Land of Too Much: American Abundance and the Paradox of Poverty that “the United States is not a laissez-faire or liberal political economy at all, and it never has been.” It’s a worst-of-all-worlds situation, and it didn’t start with the Affordable Care Act and Dodd-Frank. Compared with the Nordic social democracies, America spends like them, borrows more than they do, but fights poverty less effectively. Oh, and it taxes less efficiently, too.

Now, none of this should obscure how Scandinavia has become more market-oriented in its regulatory, labor, and tax policies over the past two decades, as the economic-freedom index highlights. Sweden was ranked at 41 back in 1995. Nor does our standing suggest that America should mimic the Nordic way of welfare. But U.S spending, whether explicitly or through the tax code, could be better targeted on a reformed, pro-mobility safety net designed to help the truly needy rather than the politically influential. Such a change might lower our economic-freedom ranking, but we would rate better in a way that counts far more: how we treat the least of our fellow citizens.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.

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