Wednesday, January 14, 2009

My Problem With the Economic Freedom Index

The 2009 Economic Freedom Index has just been released.

The United States is ranked 6th with a score of 80.7 (out of 100). In an op-ed in Tuesday’s WSJ, The Heritage Foundation’s Terry Miller reports that, “The positive correlation between economic freedom and national income is confirmed yet again by this year’s data.”

This comment alone should clue observers in on a major problem with the index. How can any country score a passing grade, when the central bank of that country manipulates the money supply and creates business cycles? The index falsely sets up freedom for critiques like that erom Columbia University economist Jeffrey Sachs, who recently wrote:

Thirty years ago, Americans were told that government was part of the problem, not the solution. We bet on the magic of the marketplace, but the magic proved illusory. Every major part of the economy — health care, energy, transportation, food and finance — is deeply troubled.
All Sachs has to do is point to the index and say, "Hey, the Economic Freedom Index gives the United States a high passing grade of 80.3, and look where the economy is. We have tried freedom and it doesn't work."

Somehow, on a further breakdown of the Index, the U.S. receives an 84 for monetary freedom! Huh, try printing your own gold-backed money.

In short, there is a major freedom defect in the economy if there is a central bank in charge of the money supply, especially if that bank distorts the structure of the economy by printing newly created fiat money. This grave lack of monetary freedom in most (all?) countries sets up the call for socialism and nationalism, once the inevitable economic downturn, or hyperinflation, occurs because of the money printing. No country with a central bank printing money should ever receive a grade above 50. That would then provide the opportunity for freedom oriented economists to explain the business cycle and how distorted things become because of government money manipulation.

The Index as it stands, by not being tough enough in its grading, sadly becomes nothing but a tool for government interventionists.

Further, it appears that the index also contains non-economic value judgements that a first year college econ student could refute, e.g., the report includes this gem:

In economically free societies.. trees are valued for their shade rather than as fuel...
On a scale of 0 to 100, my index for the value of this report, especially because of the leniency on money freedom, is negative 10.

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