What Do Recent Trends in Economic Freedom of the World Really Tell Us?

The Fraser Institute’s Economic Freedom of the World index (EFW) quantifies the economic freedom of 152 countries and territories. The index relates closely to the vitality of economic growth (De Haan, Lundström and Sturm 2006) and has been applied to a very broad number of academic topics (Hall and Lawson 2014). It is composed of five areas – Size of Government, Legal System and Property Rights, Sound Money, Freedom to Trade Internationally, and Regulation – which are in turn made up of several components. The decline in economic freedom since 2000, as measured by the index, especially in the United States, is well known to proponents of free markets. However, close scrutiny of the data demonstrates that the reasons for this fall are not what the standard narratives imply. The United States is not alone in its fall, as the Group of 7 (G7) matches its exact qualitative pattern, and to some extent so do the member countries of the Organisation for Economic Co-operation and Development (OECD). The fall is not driven by increases in government spending (except in the first few years of the Great Recession) or by the behaviour of central banks. Size of Government has, if anything, improved in recent years as measured by EFW. Additionally, Regulation has been essentially a random walk since 2000, with the most recent score almost identical to the score in 2000 for the G7. Rather, these falls have been driven by declines in the two areas of Legal System and Property Rights and Freedom to Trade Internationally. The components of these two areas that have fallen are almost entirely driven by declines in various survey data the index employs. In other words, the declines overall in the index do not reflect any hard ‘objective’ measure. We must explore why these survey numbers have declined so rapidly in order to explain how and why economic freedom has declined in the United States (and elsewhere) since 2000.