“Not only are higher levels of economic freedom associated with higher per capita incomes and higher GDP growth rates,” the Index editors write in the latest edition (just published), “but those higher growth rates seem to create a virtuous cycle, triggering further improvements in economic freedom.”
Sadly, the opposite is true, too. As economic freedom erodes, so does economic opportunity. Venezuela proves this point.
Over the summer, things looked rosy for Venezuelan President Hugo Chavez despite a series of economic “reforms” which undermined property rights, severely restricted foreign exchange, imposed price controls on most everything and nationalized the nation’s most lucrative industries.
Soaring oil prices made it seem as if the country was doing well. But now that the price of oil has collapsed, Venezuela’s economic shortcomings are clear. It’s had to cancel a program to deliver fuel oil to needy Americans, for example, shelving an attempt to purchase goodwill.
Some of the policies undertaken or planned by governments to respond to the worldwide recession are likely to threaten long-term economic freedom, and thus endanger future economic growth. Certainly if the U.S. continues on its present course, all things being equal, its economic freedom score will decline next year.
Instead of spending more, policymakers should learn the lesson of the Index of Economic Freedom. Government stimulus spending can’t manufacture prosperity. But free people, unshackled and allowed to pursue their dreams, can.