The Heritage Foundation has recently released a new Index of Economic Freedom. Yet the flaws of this index are so serious that the index cannot be taken seriously. First of all, they often use incorrect facts. They claim for example that Denmark has a 26,5% top income tax rate. The real number is 54%. But even setting aside they do not have their facts correct, the index would still be flawed.
Other flaws include:-Too little weight given to taxation and spending. Only 1/10 of the index is made up of it. The category “Government Intervention” do seem to factor in government consumption too, but this is only a small part of all public spending and even if it had included all spendingit would still be insufficient.
-Perhaps even worse is that they do not in fact have the level of public spending as a factor, only the change in public spending. Which means that if one country increases spending from 10 to 11% of GDP and the other reduces it from 55% to 54% the latter country is beingcounted as being freer. And in the other half of the 1/10 being given to taxing and spending they only include the top income tax rate and the corporate income tax. That is not only do they disregard the lower tax rate brackets for lower income people and the degree to which you can get away from these taxes through for example deductions, they completely disregard all other taxes, like capital gains taxes, payroll taxes, consumption taxes etc. Singapore-style forced savings is also not included.
Because of these peculiar ways of measuring fiscal burden of government, Sweden and Denmark are being counted as having a lower fiscal burden than China, even though China do not have a welfare state, while Sweden and Denmark have the most extensive welfare states in the world.
-The monetary system in the west and all other countries with only moderate inflation is ludicruosly being regarded as “free”.
-The strong monopolistic power of the unions (Who derive their power from the state) in a country like Sweden is briefly mentioned but do not seem to warrant any negative points. Even though that enables the unions to control the wages and sethigh minimum wages and in other ways infringe the freedom of businesses. That is even though that constitute in effect extensive regulation and high minimum wages it is not seen as something negative.
-They regard the existence of a informal market, that is one not controlled by the government as a restriction of economic freedom. That’s right, they believe a country where people successfully avoid taxes and regulation not only is not freer but in fact unfreer than countries where the state successfully prevents people from escaping its control.
There are probably more flaws in that index (You are all welcome to point out any additional flaws you can find)but these are the ones I can think of right now. And they are sufficient to make this index almost useless.
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People have been talking aboaut this for several days, and it immediately struck me as a completely arbitrary and made up index.
I’m glad someone has done the research to show how meaningless it is. Good job!
So, which Countries are free and to what degree?
Yeah, it is so “arbitrary” and so “flawed” that the most prestigious economists around the world use it repeatedly for their research…
“Yeah, it is so “arbitrary” and so “flawed” that the most prestigious economists around the world use it repeatedly for their research…”
Keynes was considered one of the most prestigious economists of the 20th century, but his theories have been just about entirely debunked. Hence, in economics prestige means little in terms of actual validity.
Hmm, this is interesting. I’ve looked at this index for the past few years and the ranking of countries is pretty much what I expected. Are there any obvious rank-reversals that would happen with a reformed index?
“Hmm, this is interesting. I’ve looked at this index for the past few years and the ranking of countries is pretty much what I expected. Are there any obvious rank-reversals that would happen with a reformed index?”
Well, it seems ridiculous to me that the UK, Denmark and Australia beat the U.S. and that Sweden comes right after the U.S. Take the UK for instance. They have huge gas taxes and a V.A.T. around something like 15%. To give Sweden a score that is almost the same as the U.S. is ridiculous as well. Sweden has a huge welfare state, and very high tax rates. On the other hand, I can buy into the rankings of Hong Kong, Luxembourg and New Zealand (they just had major reforms). Ireland, Singapore and Estonia I’m not so sure about.
I wonder how difficult it would be to create a more meaninful index of freedom by country than the obviously flawed Heritage Foundation’s Index of Economic Freedom. We could call it the Mises Institute’s Better Index of Relative Economic and Political Freedom, Catagorized by State for Your Convenience. Certainly it is no easy task as freedom is not quantifiable. Throw into the mix a mountain of incomprehensible and contradictory statutes enforced by states and you have at hand a very daunting project.
I can certainly give credit to the Heritage Foundation for having made the effort to construct such an instrument flawed or otherwise. Whether its formula is a sufficient basis upon which to built a better index is an open question.
The Cato Institute’s rankings (the last edition came out in ’04: http://www.cato.org/pubs/efw/) look slighly better in places — Sweden is 22nd, for example, though the UK is mysteriously tied with the U.S. for third.
Surely this is relative… I mean in the UK a family with 2 kids and $85k income will pay less tax than in Sweden. However, they will then spend extra money on private heath care and schooling. In Sweden the taxes might be higher, but the degree of redistribution is lower (also health and schools are vouchered). Obviously, keeping all your money and choosing to buy your own services is better, but it seems strange to ignore what happens to resources after they have been taken. A single high-earning Swede is totally screwed, by the system, but to a normal family it’s tolerable.
Danny Taggart: In general, third world countries would score better as a larger weight is given to
taxing and spending and the informal market category should be eliminated. Hong Kong would probably still be number one, but Singapore would probably lose its runner-up position because of its forced savings scheme (They would still however probably be among the top ten). Sweden and Denmark would be much lower due to their bloated welfare state, their strong unions and the elimination of the informal market category.
Tom Barker: what is the basis for your claim that the level of redistribution in Sweden is lower than in Britain? Being from Sweden myself, I know
that taxpayer money to a large extent (much larger than in Britain) to support the large group of welfare leaches that are supported full time by the State. In addition to the old age retirees, more than 20% of the working age population is supported completely by various forms of welfare and even many of those who do work are large net receivers of money from the state.
Moreover, I don’t think the school choice that exists in Sweden is much to cheer about (I don’t know that much about the system in Britain however). Any private school who wants to receive government funding must adhere strictly to a required curriculum in the case of schools.
An index of economic freedom is in any case of little value if the word ‘economic’ is taken to refer to, say, a class or category of things, people or actions, distinct from other classes or categories (social, religious, political, medical, cultural, artistic, recreational, philosophical, moral, or what not). It is not as if “economic things” can be set apart from other things. A country’s “economic freedom” may make it an attractive place for investments; but that does not mean people who live there enjoy much freedom.
A libertarian index of freedom, I suppose, should not consider primarily such shifting data as tax rates and statistical aggregates. It would be an index of how easy it is to pass, or block, legistation and policy measures that interfere with personal freedom or create privileged status (powers, immunities) for some individuals; or to use the courts to asserts one’s right to be free.
An index of economic freedom is in any case of little value if the word ‘economic’ is taken to refer to, say, a class or category of things, people or actions, distinct from other classes or categories (social, religious, political, medical, cultural, artistic, recreational, philosophical, moral, or what not). It is not as if “economic things” can be set apart from other things. A country’s “economic freedom” may make it an attractive place for investments; but that does not mean people who live there enjoy much freedom.
A libertarian index of freedom, I suppose, should not consider primarily such shifting data as tax rates and statistical aggregates. It would be an index of how easy it is to pass, or block, legistation and policy measures that interfere with personal freedom or create privileged status (powers, immunities) for some individuals; or to use the courts to asserts one’s right to be free.
As I read the Index, I got the idea that the informal market was an indication of restriction on the market, rather than being a restriction itself.
It’s cause and effect. If the government restricts some market through some law, the market tends to go underground rather than disappear. The ‘informal market’ section of the index is another way of measuring the freedom; but instead of analyzing the cause, they measure the effect.
I didn’t notice all the other points you brought up (I wouldn’t have noticed, as I was not at that point as read up on Austrian economics), but now that I look back on it, they are quite valid. The authors may be forgiven for not being extremely versed in our interpretation of ‘free’ monetary systems, though.
Brian,that is a very unrealistic interpretation of things. Because firstly even if it were meant to be a indirect indicator of the level of government intervention it would constitute double-counting since the various forms of intervention have already been included.
Secondly it could hardly be seen as such a indicator given the obvious evidence to the contrary. In Sweden where the total tax wedge (from payroll taxes, income taxes and value added tax) is more than 60% at every transaction.The reason why the informal sector is so small despite this is the strong controlling powers of the government and their associate the labor unions.
I came across the following comment on the ratings from an Australian economics blog site, http://www.badanalysis.com/catallaxy/ , they indicate what may be some sloppy research from the Heritage:
Australia’s 10th ranking in the Heritage Foundation’s 2005 Index of Economic Freedom ought to be slightly encouraging. But you have to wonder how good the economic research is when they come up with statements like this:
The Australian economy is driven largely by tourism, focusing on national assets such as the Great Barrier Reef and the Sydney Opera House; Parliament, for example, recently passed legislation to ban fishing in order to protect the Great Barrier Reef.
According to the sober people at the ABS, tourism represents about 4% of GDP and 11% of exports. It isn’t trivial, but these are not the numbers of an economy ‘driven largely by tourism’.
“Yeah, it is so “arbitrary” and so “flawed” that the most prestigious economists around the world use it repeatedly for their research…”
“Ana” is one of the chief authors of this grossly flawed index. I have met her.
Well, she gets to pretend to be “magnet-to-the-prestigious,” doesn’t she?
Instead of economic freedom, a better term (given the things measured) would be market freedom. The economy is a measure of the production, buying and selling of goods, not unrestrained banking, investing and speculation.
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