14 september 2005
[T]he problem remains: what items should be included and how much weight should be given to each item? Ideally, all forms of government intervention should be included and the weight given to each item should be in relation to just how much it restricts people's freedom to perform economic activities either in the form of taking away their money, regulating and restricting the ways in which they can use the money they get to keep as well as how these restrictions affect their behavior.Karlsson geeft vervolgens de vele problemen van de bovengenoemde index aan:
But in practice it is nearly impossible to measure just how much a certain tax or regulation restricts people's freedom. Taxes are the easiest to measure since we know how much money people pay to the government, but even this fails to completely account for the damage made because the disturbance of taxes goes beyond just the money people lose. We must also take into account just how much people have changed their behavior to avoid paying taxes and that is difficult to measure.
One striking feature is the low ratings of almost all poor countries. Only Estonia and Chile make it into the top 19 countries. What is even more surprising is the high scores of notorius welfare-state countries like Sweden and Denmark. Denmark is considered slightly more free than the United States and Sweden only slightly less free than the US. Many other notorius welfare-state countries like Finland, Holland, Germany and Austria are also considered only slightly less free than America.Na een analyse van de problemen met deze drie punten, gaat Karlsson over tot de derde categorie:
Looking at specific components the results are even more puzzling. Sweden and Denmark, which have the highest taxes and biggest welfare programs of all countries in the world, are considered to have a smaller "fiscal burden" than both the United States and China, even though public spending as a percentage of GDP is more than 20% points lower in the United States and more than 30% points lower in China.
To understand why these strange results have come about, let's analyze the index by the components it has—and the ones it doesn't have.
The first category, "Trade Policy," seems OK as it measures the degree of protectionism by both the average tariff level and the existence of various non-tariff restrictions on trade like quotas. Yet to get a true picture of just how protectionist a country is, indirect restrictions on imports should also be included. This includes the farm subsidies present in most rich countries, including the United States and the European Union, as well as loose monetary policies which contribute to a weaker exchange rate, something which has the same effect as a combined import tariff and export subsidy.
The second category, "Fiscal Burden," is perhaps the one that is most misleading. Again, it has the absurd result that Sweden and Denmark have a lower fiscal burden than the United States and China. The reason it comes up with such absurd results is its absurd methodology, although it seems in some cases based on them having their own peculiar ideas on how high taxes are. Danes would undoubtedly be very surprised if they found out from this index that they only have to pay 26.5% in income tax.
Unfortunately for the Danes, the Danish tax authorities disagree with the authors and their attributed source, The Economic Intelligence Unit, and says that Danes have to pay more than twice as much.
But again, the errors are mainly due not to incorrect data but to deeper methodological flaws. This category has three different components: change in government spending, top income tax rate and corporate tax.
The next category is "government intervention," which is defined as the degree to which government directly controls spending. This category includes government consumption expenditure, that is, direct purchases or production of various services, like the military, the police and courts, education, infrastructure, health care, etc. In addition, it also includes government ownership of business. As far as it goes it seems fairly reasonable, although one can question whether received revenues are really the best indicator of the degree of government ownership and the degree to which that ownership restricts economic freedom. However, strangely absent from this category is the degree to which a country practices so-called industrial policy. That is the kind of selective support most famously practiced by Japan and its MITI department, but to a varying extent practiced by most countries including the United States.Na een verdere analyse van problemen met deze categorie, bespreekt Karlsson de volgende categorieën:
The fourth category is "monetary policy." One would think that this category would measure the extent to which the government uses monetary policy to manipulate the economy. But according to the explanatory section, economic freedom in the monetary area is not inconsistent with government manipulation of money. That is because "There is no single, accepted theory of the right monetary institution for a free society." Well, left-liberals don't accept the argument that an extensive welfare state is inconsistent with economic freedom. Quite to the contrary they believe it liberates people from poverty and insecurity and liberates women from the patriarchial structures of the traditional family. Does this mean that a large welfare state should not be seen as inconsistent with economic freedom? Likewise, paleoconservatives don't accept the argument that a protectionist trade policy is inconsistent with economic freedom. Does this mean that the category "trade policy" should be erased from the index? Clearly, there can be no doubt that things like high taxes, protectionism and central banking are infringements of economic freedom.Of course, in today's world no country has a fully market-based monetary system but that should ideally mean that no country should be considered free and given a perfect score.
The fifth category is "Capital flows and Foreign Investments," that is the degree to which these things are regulated by the government. In this area, the methodology seems basically sound.
The sixth category is "Banking and Finance," wherein they measure the extent to which government controls banks and financial markets. Their methodology here seems more or less sound apart from the fact that they strangely neglect how both banks and financial markets are manipulated by the government institution known as central banking.Commercial banks are allied with the central bank and strongly influenced by central bank policy which sets their rates, and central banks like the Federal Reserve strongly influence stock markets with their interest rate decisions. Even the slightest changes in wording in Fed statements and speeches from Alan Greenspan are often enough send stockmarkets into a tailspin. They often actively try to "save" the stock market from falling. There are several examples of when central banks like the Federal Reserve have done this.
Thus, this category should also take into account the degree to which central banks manipulate financial markets. Moreover, given the impact massive government lending and taxation on capital has on the financial markets, budget deficits and capital gains and dividend taxes should also be considered in this context.
The seventh category is "Wages and Prices." It describes to what extent government controls prices. Apparently, it only seems to include direct price and wage controls by the government apart from interest rates, the controlling of which this report consider consistent with the free market. But strangely, they exclude from the index the strong power of unions in many countries like Sweden, Denmark, and Finland to control the most important price of all in the economy (apart from the governmentally controlled interest rate): wages. Countries like Sweden and Denmark have no formally legislated minimum wage, but the unions have been given so much power by the government that they can and do force virtually all companies to bow down and obey their command, including their minimum wages. And the minimum wage levels they impose are far higher than in the United States where the federal minimum wage is less than a third of the average pay.
In Sweden, the union imposed minimum wages are usually twice that level. Although some states and cities in the United States impose a somewhat higher minimum wage than what federal law requires, none come even close to the levels in Sweden (Especially since these localites usually have a higher average pay than the U.S. average). While the strong union power in Sweden and many other countries are briefly mentioned in the text of these countries, it has no effect on their scores. Since a minimum wage at two thirds the average level restricts freedom far more than a minimum wage at one third the average level one would expect Sweden to score far worse, but strangely they score the same near-perfect "2." This is even more strange given that they also explicitly note in the text how high levels of unemployment benefits also act as an indirect minimum wage.
Lest anyone think that unions are simply a voluntary private entity, it must be emphasized that they derive their power from government regulation that prevents companies from firing union members and workers who are on strike. In Sweden and probably some other countries, they are also given direct and indirect financial support from the government. And given the importance of wages, they together with other direct and indirect (via unions) labor market regulations should be given a separate category.
The eighth category is property rights which measures the extent to which property rights and contractual agreements are considered secure. Apparently, this only seems to mean security from private crooks as well as from expropriation. The gross violation of property rights that high levels of taxation constitutes seems irrelevant for this issue. An exclusion which might have been justified if they had already accounted for it by giving the issue of taxation a far higher weighting than other categories but which now gives very misleading results.
The ninth category is "regulation." This is supposed to measure to what extent business is inhibited by various forms of regulation. One component in this is how easy it is to get a business license. The second is how tough regulations are after the business gets started. And the third is how consistently these rules are applied. The two first components both seem proper to include, although in the first one should also take into consideration the extent to which it is possible to operate a business without a formal business license. In third world countries that is generally easier to do than in rich countries.The third one is very questionable since it says that the more the government actually carries out their restrictions on freedom the more freedom people have. It does seem reasonable to say that given a certain level of actual restriction it is preferable that it is evenly applied since this decreases the risk of officials abusing their position to extort bribes.
But it is backwards to argue—as this index does—that given a certain form of formal freedom restricting regulation they should be applied as much as possible and accordingly freedom should be restricted as much as possible.
The last category, "Informal markets," is the strangest of them all. It gives negative points for having a large informal market, also called an "underground economy." But since informal markets are markets where people do not have their freedom restricted by the state this should if anything be counted as something positive. The larger the informal market the greater chance people have to conduct their business without being taxed and regulated by government officials. In countries with a small informal sector it is far more difficult to find other people with whom you can do business and practice division of labor without having your freedom restricted by the state. Giving negative points in a freedom ranking for a large informal sector is outright Orwellian—"Freedom is slavery."Lees Karlssons hele artikel op Mises.org.