Economy & Budget

How to advance economic freedom

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In April 2000, I joined a small group of international economists who met with President Vladimir Putin and his advisers in Moscow to discuss the economic problems besetting Russia. We advised Putin to take concrete steps toward establishing conditions conducive to economic growth. In short, we called for economic freedom.

{mosads}The Putin administration adopted some of our advice. For example, it adopted a single 13 percent personal income tax rate in early 2001, scrapping the 12, 20 and 30 percent tax rates that had existed previously. The results? Revenue from Russia’s personal income tax increased 26 percent the following year in real terms.

Russia’s economy is somewhat freer today, both in absolute and relative terms, than in 2000. But while Russia made progress, the United States stumbled. According to the Cato Institute, “The United States, once considered a bastion of economic freedom, now ranks 16th in the world. … Due to a weakening rule of law, increasing regulation, and the ramifications of wars on terrorism and drugs, the United States has seen its economic freedom score plummet in recent years, compared to 2000 when it ranked second globally.”

U.S. economic growth has suffered. Over the six years following the economic downturn of 2007 to 2009, the U.S. economy grew at an average annual real rate of 2.1 percent, with the growth rate peaking at a lackluster 2.5 percent in 2010. By comparison, during the eight years of Bill Clinton’s presidency, economic growth bottomed out at 2.7 percent. Clinton’s worst year was better than President Obama’s best year.

With the sluggish U.S. economy and the presidential campaign on the minds of many Americans, it should be noted that the advice we gave Putin would apply equally well to the next American president. Much like the laws of physics, the principles that govern economic progress and failure are universal.

What are those principles?

  • Limited government. Governments can enhance economic growth by providing an infrastructure for the smooth operation of markets. This includes maintaining a legal system capable of protecting people and property and maintaining a monetary system that provides price stability. But governments impede economic growth when they impose high taxes, enact onerous regulations and pursue widespread income redistribution.
  • Competitive markets. Competition is the disciplining force of a market economy. Producers must produce efficiently and provide consumers with desired goods and services or be driven from the market. This process improves both products and production methods; it directs scarce resources to activities that produce more value.
  • Monetary stability. Sound money is indispensable to the functioning of a market economy. Prices convey vital information about individual preferences and global conditions. To the extent a government distorts this information through manipulation or simple monetary mismanagement, prices lose their utility and prudent economic decision-making becomes increasingly difficult.
  • Secure property rights. Private ownership holds people accountable for their actions. With private ownership, each economic participant faces the cost of using scarce resources. To enrich themselves, people must bid resources away from other potential users and provide customers goods and services more valuable than the cost of production.
  • Freedom to trade with foreigners. Specialization and international trade are, by design, mutually advantageous. International trade makes it possible for people to benefit from specializing in those goods and services they produce most efficiently. By selling the goods they specialize in, each trading partner produces and consumes more than would otherwise be possible.

The next president must rejuvenate the U.S. economy. With the Federal Reserve committed to price stability, the next administration could do wonders for the economy — especially in the long run — if it concentrates on strengthening property rights, liberalizing international trade, removing government impediments to competition, shrinking the size and scope of government and enacting pro-growth tax reform. But that can’t happen unless and until the American people elect a president who is committed to advancing economic freedom.

Carter served on an international advisory team in 2000 that counseled the Russian Putin administration on fiscal and economic policy. He later served as deputy assistant secretary of the Treasury and deputy undersecretary of Labor under President George W. Bush.

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