Do Free Market Policies Lead to a "Race to the Bottom"? (Hint: No)

The recent entry of Texas Governor Rick Perry into the Republican presidential race has produced a stampede of bad op-eds and blog posts from Democrats and other liberals seeking to discredit him and/or Texas' amazing successes.  There are a lot of bad hit-pieces out there at this point - and a lot of great rebuttals (see, e.g., here, here, here, here and especially here) - but for my money the worst so far is today's Politico op-ed by Delaware Governor Jack Markell, who warns that Governor Perry's radical, free market ideas would lead to a "race to the bottom" in the United States:

Perry argues that if the nation adopts his approach to business development — based on less regulation, less taxation and less litigation — the economy “will absolutely take off like a rocket.”

Perry’s priorities are not unimportant. But there are lots of countries with no regulation, little taxation and no real threat of litigation — usually also where wages are low and much of the wealth resides with a tiny slice of the elite.

That’s a lousy model for middle-class Americans....

The model favored by Perry is fueled by low-wage jobs, which creates a race to the bottom. The middle-class model involves competing with other countries in a race to the top — to attract research and development operations, high-end manufacturing, design shops and the like.

Now, leaving aside the fact that it's a total myth that the jobs created in Texas are all low-wage "McJobs," or that Perry adopted some sort of scorched earth campaign against government spending - on education, infrastructure or anything else - during his tenure as Governor, I'd like to focus tonight on Governor Markell's main message: that fiscally conservative, free market, "tea party" policies have lead to a "race to the bottom" around the world and would inevitably do the same here in the United States.  Is that really a credible premise?  Are the free market countries championed by fiscal conservatives all banana republics with "low wages" and tremendous income inequality?

In short, no.  Not at all.

Indeed, had the Governor even done the most basic of research, he would have seen that the most "free market" ("free-marketest"?) countries in the world, praised by conservatives and libertarians alike, are also some of the wealthiest, most modern and, in many cases, most "progressive."  For example, the Heritage Foundation's Index of Economic Freedom, which examines countries against a series of fiscally-conservative benchmarks (e.g., low taxes, limited regulations, free trade, small government), lists such backwards, downtrodden places as Hong Kong, Singapore, Australia, New Zealand, Switzerland, Canada, Ireland, Denmark in its top ten "most free" countries.  Indeed, the only country that could possible meet Governor Markell's misleading description is Bahrain.

Meanwhile, the libertarian Frazer Institute's Economic Freedom of the World Report, using similar measures of economic freedom (including limited government), lists most of the same countries that Heritage's Index identified: Hong Kong, Singapore, New Zealand, Switzerland, Chile, Canada, Australia, Mauritius, and the United Kingdom.  What horrible, dangerous countries!

Oh, wait.

On the other hand, the countries that rank near the bottom (or, on Gov. Markell's apparent scale, the top!) of these lists are such liberal paradises as Cuba, Iran, North Korea, Venezuela, Myanmar, Zimbabwe and Libya.

Sign me up!

In all seriousness, this simple example makes it abundantly clear that the Governor has no idea what he's talking about when he says that, if President Rick Perry turned the United States into some sort of "tea party paradise," it would inevitably turn into a third-world disaster zone.  The world's real free market paradigms, according to the very fiscal conservatives that Governor Markell openly derides, are some of the richest, healthiest and most developed countries in the world.  Considering that a simple Google search makes this fact abundantly clear, the Governor's either really slow or really disingenuous.

I'm guessing the latter, but, well, you never know.

But, hey, maybe the Governor has some fantastic ideas of his own that could somehow trump the centuries of proven prosperity that free market capitalism has repeatedly provided across the globe:

Building a sizable, vibrant and growing middle class requires great schools, a highly trained workforce and an attractive and exciting quality of life. That’s why initiatives like common core standards, heightening our focus on STEM education (science, education, engineering and math) and investing in our state and national parks and open space continue to be so important.

Yes, nothing will get this country back on its economic feet faster than Government spending (sorry, "investment") on our state and national parks and, umm, "open space."  We're saved!

Ugh.

No wonder liberals are openly wishing for an alien invasion.  They've clearly run out of earthly ideas.

Quantifying the Stagnation of US Trade Policy (and Hoping for Better in 2011)

Last week the Heritage Foundation released its 2011 Index of Economic Freedom - a veritable treasure chest of data for econo-nerds everywhere.  The top-line news emerging from the study is that the United States - in 9th place overall and thus earning the less-than-stellar label of "mostly-free" - continued to lose ground on economic freedom, while much of the rest of the world gained.  Hong Kong once again lead the pack, while Canada expanded its lead over the United States and remained North America's reigning economic champ (something your humble correspondent kinda-sorta predicted last year).

But for my purposes, the really interesting data lie in the Index's review of global "trade freedom" - a score based on a thorough analysis of each country's tariff and non-tariff barriers.  In these data, we see that, while the rest of the world is liberalizing as quickly as possible, the United States continues to stand still (and even retreated a little).  Heritage's Terry Miller and Bryan Riley provide the first part of this story - the "good news" part - in their analysis:

The 2011 rankings of trade freedom around the world, developed by The Heritage Foundation as part of its annual Index of Economic Freedom, show average trade freedom at its highest level to date. Since 1995, the average score out of a possible 100 has grown from 56.7 to 74.8—an impressive 31.9 percent improvement over the 17-year period. The average score improved 0.6 point from the 2010 rankings, a significant achievement given the worldwide reces­sion from which most countries were emerging....

In the 2011 Index, 85 countries improved their scores and 58 coun­tries declined, resulting in a “gainers to losers” ratio of 2.36 to 1. Countries whose scores changed by at least one full point demonstrated a simi­lar trend, with 39 countries improv­ing and 18 regressing....

Miller and Riley go on to demonstrate that more trade freedom means lower poverty, more equality and more wealth, and they conclude by smartly recommending that:

Whenever possible, countries should unilaterally reduce trade barriers that protect politically pow­erful elites at the expense of the gen­eral population. They should also continue to improve on multilateral trade agreements. Free trade will create more freedom, prosperity, and equality for everyone around the world.

Be sure to read the whole thing here; it's well worth your time.  However, the guys at Heritage leave out the other, more depressing, part of the story: while the rest of the world is racing to lower their barriers to free trade in order to reap the benefits from trade that Miller and Riley point out, the United States is stuck in neutral, embarrassingly remaining the 38th most trade-liberalized country in the world - tied with economic powerhouse Namibia and behind such bastions of free trade as Malta and Lithuania.  (Canada, by the way, ranks 8th overall.)

A review of the raw data from 2009-2011 makes this problem even clearer.  The United States' raw trade freedom score dropped 0.4 points between 2009 and 2011, thus making us a little less free today than we were two years ago (and last year).  Meanwhile, almost all of the 37 countries ahead of (or tied with) us in 2011 got freer over the same period:

As you can see from this chart (made by me with Heritage's data), the trade policies of only three countries ahead of (or tied with) the United States regressed between 2009 and 2011.  As already mentioned, the US also regressed, while every one else liberalized (and reaped the benefits therefrom).

Of course, anyone paying attention to US trade policy over the last two years already knew this from the mounds of anecdotal evidence presented on this blog and other (more reputable) outlets.  As I grumbled a few weeks ago:

Obama has placated his anti-trade base (and their congressional muscle) on Buy American, Mexican Trucks, Chinese Chicken Imports, Section 421 (tires), Section 301 (Chinese "green" subsidies), changes to US trade remedies laws,carbon tariffs - the list literally goes on and on.  He shelved his early 2009 support for the Colombia and Panama FTAs (and KORUS until last June) at the first whiff of congressional stink.  He has embraced mercantilism and adopted a "trade policy" in the NEI that is as unoffensive as it is ineffectual. 

Meanwhile, the rest of the world has pursued bilateral and regional free trade agreements at a breakneck pace.  Thus, it's no surprise that the new Heritage data show the United States stagnating on trade while the rest of the world surges ahead.  Indeed, it'd be a shock if the numbers showed anything else.

A lot of pundits and prognosticators are optimistic that this upsetting trend will change course in 2011, and that the Obama administration will finally engage on free trade and help the United States live up to its reputation as the world's free trade leader.  Recent talk from the administration on KORUS, zeroing and Mexican trucks appears to confirm this conventional wisdom, but it's only a start.  A real change of course on US trade policy will require real action to back up the White House's nice words, as well as new trade liberalization policies to catch us up with the rest of the world.

I sure hope that the conventional wisdom on US trade policy in 2011 turns out to be correct because if things don't change soon, we'll all be pining for the good ol' days when the United States sat pretty in 38th place.

Revealing Trade Stat(s) of the Day

Last week, the Heritage Foundation released its always-entertaining Index of Economic Freedom, and the big news was that the United States dropped one spot in the annual rankings - from 7th to 8th - thus becoming less free than our kinda-socialist neighbors to the north, Canada.  (Somewhere Bob and Doug McKenzie are taunting us.)  But if you dig through the data a bit, you'll see something equally (more?) interesting/depressing: the United States dropped dramatically in the ratings on "trade freedom."  According to the Index's searchable database, the US was the world's 13th "freest trader" in 2009 to the 38th freest trader in 2010 - behind such notable free trade leaders as Namibia and Malta. 

Now, this revelation is not rock-solid proof that President Obama is a stark-raving protectionist.  In fact, the United States' raw free trade score actually increased from 86.8 to 86.9 (whoopee!).  But instead, the relative decline in US ranking perfectly supports analysis here and elsewhere that the United States is standing still on trade, while the rest of the world races to liberalize.  While such stagnation is certainly not as bad as outright trade hostility, it's still nothing to be proud of - especially for a country once considered to be the "world's free trade leader."

And I'd say it's about time we dropped that title, wouldn't you?

(H/T Andy Roth)