The conservative Heritage Foundation, one of the most influential “think tanks” in America, rates countries around the world on “economic freedom.” It also provides figures on per capita GDP. If we plot these against one another, we find that a country’s wealth is indeed correlated with the Heritage Foundation’s Economic Freedom Index:
The green and yellow dots are European countries. The red dot is America. The question is, what is it exactly about a country’s “economic freedom” that correlates positively with wealth? Is it lower taxes? Less regulation? Freedom of trade?
To calculate the Economic Freedom Index, they look at 4 major categories of “economic freedom” – government size (including the tax burden), regulatory efficiency, open markets (including freedom of trade), and the rule of law.
The thing is, when conservatives pontificate about economic freedom, they invariably emphasize lower taxes, smaller government, and open markets. The “rule of law”? You mean – as in the GOVERNMENT? No way.
So let’s look at different factors, using the Heritage Foundation’s own data, and see what actually produces the nice correlation above.
Let’s start with free trade. The Heritage Foundation rates each country on free trade. Do they put up trade barriers or not? If we plot their free trade index by country against per capita GDP, we get this:
Yep, free trade is positively correlated with a country’s wealth. The wealthiest countries tend to be those with the most open markets, although there are some poor countries that rate highly. El Salvador, for example, with a per capita GDP of only $8303 per year, rates almost as highly as America, with a per capita GDP more than 6 times that. Clearly, free trade alone won’t cut it.
How about the 2 factors most commonly cited by conservatives – low taxes and small government? Well – here we have a problem. If we plot the overall tax burden by country versus the per capita GDP, we get this:
Instead of a negative relationship between taxes and wealth, we see a strong indication of a positive relationship! Wealthier countries tend to have higher taxes, not lower. These are the Heritage Foundation’s OWN DATA. How about the size of government? More privatization leads to greater wealth, right? So let’s plot government spending as a percentage of total output versus per capita GDP:
Crap. Again we get indications of a positive relationship, not the negative one that we should have. More government spending is supposed to HURT prosperity. Instead, it seems to generally help.
The Heritage Foundation’s Economic Freedom Index counts higher taxes and bigger government as NEGATIVES. But these very things, according to their own data, seem to have POSITIVE relationships to wealth. So what’s left?
What’s left is the rule of law. Does the government administer laws fairly, for the benefit of everyone? Is the government transparent in its dealings? Is the judiciary independent? Or do government officials use their positions to line their own pockets, and those of their business associates? If we plot the Heritage Foundation’s government integrity rating by country versus per capita GDP, we get this:
This is the clearest correlation of all. Poor countries tend to have corrupt governments, with officials who line their own pockets and those of their business buddies. Transparent governments that respect the rule of law are found in wealthy countries. Not a single country with a government integrity rating below 60 has a per capita GDP of more than $40,000 per year. Not a single country with an integrity rating above 75 has a per capita GDP of less than $40,000 per year.
Notice that this graph looks a lot like the very first one – except the correlation is even stronger! In other words, if they wanted to predict prosperity, the Heritage Foundation would do better to drop everything else used to calculate their “economic freedom index,’ and just use government integrity. Most of their other “freedom” factors – like lower taxes and smaller government – actually have NEGATIVE effects on prosperity.
In fact, we can use a statistical technique called multiple regression to look at 4 factors and how they affect per capita GDP: government integrity, overall tax burden, government spending (as a percentage of total output), and free trade – all using the Heritage Foundation’s own data. When we do this, what we find is this: Once government integrity is factored in, these others are insignificant. The fact is, they are correlated with each other. The size of government, for example, is positively correlated with government integrity:
In other words, if you consider the positive effect of a government’s integrity on the country’s wealth, you don’t need all of these other factors. They’re all correlated with the most important factor: government integrity. Countries with bigger governments tend to have less corrupt governments. Since less corruption tends to mean greater wealth, bigger government also tends to mean more wealth. The same holds true for higher taxes:
Countries with higher taxes tend to have less government corruption – and more wealth. It isn’t that higher taxes that are producing the wealth directly – it’s what the taxes are paying for. Bigger, more transparent government with leaders who use their positions for the benefit of everyone, not just their business partners. Greater fairness leads to a more vibrant middle class, which is the real source of a country’s wealth.
These relationships are why a country like Norway ranks only 25th on their Economic Freedom Index, yet has one of the highest per capita GDP’s in the world at $68,430 per year. Norway’s government integrity rating is 88.3, one of the highest in the world, considerably higher than America’s 78.1. To use the Heritage Foundation’s own words, “Well-established anticorruption measures reinforce a cultural emphasis on government integrity.” Norway has big, transparent government, with universal health care, excellent retirement programs, and strong labor unions. But conservative ideology insists that their “bloated” government and high taxes must be bad for business.
And here’s the thing. 11 countries are rated higher than America in government integrity by the Heritage Foundation. 9 of them are in Europe. Since Europe only has 33 countries, this is about a quarter of ALL of the European countries.
Let me say that again. A QUARTER OF ALL OF THE EUROPEAN COUNTRIES are given a higher government integrity rating than America by the CONSERVATIVE Heritage Foundation. Here they are:
Denmark – 84.9
Finland – 90.0
Ireland – 78.3
Luxembourg – 78.3
Netherlands – 85.7
Norway – 88.3
Sweden – 87.4
Switzerland – 80.3
United Kingdom – 78.3
4 of these are Scandinavian countries – Denmark, Finland, Norway, and Sweden. These countries are often condemned by conservatives as “socialist.” In fact, they have what are called mixed economies – essentially capitalist, but with strong regulatory oversight and many government-provided public goods. They are also often referred to as social democracies – again, countries that are essentially capitalist, but have strong economic and social interventions to promote social justice.
Such societies now dominate north Europe. Labor unions are very strong, so strong that in many cases no laws are necessary to achieve economic justice. In Denmark, Finland, Norway, and Sweden for example (as well as Iceland), there is no official minimum wage. They don’t need one. Powerful labor unions keep worker wages high.
These countries are despised by conservatives. The people of Norway are consistently rated as the happiest people on earth. But for conservatives, that just won’t cut it. Having good wages, excellent retirement, plenty of leisure time, universal health care, and being just plain happy – well, that’s awful. It’s bad for business. It must be.
My ideology says so.