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Thursday, October 16, 2008

ECONOMIC COMPETITIVENESS AND ECONOMIC FREEDOM: HOW CLOSELY MATCHED?

                                      Today's 3rd Buggy Topic

Well, to my surprise, it was originally posted on October 13, 2008, at Carpe Diem, but for some reason --- his perfect right, mind you --- Professor Mark Perry who runs that impressive web site decided to delete prof bug's lengthy commentaries . . . three of them.  No matter.  Here is the relevant middle commentary.  As you can see, it deals with Prof. Perry's original post a few days earlier on the World Economic Forum's selection of the top competitive economies.  What the buggy prof did --- at odds to an extent with Prof Perry's own, well-defended and open-minded libertarian impulses, show that the Heritage Foundation and the Wall Street Journal's collaborative yearly rankings of economies world-wide in terms of economic freedom from government interference --- on several criteria like taxes, regulations, government spending as a percentage of GDP and the like --- do not closely match up. 

More specifically, the findings are ambiguous, and maybe at odds with libertarian impulses.

 

                            The Buggy Argument Set Out 

1) At the end of an earlier buggy commentary in this Carpe Diem thread about Paul Krugman's Nobel Prize in Economics,, I noted that I personally preferred the less statist US political-economy compared to the more statist economies of the Continental Europeans --- or the highly regulated Japanese economy. Then, noted, I explained why our system was less statist in a good 10 lengthy articles at my web site in 2004 and 2005.

In particular, why we have no socialist legacy on the left in this country, nor --- since the destruction of the landed, slave-holding, and militarized southern aristocracy in the Civil War --- conservative traditions rooted in pre-industrial, pre-democratic feudalism.

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2) Still, as I also noted, it doesn't follow that the West European welfare-state systems haven't considerable economic and political achievements to their credit . . . above all (should have mentioned this) the complex welfare-state mixed economy that emerged in Sweden in the early 1930s --- and was emulated everywhere in West Europe (even in Britain until the Thatcher era of the 1980s) --- ended once and for all, it seems, the violent, polarized ideological conflicts between socialism and capitalism of various kinds in Europe.

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3) Now, as for the concrete economic achievements, here is the quoted query left by Paul, a poster in Mark Perry's thread on Friday (Oct. 10th) where Mark listed the 10 top-ranked economies of the world in terms of competitive vigor . . . the ranking put out each year by the World Economic Forum on the basis of a variety of criteria.
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Paul's good, left-unanswered query:
"Mark, how does this competitive ranking compare to rankings on economic freedom, e.g. from the heritage foundation, which has the US at 5th in the world in economic freedom"

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4) Here's a fact-based, straightforward reply, Paul:.

First: the 10 top ranked economies by the World Economic Forum posted by Mark in column 1, and the ranking in economic freedom by the Heritage Foundation in cooperation with the Wall Street Journal. Click here

 

Country WEF Rank Econ Free
USA 1  5
Switzerland 2  9
Denmark 3 11
Sweden 4 27
Singapore 5  2 
Finland 6 16
Germany 7 23
Holland 8 13
Japan 9 17
Canada 10  7
   

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5) As you can see, 4 of the top 10 WEF-ranked countries in economic competitiveness are listed by the Heritage/WSJ index as being in the top 10 free economies.

Another 4 are found between 11 and 20 on the econ freedom index.

And 2 --- Germany and Sweden --- are 23rd and 27th.

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Click to Continue ----> 

6) The buggy conclusion?

It's ambiguous. Six of the top 10 competitive economies aren't in the top 10 economically free countries. They have far more advanced welfare-state and regulatory rules and laws compared to the US. And, further, compared to Singapore (a small authoritarian Chinese city-state), Switzerland, and Canada.

But the more regulated, high-taxing, and (save for Japan) advanced welfare-state economies have their own vigor and competitive virtues; have shown an ability (save for Japan really) to adapt and overhaul their economies in the last decade; and have enjoyed solid growth in the last four years or more until very recently.

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7) One conclusion, though, is less ambiguous.

Capitalism comes in a variety of forms, all depending on the state-market relationships. And these are embedded not in theoretical socialist or free-market ideologies, but rather in the institutional, cultural, and political histories of these countries.

It's hard for Americans --- even professional economists in the main (who aren't well grounded in economic history) --- to grasp that free-market capitalism is a rarity in the world because of very different histories than our own country.

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8) Something else now --- a big surprise no doubt for most regular posters at Prof Perry's web site.
Contrary to what they seem to think, the United States became the mightiest industrial country in per capita income in the 1880s (Britain no. 1 until then) and in productivity slightly later by industrializing behind high tariff protection.

How much such protection in the early 19th century contributed to that industrial manufacturing thrust --- it started in 1791 --- has been debated by economic historians.

No matter. The protection was there, and it actually accentuated in the late 19th and early 20th century after some tepid liberalization in after the civil war.
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9) Moreover --- hold onto y our seats, everyone! --- protectionism was the bedrock of the Republican Party until well into the post-WWII era. It was the Democratic Party that, off and on in the late 19th century, then during the Woodrow Wilson era (1912-1920), and FDR who opted for trade liberalization. And it was always Republican administrations that overturned the liberalization until after WWII. Click here for the CATO Institute survey.

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Nor is that all.

It was the Truman Administration, cooperating with Robert Taft and other Republican Congressmen and Senators, who managed to drag along the Republicans to endorse the GATT proposals --- watered down because of Republican hostility in Congress --- and to drag them out of foreign policy isolationism.

And as the Clinton era showed, with NAFTA, Democratic leaders like the president managed to beat off the growing populist rebellion against rapid globalization and de-industrialization that set in during the late 1970s and, since then, has accelerated. (Only fair to add that some recent and good economic historical work has shown that the shift of American industrial jobs abroad --- due to both trade liberalization and multinational expansion from the US home base --- didn't accelerate in the 1980s and 1990s compared to the previous two decades.

It has definitely accelerated in the last 8 years though. And financial interdependence has exploded in the last 30 years beyond equivocal data.

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10) Oh, before I forget. It was President Reagan in the 1980s who tried to deflect protectionism from Republican and Democratic ranks by signing into law a policy that began arm-twisting countries abroad to open up their markets --- contrary to standard free trade theory (especially robust libertarian versions) --- on pain of being retaliated against. And it was George Bush Sr.'s administration that began forcing Japan's government to negotiate openings there (with little results).

And it is George W. Bush's first administration --- not the Clinton's two administration --- that demagogically protected the steel industry in order to boost the Republican electoral gains in the 2002 Congressional elections. Protection, please note, that was condemned by the World Trade Organization.
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Michael Gordon, AKA, the buggy professor