US continues slide down economic freedom scale

Audrey Pietrucha

If economic and political liberties are necessarily linked, as many believe, then the United States’ reputation as the land of the free slipped a little further this week as documented in Economic Freedom of the World 2011 Annual Report.

The 15th edition of the report, as compiled by the Cato Institute, the Frasier Institute of Canada and more than 70 think tanks from throughout the world, ranks 141 nations for 2009, the most recent year for which data are available. Hong Kong and Singapore led the way as nations offering the most economic freedom while Australia, Switzerland and New Zealand filled out the top five. The tiny African island nation of Mauritius took the number nine spot ahead of the United States, which just squeaked into the top ten.

The report designates the basis of economic freedom as voluntary exchange, personal choice, security of private property and the freedom to compete and measures the extent to which a nation’s policies and institutions provide a foundation for these pillars. More than forty data points are used to summarize and measure economic freedom in five broad areas. These areas include the size and scope of government as well as its impact on the private economy through expenditures and taxes; legal structure, especially as it relates to property rights; sound monetary policies; free international trade and regulation of credit, labor and business.

The report attributes the United States’ decline over the last ten years partly to lower scores in legal structure and property rights, but the bulk of the problem comes from higher government spending and borrowing. Considering this report is based on data from 2009 and does not include the last few bloated budgets delivered by Washington there is reason to believe next year’s findings will be even more discouraging.

A fascinating finding of the report is the extent to which economically free nations outperform non-free nations in terms of the well-being of their populations. For instance, the average per-capita GDP of nations in the top quarter of the index was more than six times that of nations in the bottom quarter. The average income of the poorest ten percent of the freer nations’ populations was more than eight times higher than that of the poorest inhabitants of unfree nations. In fact, the poorest members of economically freer nations were almost twice as rich as the average citizen of the economically least-free countries with the $8,735 average income of the poorest members of the top quarter almost double the $4,545 overall income per capita in the bottom quarter. Poverty rates influence wellness, of course, so it is not surprising that life expectancy in the top quartile is almost nineteen years longer than that in the bottom quartile, 79.4 years compared to 60.7 years.

An interesting finding of this year’s report was a comparison of policies that promote freedom over entitlement in relation to economic development. Jean-Pierre Chauffour, lead economist with the World Bank, Middle East and North Africa Region, studied the balance between coerced economic decisions and free choices and concluded that nations which emphasize free choice in the form of economic, civil and political liberties over entitlement rights are likely to achieve higher sustainable economic growth. In contrast, pursuing entitlement rights through greater coercion by the state is likely to be self-defeating in the long run. This is important information for developed countries to consider as they pursue reform of the welfare state and even more important for developing nations as demands for political freedom spur the creation of new social contracts with citizens.

The African experience is important evidence of this finding. Post-colonial Africa turned almost exclusively toward socialism and authoritarian rule. Two notable exceptions were top-ten contender Mauritius and Botswana, which ranked 68 on the economic freedom scale. Sadly, eight of the ten least-free nations were African including bottom dwellers Angola and Zimbabwe. The South American nation of Venezuela and the Asian nation of Myanmar were the only non-African nations to so dubiously distinguish themselves.

The message is clear – societies that embrace economic and political freedom thrive while those whose people are not given choices in how they live their lives and spend their money fail. As we continue the discussion in our own nation about the proper balance between private and public economic behavior let’s err on the side of freedom and at least give Mauritius a run for her money.

Audrey Pietrucha helps coordinate the Vermont Liberty Alliance. She can be reached at vermontliberty@gmail.com.

My musings for July 4th

My yearly ritual of reading the Declaration of Independence with slide show.

New daily Blog on Liberty

I have started a daily video blog entitled "Gadfly's Buzz" which is focussed on daily topics from the news. They are short (five minutes) takes on events and ideas I encounter each day. Check it out. I am currently working on a longer "Gadfly's Musings" which will be 15 minute weekly blogs discussing libertarian topics and ideas. So check out my channel VermontGadfly on youtube and let me know what you think.

Giving Bin Laden what he wanted

The threat of war with France hung over the newly-formed United States of America when John Adams signed the Sedition Act on July 14, 1798. This law declared that treasonable activity, including the publication of "any false, scandalous and malicious writing," was a high misdemeanor, punishable by fine and imprisonment.

As we look backward from our 21st century perch, we are puzzled how such a blatantly unconstitutional law could have passed. Doesn’t the First Amendment to the Constitution specifically state Congress shall make no law “abridging the freedom of speech, or of the press”? How could those who had so recently fought for liberty disregard this fundamental right?

Fear makes people behave in irrational ways and, unfortunately, fear is often used as an excuse to circumvent the Constitution and the natural rights its authors sought to protect through the rule of law. Shortly after the attacks of September 11, 2001 a piece of legislation easily passed into law and remains there still, with little modification of its unconstitutional provisions. That law is known as the USA PATRIOT Act and it has changed Americans’ relationships with law enforcement and government officials in countless ways. If Osama Bin Laden’s purpose in attacking us was to fundamentally change American society, the PATRIOT Act helped him succeed beyond his wildest dreams.

Many of the controversial intelligence gathering and law enforcement features of the PATRIOT Act are not significantly different from methods that have been used for decades. The troubling aspects have to do with the expansion of powers and reduction of accountability and oversight. The use of National Security Letters, or NSLs, is a good example.

An NSL is a letter to a particular entity or organization, such as a telecommunications company or financial institution, demanding the records and data pertaining to individuals. No judicial oversight or permission is required, as is the case with traditional search warrants used in law enforcement, and the writer of an NSL does not have to justify his or her suspicions. NSL’s can request information such as financial transaction records or email addresses mailed to and from, and they also contain gag orders which prevent institutional officers from alerting their clients to the government’s interest in their financial or communication affairs.

Though some attempts have been made to curb NSLs, their use remains essentially unchecked. A congressional audit concluded hundreds of thousands of NSLs have been issued since 2001. Their use has not been well monitored and the private information they revealed, most of it immaterial to any national security concerns, is kept on file.

“Well, so what?” many ask. “It shouldn’t be a problem if you’re innocent and have nothing to hide.” But the Founders knew the fickle nature of government and its officers. They had seen abuses of power and crafted the Bill of Rights as a charter of negative rights to prevent the government from “changing its mind” about which actions or thoughts were permitted and which were not. The Fourth Amendment, which guarantees “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures . . .” was a direct response to legal instruments similar to NSLs. In the mid-1700s the British crown employed “Writs of Assistance” to justify random searches for smuggled goods in colonists’ homes. James Otis, who as Advocate General was supposed to represent the crown in its prosecution of a group of merchants found with smuggled goods through the use of Writs of Assistance, resigned his position and instead took on the merchants’ defense pro bono. Writs of Assistance, Otis said, violated one of the most cherished English rights, that of the freedom of one’s home, and were “a power that places the liberty of every man in the hands of every petty officer.”

Last month Congress passed and President Obama signed extensions of several controversial PATRIOT Act provisions that were set to expire, institutionalizing civil liberties abuses for at least another four years. Republican Senator Rand Paul, perhaps the most prominent “Tea Party” representative in Congress, put up a valiant fight against bringing the PATRIOT Act extensions up for vote in the Senate. But establishment politicians on both sides of the aisle accepted hyperbolic claims that terrorist attacks were imminent unless these provisions were renewed and once again demonstrated their contempt for our Constitution.

To their credit, all three members of Vermont’s congressional delegation voted against these extensions. And Senator Patrick Leahy, though he has voted in favor of the PATRIOT Act and its renewal in the past, has teamed up with Paul to co-sponsor an amendment to the act which would serve to monitor and curb abuses of power.

National security should be a principle duty of government but too often it is used as an excuse to sacrifice its main responsibility, that of protecting the natural rights of humankind. At a time when fear is used to political advantage far too often, Benjamin Franklin’s famous quote comes to mind: “Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.” If we continue to allow our government to ignore the Constitution, the document which at its core sought to restrain government and codify our natural rights to life, liberty and private property, we will get what we deserve.

Corporate Welfare at its Finest

by Audrey Pietrucha

Congressman Peter Welch garnered headlines last week when he offered an amendment to HR 1230, a bill that would reopen off-shore oil leases canceled in the aftermath of the BP Gulf oil disaster. Welch’s amendment would “repeal taxpayer subsidies to the oil industry” according to a press release from his office.

"While oil companies are doing quite well, Vermonters are not. They simply can't afford to fill their gas tanks," Welch said. "Congress should be taking steps to cut gas prices, not look the other way while oil companies line their pockets with taxpayer support."

If Welch was really concerned about cutting gas prices for consumers he might have offered a different amendment, one that eliminated state and federal gasoline taxes. This would, according to the Tax Foundation, shave 43.5 cents off of every gallon of gasoline sold in Vermont. Oil companies such as Exxon-Mobil, on the other hand, only take two or three cents in profit per gallon. A first-grader could tell you which number is higher.

But there is a bigger issue at stake here and it concerns the fairness and effectiveness of government subsidies to the energy industry and to industry in general. There are legitimate roles for government but it is highly questionable if one of them is choosing which businesses should benefit from taxpayer financial support.

First let’s look at energy subsidies, the most notable of which may have been the ethanol subsidies which have been set at forty-five cents per gallon since 2005. In addition to the unintended consequences attached to increased ethanol production (corn prices shot up and, by extension, the price of foods connected with corn such as beef), these subsidies have resulted in more fertilizer use, more land use, more energy use in the production and harvesting of corn and no less pollution since it has been found that ethanol and gasoline emit just about the same amount of greenhouse gases.

Similar stories emerge from other energy sectors. Clean coal and nuclear power plants have consumed federal dollars for decades with little positive fiscal results to show for it. For instance, the Government Accounting Office (GOA) found that many clean coal projects have “experienced delays, cost overruns, bankruptcies, and performance problems.” The GAO examined 13 projects and found that “8 had serious delays or financial problems, 6 were behind their original schedules by 2 to 7 years, and 2 projects were bankrupt” Nuclear power plant construction is notoriously dependent on federal loan guarantees in order to be built in the first place and then furnish competitively priced power.

Hints of similar future boondoggles permeate the “green” energy industry. Neither wind nor solar power has proven feasible on a large scale without massive injections of government money and the environmental impact of these technologies has yet to be fully considered. For instance, Jesse Ausubel, director of the Program for the Human Environment and senior research associate at Rockefeller University, calculates an area of land equal in size to the state of Connecticut would need to be devoted to wind turbines to power the city of New York.

There are many other federally-subsidized industries and programs that can be traced back to energy use. Alternative-energy vehicles and public transportation are two that immediately come to mind. Leaving the energy realm we find a plethora of industries that either boost their profits through government intervention or remain profitable only with government help. Agriculture is fraught with examples, with more than ninety percent of the ten to thirty billion dollars per year in agriculture subsidies going to farmers of five crops—wheat, corn, soybeans, rice, and cotton. Dairy products and sugar also benefit and all told more than 800,000 farmers and landowners receive subsidies. These payments are heavily tilted toward the largest producers, not family farmers.

Welch picked on the oil companies because they are the popular political punching bag of the moment. “Why are we asking the American taxpayers to subsidize a profitable industry?" he asked. A reasonable question but a better question would be why are we asking American taxpayers to subsidize any industry. If investors or consumers are unenthusiastic about a product or service, it’s probably for good reason. Do politicians really have a better understanding of these businesses than the individuals who have money at stake?

Subsidies harm their intended beneficiaries by protecting them from market forces. This isolation from real-life consequences reduces incentives for economic and technological innovation and ultimately reduces competitiveness ever further. Subsidies also distort useful and necessary price signals.

Those who fear free markets should consider the alternative – political decisions. The broadly dispersed influence of individual consumers and investors making rational decisions in the marketplace seems a far safer way to distribute wealth than through the powerful and politically-connected. Pork-barrel projects and special interest spending have been the means through which politicians from both parties have distributed billions of dollars of taxpayer money. It’s time to close the wallet.

Audrey Pietrucha helps coordinate the Vermont Liberty Alliance. She can be reached at vermontliberty@gmail.com.

Free Market Solutions to Healthcare Dilemma

Audrey Pietrucha

Governor Peter Shumlin and his super legislative majority have received their federal waiver and can be expected to begin the conversion of Vermont’s health insurance system – what’s left of it – to a government-run single-payer plan in earnest and without much resistance. After two decades of government intervention in the health insurance market which, according to the politicians themselves, has left Vermonters struggling with higher insurance and medical costs, the political class has decided the path to lower is costs is through more government intervention.

This illustration of the classic definition of insanity is by no means unique. It has played out on the national level as well, with health care being only the most conspicuous example. Government has become increasingly active in regulating and financing health care over the last 40 years—increasing health care spending from 25 percent to more than 50 percent of overall spending. Clearly the solution must be more government.

Unfortunately, the free market solutions to the health care insurance dilemma are virtually ignored in Washington and Montpelier alike. That does not make them less effective, however, only less palatable to those seeking to secure more power under the guise of compassion and fairness. It’s time at least some of those solutions had a hearing.

One of the easiest ways to reform the health insurance market would be to allow consumers to purchase policies available in other states. Only a few health insurance companies operate nationally or regionally and consumers are not allowed to cross state lines to purchase policies from smaller companies. When choices are limited and no one is competing for customers the consumer is at the mercy of those who have achieved state sanction.

Or should we say those who have had the resources and tenacity to jump through all of the state-held hoops? Many companies offer policies that are acceptable to or even preferred by individual consumers, but do not meet coverage standards dictated by the state. If we are to attract more insurance companies to Vermont, we have to repeal the onerous state coverage mandates that drove so many companies outside our borders in the first place. Standardized statewide plans have allowed only large insurance companies with deep client pools to continue swimming in Vermont. Dropping community rating standards and allowing Vermonters to select from an a la carte menu of insurance options would attract more providers to the state and lower consumer costs.

Third party payments, whether through government or private insurance, have insulated medical service consumers from the cost of these services and resulted in careless spending of “other” people’s money. One of the best ways by which we could tame medical costs would be to decrease dependency on insurance for routine medical care and once again involve the consumer. High deductible insurance policies for catastrophic illness and tax-deductible Health Savings Accounts (HAS) can accomplish this.
Whole Foods Market provides a successful blueprint for this approach. Whole Foods provides its employees who work 30 or more hours a week with a high-deductible health insurance policy plus up to $1,800 per year in additional health-care dollars through deposits into employees' Personal Wellness Accounts. Money not spent rolls over from year to year. Whole Foods employees therefore spend their own health-care dollars until the annual deductible of around $2,500 is met and the insurance plan kicks in. This creates incentives to spend the first $2,500 more carefully. Combining actively engaged consumers with greater transparency of health care costs could make a multi-billion dollar difference in our approach to these costs.

No discussion of free market remedies would be complete without raising the specter of tort reform. I once heard a radio talk show host dismiss lawsuits as making up “only” 200 billion of the 1.2 trillion dollar health care industry. Umm, do the math – that is one-sixth of the cost involved in medical care and that estimate is probably low since it is nearly impossible to assess how much of medicine as practiced today is defensive. We need to establish sensible guidelines for what constitutes medical malpractice and remove the threat that currently hangs constantly over our medical professionals’ heads.

There are many other sensible solutions, such as changes in tax law regarding the deductibility of individual health insurance purchases, Medicare reform and vouchers for government health benefit recipients. We can also take control of our health as individuals and families by learning about and implementing the many preventative measures we can take with regard to wellness. Personal responsibility can greatly impact both our individual and collective health care circumstances and should be part of the equation.

As should free market solutions. Contrary to a popular slogan, health care is not a right but a service. Like food and housing, it should be provided through voluntary and mutually beneficial interactions between consumers and providers

Fannie Mae and Freddie Mac: A Study in Unintended Consequences

Treasury Secretary Timothy Geithner’s recent announcement of a plan to eliminate the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation - affectionately known as Fannie Mae and Freddie Mac – included a shocking admission.

Speaking of the federal government’s overwhelming involvement in the U.S. mortgage industry, Geithner said "I think it's absolutely the case that the U.S. government provided too much support for housing, too strong incentives for investment in housing. We just took that too far."

Well, maybe this isn’t so shocking to anyone who followed the upward trajectory of housing prices from the early 2000s through 2006 and recognized the role easy credit played in both the birth and demise of the housing boom. After years of hearing politicians like our own Senator Bernie Sanders blame everyone but the government for the crash that led to our current bleak financial situation, however, it was satisfying to finally have public confirmation that Government-sponsored Enterprises (GSEs) such as Freddie and Fannie had played a large role in the financial meltdown.

Fannie Mae and Freddie Mac were set up forty years ago as mortgage securities brokers. They did not provide mortgage money directly but bought mortgages and mortgage-backed securities from banks and other financial institutions. Though technically private, they enjoyed government support in the form of lower interest rates than what were available to other lenders. They also received implicit assurance of federal assistance should they find themselves in financial trouble, which, of course, they did.

It was fun while it lasted – private lenders found a new pool of customers as people who should have been renting were encouraged to take advantage of creative financing options, many of which required little or no money down. These private financial institutions took on risky customers knowing the government-sponsored enterprises would gobble up the loan packages, thus providing the money to finance more questionable loans.

Freddie and Fannie were having a great time of it - borrowing at low rates the money to purchase these mortgage packages, making a tidy profit for themselves and their investors in selling, earning large salaries for management and even holding some capital, all the while allowing the federal government (that would be we, the taxpayers) to bear the risk.

Meanwhile, politicians of both parties raked in hefty campaign donations, especially from Freddie and Fannie, who over a decade spent almost $200 million in lobbying and contributions. The top three recipients in the Senate of Fannie’s and Freddie’s largess were Democratic senators Christopher Dodd, Barack Obama and John Kerry. This is important to note because it was Democrats such as Dodd and his House counterpart Barney Frank who blocked attempts by Republicans in early 2003 to investigate some funky accounting practices being used by the GSEs.

As often happens when other people’s money is at stake rather than one’s own, Fannie, Freddie, and their Washington enablers pushed things too far. The politicians saw an opportunity to make political inroads with yet another constituency group – the unhoused – and pressured lenders to provide mortgages to more and more people who, unfortunately, couldn’t really afford to own homes. In 2004 the Bush administration decreed that within four years, 56% of Fannie's and Freddie's mortgages should go to low-income households and 28% of the mortgages to those with a "very-low income." Rather than curtailing a lending strategy which made “sub-prime loans” desirable financial instruments, Congress pushed for even more aggressive lending. Old-fashioned requirements like down payments and even income were dispensed with in the effort to get every American into a house (or two or three) or his or her own.

Reality has a way of rearing its unwelcome head and did so in September of 2008. All those new customers who were brought into the housing market through easily obtained mortgages pushed up the cost of existing homes. High home prices encouraged immoderate new construction, which led to the overproduction of housing and, eventually, falling prices. Homeowners found themselves in foreclosure and many walked away from homes that were worth less than they owed. Fannie and Freddie found themselves in crises and were brought under government conservatorship. Estimates of what this will eventually cost American taxpayers range between 350 and 750 billion, though some say the total cost will reach into the trillions. This doesn’t include the inestimable effect on what should be a free economy when as large a player as the federal government decides to manipulate the market. The unintended consequences of government intervention in the housing market have become painfully apparent to all Americans, and all continue to feel the adverse effects.

The move to transition the U.S. mortgage industry away from government dependence is a good one. According to Geithner it will include reforms that will benefit both lending institutions and consumers, also good. Smoothing over government’s footprint in the housing market sand will take time, though, as it is wide and deep. Could we at least use that time wisely, study the lessons of Freddie and Fannie and apply them by keeping government out of enterprises where it really has no Constitutional right to be?