Gene Epstein uses his latest “Economic Beat” column for Barron’s to argue that a loss of economic freedom has helped slow American growth.
There were five expansions from 1970 to 2000, through which growth averaged in a range from 3.6% to 5.1%. Of the two expansions since 2000, the current expansion has been the slowest of all, at 2.2% so far. The second-slowest was the previous expansion, at 2.8%.
HOW COME? I see a causal connection between the trend in economic growth and in the Fraser Institute’s Index of Economic Freedom, which consists of five components: measures of regulation, the rule of law, the size of government, the soundness of money, and openness to trade.
Fraser’s Index of Economic Freedom for the U.S rose every decade from 1970 through 2000, coinciding with the extended period of relatively strong growth. But the index has plunged since 2000 to a level comparable to 1970, a decline that has coincided with relatively weak growth.
This causal connection is admittedly a large claim—too large, in fact, to be fully defended here. Let me at least defend it indirectly by ruling out certain alternative explanations that have been put forward.
The most popular explanation has been that sluggish growth since 2009 has been due to the financial crisis that sparked the Great Recession of 2008-09, since financial crises are supposedly followed by slow expansions. But a National Bureau of Economic Research review of business cycles in the U.S. since 1880 has shown that, if anything, the reverse is the case. Recessions accompanied by financial crises tend to be deeper than average. Once the recovery has begun, however, the expansions that follow actually tend to be stronger than average. …
… Private-sector GDP growth in the George W. Bush and Barack Obama expansions was virtually the same. And both were still the slowest on record—a finding that tends to confirm the view that the decline in economic freedom since 2000 is the main cause—a view that has important policy implications.
