By Ben Eisen
and Fred McMahon
The Fraser Institute
Just as the United States has long served as a global exemplar of economic freedom and prosperity, Alberta has shown other provinces how to provide liberty and economic opportunity. Sadly, economic freedom is in retreat in both places.
Throughout the 1980s and 1990s, the U.S. was a global leader in economic freedom. It had comparatively modest tax rates, a relatively small government sector and somewhat less onerous economic regulations than other countries. This served the country well, as living standards in America have historically been among the world’s highest. So it is sad news that a recent analysis shows economic freedom is waning in the U.S.
Between 2000 and 2013, government spending as a share of all consumption in the U.S. economy increased. That means more economic decisions are being made by governments, and fewer by private citizens and businesses. Further, personal income taxes have risen and policy-makers have added more onerous regulation.
As a result, the U.S. has gone from the world’s third most economically free country in 2000 to the 16th freest in 2014, the most recent year of comparable data.
There’s robust evidence of a strong relationship between economic freedom and prosperity, so it should come as no surprise that America’s economic performance has sagged.
So far this century, real economic growth in the U.S. has been well below its historic average, while job growth and labour force participation have lagged behind levels from recent decades. And the U.S. recovery from the recent recession has been the weakest since the Great Depression.
That’s sad news for the world’s traditional beacon of economic freedom.
It’s hard to read about the decline of economic freedom in America without thinking about Alberta, Canada’s longtime leader in the same category.
Like America, Alberta has in recent decades embraced a tax and regulatory approach that promotes freedom and is conducive to prosperity. Partly as a result, the province has become one of the most prosperous places on Earth. While oil and gas helped drive growth, Alberta also grew in sectors including manufacturing, head offices and financial services.
Just as America has been a global example of economic freedom, Alberta has been the exemplar within Canada, inspiring positive policy change in other provinces, including Saskatchewan and British Columbia.
So it’s troubling to see Alberta make policy choices similar to the ones that have undermined economic freedom in the U.S.
For example, last year Alberta’s provincial government dramatically increased personal and corporate income taxes. These hikes will take more economic choices from the hands of consumers and businesses and place them in the hands of politicians. Further, successive governments in Alberta have increased spending, adding to provincial debt and plunging the province into deficit spending.
Given the link between freedom and prosperity, these policy changes will likely result in less growth and less wealth-creation – at a time of declining oil and gas prices. Alberta needs to attract investment in all sectors. But increasing taxes and higher business costs from regulatory interventions such as the planned minimum wage increase to $15 make the province less attractive for investment.
Declining economic freedom is sad wherever it occurs, but it’s particularly damaging when it takes place in jurisdictions that serve as global or national examples, showing the power of economic freedom to make life better.
That’s why the decline of economic freedom in America is so troubling, and for Canadians, why it’s hard to watch Alberta make similar mistakes.
Ben Eisen and Fred McMahon are analysts at the Fraser Institute.