Economic Freedom Indexes: Fraser vs. Heritage
After my article on the Heritage Foundation's Economic freedom index I received a lot of e-mail, almost all positive. I was actually somewhat disappointed (but not completely surprised) that even though I know people associated with the index reads this web page no one even tried to defend the index against the arguments I made, or alternatively if they had no counter-argument against my arguments, admit that they made some mistakes. Many people however asked me for my opinion on the other well-known economic freedom index, the one published by the Fraser Institute in cooperation with the Cato Institute and some other free market-oriented institutes around the world.
Actually, as the primary purpose of my article was not to attack the Heritage index, but to suggest ways in which a better index could be constructed, you could yourself merely apply my arguments about what was good about the Heritage index, what they should not have included and what they should have (but didn't) include, to the Fraser index and see to what extent they dealt with the issues I mentioned. But even so, I promised them that I would post a blog here analyzing the Fraser Index in a more detailed way (although not quite as detailed as my analysis of the Heritage index). Unfortunately, since I've been quite busy during the last 1½ months, I haven't had time to do so until now. But here it is now.
The Fraser Index does overall look a bit better than the Heritage Index. It does not for example have the absurd view that the change of public spending is equal to the level of public spending, it has a somewhat broader indicator of monetary disturbance, it gives negative points for union power (although I think the weighting of that is too low), it has a somewhat better measurement of the size of government enterprises and it does not give negative points to a large inofficial sector. However, while it is better it is still not good enough.
Like Heritage institute index it gives too low a weight to welfare statism, it includes only a few tax rates (Unlike Heritage they include payroll taxes but on the other hand unlike Heritage they exclude corporate taxes and they share the other shortcomings on taxes that the Heritage index had), it ignores the existence of forced savings in countries like Singapore, it ignores the issue of industrial policy, it neglects monetary policy effects on exchange rates (and accordingly it neglects how monetary policy can distort trade) and asset prices. Moreover, their way of measuring the impact of government spending seem even worse than that of the Heritage index.
To elaborate on a few points: —While their measure on the fiscal burden of government unlike the Heritage index do not make the absurd claim that the burden of government in notoriusly welfare statist Sweden and Denmark is lower than in the United States, they do —like the Heritage index— make the absurd claim that Sweden and Denmark has a equally large or lower fiscal burden than China, a country with virtually no welfare state. In part this seems to be the result of the fact that they have included a measure of government-owned enterprises, a issue where China —despite the fact that state companies are steadily declining in influence over time because of the rapid private sector growth- still is relatively statist and more statist than Sweden and Denmark. But this issue should preferably have received a separate category. Moreover, they have a quite absurd way of measuring the burden of government spending in China which is roughly 22% of GDP (as compared to 35% in the US and 58% in Sweden).
First they concentrate all of this in the sub-category of government consumption, giving China a relatively low (low means statist) rating. Then in the sub-category of transfer payment they include nothing but they do not use this sub-category at all, meaning that the high rating in the government consumption category is used for the entire government spending score, without taking into account the lack of transfer payments. This gives a to say the least very misleading result, and that is how you can give a country with virtually no welfare state a worse score than the countries with the most bloated welfare states in the world.
—Like the Heritage index, they do not seem to regard forced savings as a infringement of economic freedom as Singapore, a country where the government forces its citizens to save a third of their income, is scored after its quite low top level (22%) of outright income tax and its lack of a payroll tax. This of course means that if the Bush plan for Social Security is enacted , America will be seen as having a huge increase in its economic freedom even though the government will still restrict your right to use your money as you see fit to the same degree as before. Even if you believe that forced savings is a lesser evil than forced payments into pay-as-you-go pension systems, it is still outrageuos to regard forced savings as a equal degree of economic freedom as getting to keep your money.
—While the Fraser Index is a small improvement on the Heritage Index in that they not only mention the destructive effects on labor markets of strong unions and high unemployment benefits but includes it in their scoring, their weighting of this is far too low. Given the very destructive effects on the labor markets of Sweden and other European countries this have had in creating mass unemployment (the official unemployment rate in Sweden is only slightly above 5% but, if you include all the people in the working age population the government pays not to work but chooses not to call unemployed, the rate is over 20%), it is very misleading to let this only have a weighting of 2/5 of 1/3 of 1/5, that is a total of 2/75 or 2,67% of the total index score.