Trump, Xi Jinping, and the US Economy

By Daniel Corin and David Hamon, ACD's Economic Warfare Institute
Tuesday, April 4th, 2017 @ 9:40PM

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President Donald Trump will be meeting his Chinese counterpart on Thursday negotiate economic and security matters. But while Mr. Trump is confident he will “make America great again,” the country can barely afford both butter and guns.

The national security of the U.S. relies heavily on the robustness of economic growth. The faster the economy grows, the more revenue pours into state and federal government coffers, feeding greater security.  More importantly, the President may fund additional defense and intelligence requirements without imposing politically sensitive cuts to domestic programs.

For instance, President Trump announced that he aims to increase defense spending by $54 billion in fiscal-year 2018.  To do this without increasing the deficit, he proposes cutting an equal amount of spending from other federal programs.  Higher economic growth would make it easier to do this.  In fiscal-year 2016, defense spending came in at 2.8% of nominal GDP.  Had GDP grown just one percentage point faster (3.9% instead of 2.9%), and assuming defense spending remained at 2.8% of GDP, the Pentagon would have an extra $5 billion to spend.  If the economy grew three percentage points faster, the military would have $15 billion in additional money to spend—money that would not have to come out of the budgets of any domestic programs.

The Heritage Foundation’s recent release of its annual Index of Economic Freedom is cause for concern.  According to Heritage experts, only five countries were deemed economically free:  Hong Kong, Singapore, New Zealand, Switzerland, and Australia.  The United States (along with 28 other countries) fell into the category of “mostly free.”  Overall, the United States ranked 17th in the world in economic freedom.  Rounding out the list of countries ahead of the US:  Estonia, Canada, United Arab Emirates, Ireland, Chile, Taiwan, The United Kingdom, Georgia, Luxembourg, the Netherlands, and Lithuania.

When compared with earlier years, Heritage’s index indicates a disturbing trend for the economy of the United States.  The first graph shows the freedom index of the US since its inception in 1995.  There was a somewhat steady upward movement for the first 11 years, leveling off in the two years before the onset of the Great Recession.  Since 2009, the U.S. index has shown a steady decline, falling to its lowest level ever.

[It should be noted that Heritage incorporated some changes to its methodology this past year, adding two additional categories.  Heritage didn’t go back and update country indexes for previous years.  Thus, one should be cautious when drawing conclusions based on the time-series as the indexes of the earlier years used a slightly different methodology.]

Regardless of methodology, the index shows an economy growing less free over the past nine years.  Much of the decline reflects the implementation of various government programs and regulations designed to stem the tide of the 2008/2009 economic downturn–argued by some economists as necessary to forestall another Great Depression.  The point is debatable.  What is true is the United States, compared with the rest of the world, ranked 4th in 2007, fell to 17th in 2017.

The Great Recession was a global event—impacting most of the major economies.  Many—if not all—of these countries implemented the same government programs and regulations as the US.  One would expect that the US—despite its falling index—to maintain its relative ranking in the freedom index as they too enacted anti-recessionary programs.  Instead, thirteen countries passed the U.S. over the past ten years to be labeled more economically free.  But the news is worse:  also, there are 13 other countries that are within three points of the United States.  Put bluntly:  the US is nowhere near the economic leader perceived by many.

This embarrassment should give Congress a pause for concern. Three of the countries with a higher index in 2017 are former Soviet Socialist Republics (Estonia, Georgia, and Lithuania).  Two others (Chile and Taiwan) were dictatorships a generation ago; a third is a Middle Eastern country ruled by emirs (UAE.)

Heritage’s Freedom Index is made up of twelve categories:  Business Freedom; Trade Freedom; Fiscal Freedom; Government Spending; Monetary Freedom; Investment Freedom; Financial Freedom; Property Rights; Freedom from Corruption; Labor Freedom; Judicial Effectiveness; and Fiscal Health (the last two were added this year.)  These categories revolve around the scope of central government intervention in the economy.  This is not to say that government in unnecessary:  it is essential for the protection of property rights, the rule of law, anti-corruption, and to regulate interstate commerce.  The problem: regulations make it difficult to open a business (Business Freedom/Freedom of Corruption); high taxes and regulations on capital (Investment/Financial Freedom); and increasing debt to fund an expanding federal government (Fiscal Freedom/Fiscal Health).

The chief reason for the poor performance of the American economy is the federal government.  Since the dawn of the Obama administration, Washington has greatly increased spending, racking up trillions of dollars in debt.  The Federal Reserve made unprecedented interventions in monetary policy (quantitative easing—QEI through QEIII); and Dodd-Frank and the Affordable Care Act (to name but two) placed many onerous rules and regulations on capital markets, burdening businesses both large and small.  One reaction:  the revival of anti-trade policies in official Washington.

The Heritage graph, which calculates each nation’s economic freedom index with their corresponding per capita GDP, shows a strong relationship between higher economic freedom and per capita output/income.

The defense and intelligence budgets are subject to growing pressure in the coming years as entitlement programs like Social Security and Medicare continue to gnaw at and consume a greater portion of the federal budget—the result of the aging Baby-Boomers.

The path of less economic freedom in this country is a troubling trend and must be reversed. Greater economic growth would give the federal government additional resources to buy both guns and butter.

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Categories: economic freedom, Economy, Hertiage Index of Economic Freedom, Latest News, security, Trump, Xi Jinping