February 26, 2024
Rising US public debt threatens economic freedom
Table of contents
Evolution of freedom
How troubled is the United States? The Freedom Index shows modest long-term decline, which sharply contrasts with the growth of freedom in the European Union (EU). The Prosperity Index illustrates stasis, while again the EU shows improvement. But to understand the path of the United States, it is important to differentiate between three aspects of American society: (1) public discourse and debate, (2) formal political and civil institutions, and (3) the state of the economy as a whole. The first element—public discourse—has experienced a terrible downward trend, at least relative to what we would expect in a stable democracy. The second aspect—formal institutions—is more stable; while there is little evidence of improvement, there is also no evidence of catastrophic change. The third element—the economy—is far more robust.
The negative trend in the Freedom Index, and especially in the political subindex, is largely driven by the downturn in civil politics. The United States has simply gotten more combative and polarized. For example, consider the significant drops in both civil liberties and legislative constraints on the executive branch since 2016. There have been no significant constitutional changes over this time period, but there has been language used—about political opponents, immigrants, and minorities—that would have been exceptional not too long ago. The institutional framework of the USA has not moved as fast as public discourse, so we can think of it as a second level in which change is much slower and gradual.
There have been small institutional changes in different parts of the country, the direction of which typically depends on whether the state is largely Republican or Democratic, but there is no generalized movement towards reform. This claim seems to be supported by the relative stability of the legal subindex. As the graphs above show, clarity of the law, informality, bureaucracy and corruption have seen little change over the last three decades.
Moreover, the economy has been remarkably robust. The US economic system is highly unequal, and that surely adds to political polarization, but that has not changed substantially over the past twenty years. We are not as confident as we used to be about the benefits of free trade, perhaps because the downsides of such a policy have become more salient. However, the economy has continued to hum, albeit with the help of massive fiscal stimulus.
The economic freedom subindices display a series of surprising trends. Trade freedom and property rights protection show a clear negative trend from around the turn of the century. The ratio of trade to gross domestic product (GDP) in the United States increased between 2000 and today, but at the same time the very positive view towards free trade, embodied in the Washington Consensus of the 1990s, has ebbed. Regardless of what specific metrics (like trade-to-GDP ratios) may point to, the decline in the trade freedom indicator accurately reflects the fact that the United States is much less committed to trade than it was twenty-five years ago. Economists, including myself, are at least partly to blame for this shift in attitudes towards free trade. Most of us were once unalloyed boosters of free trade, and we did a poor job of predicting and acknowledging that there would be significant losers from the entry of China into world trade. We did not pay enough attention to the potential for social dislocation of particularly vulnerable communities, or the other costs of trade openness that have now been well documented. This has provided the political backdrop for politicians to move towards protectionism. As both parties have a tepid—at best—commitment to trade freedom, it does not seem that the trend of the last couple of decades will be reversed anytime soon.
The decline in property rights protection is probably not related to an increasing risk of expropriation, which is certainly low in the United States, but rather because it is less clear what you can do with your property, and especially with land. The United States has increasingly become more invasive in its land-use regulations, and there is also more legal uncertainty about the ability to develop land. The fall in property rights protection seems to be capturing a cultural movement away from a sentiment—widespread in the United States before 2001—that property is sacrosanct, to something more nuanced, rather than any objective change in legislation.
Investment freedom is relatively high in the United States, but the indicator also shows some ups and downs. The first bump shown in the graph (2006–12) is somewhat surprising, as it coincides with the increased regulation of financial institutions embodied in the Dodd-Frank Act. It also goes in the complete opposite direction to what I would have expected. At the onset of the great recession (2006–2009), it is not very plausible that investment freedom was improving in the United States. The second shift, starting in 2016, likely reflects the positive view of investment under the Trump administration. There were also laws which may have moved the indicator, such as the introduction of “opportunity zones.” These zones created tax incentives to encourage investment in low-income areas, and while my own research did not find significant links between this policy and housing prices, nevertheless these zones embody the administration’s pro-investment zeitgeist.
Finally, the sharp increase in women’s economic freedom in 2018 is somewhat misleading. This indicator is based on World Bank data that examine legislative changes in a country’s biggest city. For the United States, this is New York City, which introduced paid maternity leave in 2018, driving the large rise in the score. Among Democratic states, there is certainly enthusiasm for moving closer to the EU’s model on these issues, but this is hardly a universal trend across the country.
Political freedom presents two clear periods of democratic backsliding since 1995. The first occurred right after the 9/11 attacks of 2001, driven by the resulting decline in civil liberties. Certainly, US’s leaders thought that giving up a little bit of freedom was a small price to pay for maintaining the country’s safety. Many, and probably most, Americans agreed with them, although there were certainly civil libertarians who did not. While the indicator recovers during the Obama administration, it again drops after Trump’s 2016 electoral victory. The post-2016 drop seems more likely to reflect the president’s negative rhetoric with respect to immigrants, Muslims, and other minorities, rather than any legal change in civil liberties.
The sharp overall drop in political freedom that starts in 2016 reflects the fact that all four indicators of this subindex fell simultaneously: political rights, legislative constraints on the executive, elections, and civil liberties. The highly confrontational political atmosphere of the Trump years may have had a chilling effect on free speech in some places. Many people—on both sides of the political spectrum—may have feared that politically “incorrect” statements would be penalized, either by peers or by prospective employers. But this perception, even if it is widespread, did not translate in any meaningful way into specific legislative changes that would limit political or civil rights. The significant drop in the legislative constraints on the executive picks up the clear erosion of traditional norms around restraints on the executive, but the system did not break. Despite a small uprising and a modest attempt to overturn the results of an election, power still changed hands.
The legal freedom subindex is steadier than those for economic and political freedom, with the exception of the security indicator. This indicator shows a negative overall trend, which is not only capturing the 9/11 terror attacks, the subsequent “war on terror” and the protests around it, but continues up until today. This seems to be more reflective of media headlines than of people’s actual lives as, from 2001 through 2019, murder rates in the United States were declining. Politically motivated insecurity (i.e., perceptions of the likelihood of political instability or violence driven by political motives, such as terrorism) may be greater than in the past, even if there is no change or an improvement relative to the ordinary insecurity that affects people on a daily basis. We have had more political insecurity, as indicated by the Occupy movement, mass protests of police shootings, and violence in the Capitol Building itself, and it seems likely that this is driving this indicator.
The United States’ relatively low score on clarity of the law may partially reflect the ambiguity present in all common law systems that rely on case precedence rather than a civil code, as this empowers sometimes unpredictable juries. The mild but sustained deterioration of the score on judicial independence seems more likely to reflect the increasingly political process of appointing judges rather than of a lack of judicial independence post-appointment. There were certainly loud verbal attacks on the judiciary by the executive during the Trump administration, and that may explain the 5-point decline in this indicator between 2016 and 2020.
From freedom to prosperity
The Prosperity Index score starts at a high base for the United States, and does not move a lot over the period of analysis. That stasis, in my view, correctly reflects the relative strength of the American economy. Despite political sturm und drang, our economy has been working for decades without major disturbances. The American economy is not recession-proof, but over the past forty years, despite enormous technological changes, it has been stable, and typically more so than many others—especially other developed economies. The prosperity of the United States is illustrated best by the income indicator, which moves steadily upward, except for transitory drops in 2008 and 2020.
The health indicator shows the United States’ shortcomings. First, the long trend of health is worse in the United States than in the EU, despite the fact that we spend a vast amount on healthcare. Second, the plummeting of the score in 2020 fairly reflects the United States’ relatively dismal handling of the COVID-19 pandemic. Moreover, recent research has provided evidence that the crisis struck Americans who were not as well educated much more severely than more educated Americans, reflecting both preexisting conditions and the ability to shift to remote work. In May of 2020, 68.9 percent of Americans with advanced degrees were working remotely, compared to only 5 percent among high school dropouts. This translated into mortality rates that were four times higher in America’s least educated metropolitan areas. Instead, in some highly educated metropolitan areas like Seattle, more people died from opioid overdoses during the pandemic than died from COVID-19.
The health indicator should be an alarm bell for the United States. Our healthcare system is significantly led by the public sector through Medicare and Medicaid, yet it is failing to keep Americans healthy and it is costing an extraordinary amount. This seems like an important area for reform.
The worsening trend in the US score on inequality is unsurprising. The United States has never particularly embraced a wholesale fight against inequality. Even Democratic administrations feel constrained in how far they can raise taxes on the rich. Moreover, the significant expansion in the Federal debt over the past five years will make further attempts to use Federal spending to combat inequality even more difficult.
But the sharpest change within the Prosperity Index is the significant decline in the minority rights indicator, which occurred during the Trump administration. The minority rights indicator uses religious freedom as a proxy, and it is certainly true that President Trump said many combative things about Muslims. But this measurement is based on perceptions, and political statements can clearly shift perceptions. It seems unlikely that there has been a substantial real change in religious freedom in the United States. The Bill of Rights, which protects religious freedom, continues to be upheld and enforced to this day. The formal political institutions have, at least so far, been relatively robust to the political rhetoric.
The final two indicators – environment and education – show mild improvements, but the United States should take relatively little comfort from these changes. America’s public school system continues to terribly fail the most vulnerable children, and these problems are not going away. Major risks to the environment remain, and the environment appears to be causing at least as much damage—through wildfires, floods, and storms—as in the past.
The future ahead
Over the past fifteen years, US public debt has increased massively and that poses significant threats for the future. That adverse change is probably underweighted in the Freedom and Prosperity Indexes. It is a sign of where the government has gone wrong. The United States is spending a great deal, and it is acting as if debt just does not matter at all. I am not a macroeconomist, but there are good reasons to be skeptical about the idea that debt is free. We are likely to pay a significant cost for all of this borrowing, both in terms of economic freedom and for the economy as a whole.
Nonetheless, I continue to expect that, by and large, the American economy will deliver more of the same: little change in inequality, the traditional bumpiness of recessions and recoveries, but also a lot of dynamism mixed into that. Overall, the country is likely to continue on the path of the last fifty years.
Yet there are many things that the United States should be doing to ensure sustained economic growth and prosperity: We should regulate small businesses less. We should improve our procurement processes, especially related to healthcare and infrastructure. We should improve our urban school systems. Most importantly, we need to recover a rational and policy-oriented political discourse.
I particularly worry about the increasing regulation of occupations, property, and small businesses at the local level. These effects seem to suggest that the United States does more to protect insiders than to empower outsiders. A robust national reform movement for economic freedom would be exciting, but as of now I only see small demands for reform related to property rights and housing. The “Yes, in my backyard” movement can be interpreted as an incipient effort in that direction. There are places like Los Angeles that have modestly liberalized their land-use regulations, especially by increasing the number of units that can be built without a lengthy planning process. Clarifying the rules for building new homes would make it easier to deliver affordable homes in
high-cost areas.
Moreover, while the United States is the richest large country in the world, our public sector has great room for improvement. Continual reform of the public sector should be a national priority, but the need to make government better is frequently ignored because of fractious political fights. There are pressures for local governments to improve, and there are reasons to be cautiously optimistic that at least some of these local governments may figure out how to improve procurement.
Finally, finding a way to fix civil discourse in the United States feels like an enormously hard task, and it is difficult to be hopeful about that. The disappearance of a small number of contentious individuals from the political arena might move us towards more civilized discourse going forward. But the path towards a less polarized political environment seems unclear to me. As long as identity politics plays an important role, the more that we will argue about “us versus them” rather than how to improve a public sector that serves us all.
Edward Glaeser is the Fred and Eleanor Glimp Professor of Economics and the Chairman of the Department of Economics at Harvard University, where he has taught microeconomic theory, and occasionally urban and public economics, since 1992.
EXPLORE THE DATA
Image: People photograph the annular solar eclipse at the Albuquerque International Balloon Fiesta in Albuquerque, New Mexico, U.S., October 14, 2023. REUTERS/Adria Malcolm