Last week the Fraser Institute released the latest update of its Economic Freedom of the World report, and the news is bad for America. We are now ranked 18th from the top, just behind Bahrain and just ahead of Quatar. During most of the Survey’s history, which has been published since 1995, we ranked somewhere in the vicinity of 3rd. We’re losing ground for two reasons: 1) We’ve been getting less free. 2) Since the fall of the U.S.S.R., the rest of the world has been generally getting more free. In other words, we’re losing freedom on an absolute scale, and we’re also losing freedom even faster on a relative scale. In racing terms, we’re getting fatter as the rest of the world is getting fitter.
One important implication of this fact is that it absolutely shreds any political propaganda about how the Obama economic plan will just be bringing us back to the tax rates of the Clinton 90s which was plenty low enough to give us great growth.
First, of course, the argument is factually wrong. Just going back to the Clinton era marginal tax rates is not the same thing as going back to Clinton era taxes. Obama has imposed other taxes which Clinton never dreamed of, for example, those associated with ObamaCare. In addition, there are now roughly twice as many people at the highest bracket than there were in the 1990s. Targeting people at incomes above $250,000 was a very different matter in 1990 than in 2012, because for reasons pertaining to inflation and income growth there are a lot more two-hundred-and-fifty-thousandaires now than there were then.
But the biggest problem is conceptual: The average world freedom score in 1990 was 5.76, now it’s 6.83. In other words global freedom has gone from something like an F+ to something like a C-. So the world has gotten far more competitive. We’ve gone from an 8.35 to a 7.7. From a solid B to a solid C. In other words we’ve gone from being exceptional to being fairly close to ordinary. And that just won’t do.
What makes things worse is that this data is only updated as of 2010, the Economic Freedom of the World has long reporting and analysis time lags, and it is a near certainty that our level of freedom has declined in the two years from 2010 until now.
What makes things still worse for investors, and I write as an investor to investors, not as a political pundit to political activists, is that U.S. market valuations have been rising over the past couple of years. In other words, as our economic environment has been growing less favorable to investment, the world’s capital has been moving towards us. For what reasons? Take your pick: habit, haven effect, Fed manipulation, least dirty shirt, etc. But neither monetary manipulation nor deep-seated homing instincts can change the inexorable fact that falling yields cannot go with rising risk levels forever. In the long run, risk does not consist in going against the crowd; risk consists in going against reality, because eventually reality always wins.
Mr. Bowyer is the author of "The Free Market Capitalists Survival Guide," published by HarperCollins, and a columnist for Forbes.com.