Economic freedom—the ability of individuals to exchange voluntarily without government interference—is the greatest driver of prosperity the world has ever seen. Over the past three decades, increasing economic freedom has liberated more than one billion people from backbreaking toil and dearth. The extreme poverty rate, for the first time ever, has fallen under 10 percent of the world’s population. This is perhaps the greatest achievement in the history of mankind.
On a global scale, the implications of economic freedom are stark. Countries that are more economically free have higher levels of income, more rapid economic growth, and a greater reduction in poverty. In 2015, for example, nations in the top quartile of economic freedom had an average adjusted per capita GDP of more than $40,000, while those in the bottom had $5,000.
However, while much of the developing world continues to flourish under liberalized markets, the stalwart of Western capitalism, the United States, has fallen behind. For the vast majority of recent history, the U.S. has ranked in the top five most economically free countries in the world. In two years under President Obama, however, the America slipped from sixth place to eighteenth in the Fraser Institute’s index of economic freedom. Once the world’s leader, the U.S. now sits at eleventh place.
America’s fall from grace is one of the most important events in recent history, if not the least appreciated. Such centralized control of economic life has slowed post–financial-crisis growth to a trickle, with grave consequences for average Americans. Between World War II and the 2007 financial crisis, an average person’s standard of living roughly doubled every thirty-five years. The current growth rate, adjusting for changes in population, will see the current standard double nearly every century. Big government is hampering the American Dream.
Looking at the remarkable progress of developing countries, there is a lot the United States can learn. Free-market reforms have raised billions from poverty around the world, and they can do the same in America. One area ripe for reform is the unnecessary and regressive licensing of occupations.
An occupational license is a permission slip from the government that allows you to work. Many require thousands of hours of classes and hundreds of dollars in fees; without them, you can face hefty fines or even jail time. In 1970, around 10 percent of jobs in the United States required licenses. Today, that number is about 30 percent, encompassing some 1,100 occupations across the country. These aren’t just white-collar professions either, but working-class jobs like florists and hair braiders.
Occupational licensing hurts the poor the most. In a perverse case of crony capitalism, incumbent workers team up with the government to restrict competition and raise their own wages. Those who lack the resources to jump through the government’s costly hoops find themselves without a job and with higher priced goods. In 2011, for example, a University of Minnesota and Princeton study found that occupational licensing costs consumers $203 billion a year and led to 2.8 million fewer jobs.
Licensing problems aren’t just an American phenomenon, however. Prior to the 1990s, India persisted under three decades of socialism known as the “License Raj.” To do just about anything in India required a license from the government, whether getting a job or importing goods. During this period, India was mired in poverty. Economic growth was so sluggish that it was termed the “Hindu rate of growth,” a natural rate allegedly due to Hinduism’s outlook of fatalism and contentedness.
Since then, economic liberalization transformed India into one of the world’s fastest-growing major economies. Broad deregulation was the center piece of reform, removing large swaths of the licensing regime that plagued the Indian economy. With the freedom to voluntarily exchange their labor, goods, and capital, millions of the world’s poorest people flourished. The same potential can do much to help America’s poor.
Whether in Delhi or Detroit, removing regulations that keep people from working at a job or starting a business is key to alleviating hardship. Another is liberating the financial system to enable investment in low-income communities.
Since the 2007 financial crisis, banks have been weighed down by a growing pile of new regulations. While targeted at Wall Street, much of the burden has been borne by Main Street. One in five banks has either closed or merged, of which the overwhelmingly majority are small banks that finance local communities. As a result, businesses are never formed, individuals are never hired, and the economy sputters limply along.
State control of finance is common around the world. In China, there is a glaring contrast between two systems: one dominated by the state and a private one that has grown around it.
Chinese state-run financial institutions are plagued by inefficiency and corruption, and are notoriously reluctant to lend to small businesses. However, rather than relying on formal institutions, many private citizens have fostered an extralegal banking system. The underground financial system of the city of Wenzhou, one of China’s economic miracles, is used by nearly 90 percent of private citizens and 57 percent of local companies. According to Beijing-based business writer Bradley Gardner, the secondary banking system was critical to the development of China’s local entrepreneurs and businesses.
Free-market finance flourished where government intervention failed—and the United States should take note. The slowest economic recovery in modern American history is a direct result of the government’s stranglehold on the financial system, which prevents individuals and businesses from obtaining access to capital.
Increasing economic freedom has worked throughout history and across the world to empower people to rise out of poverty.
There is no reason why it cannot do so, again, in America.
Daniel Press is a policy analyst with the Competitive Enterprise Institute, a free-market public policy organization based in Washington, D.C.
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