Is the U.S. Canada's Socialist Neighbor to the South?

Americans have long dismissed Canadians as “our socialist neighbors to the north.” But since 2005 Canada has been more economically free than the supposed laissez-faire wonderland of the United States—and the gap is widening.

The news comes from the Economic Freedom of the World Index, co-published by the Cato Institute, the Canadian Fraser Institute, and more than 70 other think-tanks from around the world. The 2013 Annual Report was published in September and ranked countries based on data from 2011.

Economic freedom is defined by the Fraser Institute as “the extent to which you can pursue economic activity without interference from government, as long as your actions don’t violate the identical rights of others.” This ideal is difficult to define, much less quantify, so the index breaks each country’s score into five broad categories: size of government, legal structure and property rights, access to sound money, international free trade, and regulation of credit, labor, and business.

Every country is ranked on a scale of one to ten, with ten being most free. In 2013 the report ranked 152 countries and territories. The Index has data on most going back to 1980. This allows for long-term analyses of what policies caused countries to catch up, or in the case of the United States, fall behind, in economic freedom.

Canada’s policies can serve as an example for policy makers looking to jumpstart U.S. growth. Canada has a federal corporate tax rate of just 15 percent whereas the United States has a top rate of 35 percent, the highest among OECD countries. Canada’s federal debt-to-GDP ratio is 35 percent. It is targeting a ratio of 25 percent by 2021 thanks to a strong commitment to spending cuts from Conservative Party Prime Minister Stephen Harper. The U.S. ratio is 73 percent and rising. Mr. Harper has publicly pushed for approval of the Keystone XL Pipeline, which would benefit the economies of both countries, while President Obama has done all he can to block the State Department’s permit. Canada also has an unemployment rate of 7.1 percent, lower than America’s.

From 1980 until 2000 the United States was generally rated the third freest country behind only Hong Kong and Singapore. Now it is #17. It is not only developed countries, such as New Zealand (#3), Switzerland (#4), and Finland (#7), overtaking the United States—developing countries are catching up. America’s ranking fell 10.5 percent from 2000 to 2011. Over that same period the world’s economic freedom rose by two percent. This is not a good sign for the future of America in an age of global competition.

U.S. rankings fell from the previous year in every category. According to Fred McMahon of the Fraser Institute, a co-author of the Index with Robert Lawson and Joshua Hall, the main factors that brought down America’s scores were overspending, weakened rule of law, and regulatory overkill.

It is difficult to see the United States making a comeback anytime in the near future. The Affordable Care Act and Dodd-Frank are both filled with more regulations (almost 25,000 pages worth combined) that will only increase costs of doing business and regulatory uncertainty.

The non-partisan Congressional Budget Office projects that federal spending on Medicare, Medicaid, Social Security, and interest payments will increase to 19 percent of GDP by 2038. That is far beyond the 9 percent annual average for the forty years leading up to 2013. Since the political will is nonexistent to cut government services, the increase must be paid for by raising taxes or inflating the money supply—both options negatively affect a country’s economic freedom score.

These rankings matter. The amount of economic freedom in a country has a direct impact on its residents’ lives. Whether people are trying to find jobs, finance homes, start businesses, or save for retirement, they are deeply affected by the level of government interference with the economy.

Those people living in the freest quartile of countries produce a GDP per capita that is on average eight times larger than those in the least free quartile. They produce two times as much per capita as those in the second freest quartile. The Index shows that crafting policies to advance economic freedom leads to a higher GDP, and with that comes an increased standard of living.

It is a long way down for the United States to reach the levels of countries like Russia (#101), Iran (#127), or Venezuela (#152). But if America keeps falling over 15 places a decade, it could happen. At least the United States has a role model to look up to—its capitalist neighbor to the north.

Jared Meyer is a Reserach Associate at the Manhattan Insitute for Policy Research