The true north really is strong and free these days. According to the Heritage Foundation’s 2010 Index of Economic Freedom, Canada now enjoys a greater degree of economic freedom than the United States. They enjoy the most economic freedom in North America, as it were. Those of us who watch Canada with a weary eye took note of this trend way back in April 2009, when the U.S. passed Canada in size of government relative to GDP. Remember this graph?
Where you getting all this economic freedom all the sudden Canada? Just happen to find it laying around in the snow somewhere? Well it turns out we’ve recently misplaced a good deal of it around here. A little suspicious if you ask me.
Back to the Heritage index…Adam Pasick, new blogger at the Atlantic, points us an unconvincing critique of the index from John Miller:
So it seems that the Index of Economic Freedom in practice tells us little about the cost of abandoning free market policies and offers little proof that government intervention into the economy would either retard economic growth or contract political freedom. In actuality, this rather objective-looking index is a slip-shod measure that would seem to have no other purpose than to sell the neoliberal policies that brought on the current crisis.
He argues as if his criticisms show that the index “cannot and should not be trusted” and that it has “fundamental flaws”, but then conflates that with the argument that studies show that economic freedom as measured by the index don’t lead to growth.
His two objections to the methodology are that it only uses nominal and not effective corporate taxes, and that the size of government can be a good thing. On the first point he might be right that effective corporate taxes would be a better measure of government interference in free markets. But nominal taxes that lead to a high degree of tax avoiding behavior is still government interference. So you can certainly argue that high nominal taxes negatively affect economic freedom even if corporations are good at avoiding them. Either way, this quibble hardly renders the index fundamentally flawed or unreliable.
His other criticism is that the “third measure of fiscal freedom, government tax revenues relative to GDP, bears little relationship to economic growth”. He’s already argued that their measure of economic freedom doesn’t relate to growth, which is a point to make, but really completely unrelated to the accuracy of the index. The problem is that this point supposed to be one of the two pieces of evidence that the methodology is flawed, not more evidence that the index doesn’t relate to growth. I’m not sure why he thinks this qualifies as former rather than the latter, since it clearly is not.
So really all he has is a quibble about effective corporate tax rates, which I find to be pretty weak ground from which to declare the index “fundamentally flawed” and “not to be trusted’. He clearly believes that the index does not relate to economic growth, and that the Heritage people claim that it does. That’s fine, it’s a debate to have. But that doesn’t really have anything to do with whether or not the index is good at measuring what it purports to measure. Unless of course Pasick or Miller have such strong prior beliefs that economic freedom relates to growth that any index that contradicts that fact must be flawed. Somehow I doubt this is the case.
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Monday ~ January 25th, 2010 at 1:34 pm
Tedd
Given the propensity of federal governments in Canada to try to buy votes with Millenium Projects and other such nonsense, it’s hard to believe that we could be held up as an example of virtue. But it does appear that we’ve been at least a little better in that respect than many OECD countries, and certainly better than the U.S. over the past couple of decades.
What I find most disturbing is that, in both Canada and the U.S., there doesn’t seem to be a very good correlation between the rhetoric of politicians and the behaviour of the governments they form. In Canada, we’ve had Liberals that, during the election, decried spending restraint as though it was the greatest possible evil, but who were reasonably prudent while in power, and Conservatives who have done the opposite. I believe it has been similar in the U.S. (although without quite so much prudence, apparently).
This leaves thoughtful voters in a quandary. If politicians were consistently deceptive about fiscal prudence then we could simply vote for those who argued against it, knowing that we’d then get it. But sometimes the rhetoric does match the results, making it very difficult to choose.
Monday ~ January 25th, 2010 at 2:06 pm
Bill
As a financial analyst and resident of Canada for seven of the 11 years between 1997 and 2008 (living in Alberta and then Ontario), I can confirm that on average the place has liberalized. However, I’d use a physics analogy and characterize the change as one of potential energy, not kinetic energy.
This stuff hasn’t trickled down to the consumer except via marginally lower taxes. And even there the Canadian taxpayer begins paying income tax at approximately $8k of labor or capital earnings per year, versus around $30k in the US.
The commercial/retail sector is still sclerotic. Interprovincial trade barriers keep markets balkanized, prices high and quality low. Oligopolies exist in most consumer sectors because the country is small (30 million) and yet essentially closed to retail competition with the U.S.
Productivity is endemically 20% below the U.S. and salaries are as well. The housing stock in major markets is generally of vastly inferior quality to the U.S. and much more expensive. Urban growth boundaries in places such as Ottawa make the situation much worse.
Two pithy examples of what being a Canadian consumer mean v. the U.S. I bought a hockey helmet three years ago while living in Ottawa. Manufactured 120 miles from my home in Ontario. It cost US$ 135 plus 12.5% tax for a total of ~ US$ 150 in Ottawa. Couldn’t’ find it online any cheaper anywhere in Canada. Ended up buying it one week later from a sporting goods warehouse operation in L.A. and having it shipped to my brother’s house in Upstate NY. Paid $75 with shipping.
Shopped for a new car shortly before moving. US$40k in Ontario incl tax. Same model and trim in the U.S. three months later cost US$26k.
Lower taxes are great for Canadians. However, these don’t begin to ameliorate the misery that characterizes being a Canadian consumer.
Monday ~ January 25th, 2010 at 5:20 pm
sgi
I would like to see this index compared to a cost of living index. Yes, Canadians have economic freedoms that are the envy of most of the world, but what do those freedoms actually buy? What standard of living can they purchase?
In British Columbia where I live, most people cannot afford to buy single family homes; our car insurance, gas, and hydro are all public monopolies, our education and health services are monopolized by unions, and our provincial government boasts that it is the largest unionized corporate employer in the province.
Thus almost all of our essential services are non-negotiable which doesn’t leave much left over for anything else. So yes, you can start a business but who is going to buy your product?
Tuesday ~ January 26th, 2010 at 10:22 am
Blame Canada? at Langkilde 2.0
[...] recently misplaced a good deal of it around here [in the US]. A little suspicious if you ask me. (Modeled Behavior) « Fysik i media Förvirrad strategi [...]
Wednesday ~ January 27th, 2010 at 9:53 pm
Greg B.
It is a useful measure only to the extent that it shows the government expenditure rate as a function of GDP. It should not be used to compare systems and tax structures as these are vastly different.
For Canada to do better, the average Canadian and Canadian family must do better than it is doing now. Without risking damage to either health care or education or other needed social programs, governments at all levels must focus on controlling their costs and ensuring that the average Canadian does better.
While the GST was the most hated tax ever that led to the fall of many small businesses during the transition as people withheld their discretionary spending what the current Conservative government has done in reducing the GST instead of our taxes has been a retrograde step.
Governments can have it both ways. They can either have their consumption taxes and lower personal income taxes but not both which is what has happened.
As a Canadian working in Hong Kong these days but still a resident of Canada for tax purposes, I can tell you that our country is still a wonderful place as it cares for its seniors better than I see is done here. In Canada you don’t have to quit work to take care of sick or elderly parents. I see it all the time here. Our medical plans are not all linked to our jobs which if you lose yours means you might be in trouble if a family member has high medical bills.
We Canadians may complain a lot but we have much to be grateful for.
For me as a Canadian who is in the upper 10% of income earners I have done well. What worries me is that our youth are facing higher education costs and that these are set in place by my generation who benefited from relatively inexpensive post secondary education and who had summer jobs that paid well (not a lot of which exist today).
We need to invest in our youth and ensure that Canadians have decent jobs not all low paid service sector jobs. These jobs will only come from investing in people! Education is critical.
Thursday ~ January 28th, 2010 at 8:26 pm
Allan
Very interesting to learn how Canada has surpassed the United States.
Sunday ~ February 7th, 2010 at 9:22 am
pscarino
I think it’s safe to say that the liberal economic policies of the pas Greenspan era did NOT contribute to economic growth, ergo today’s mess. Was it A.Greenspan who was quoted that fraud should be outlawed?
Friday ~ August 13th, 2010 at 8:37 am
Let’s beggar that neighbor « Modeled Behavior
[...] only are they growing faster, by some measures they’ve got more economic freedom than us now. All I’m saying is that’s a real nice economy they’ve got there; I [...]