What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity edited by Donald J. Boudreaux Fraser Institute Mercatus Center at George Mason University 2015 Copyright ©2015 by the Fraser Institute. All rights reserved. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. As the researchers have worked independently, the views and conclusions expressed in this paper do not necessarily reflect those of the Board of Directors of the Fraser Institute and Mercatus Center at George Mason University, the staff, or supporters. Date of issue: April 2015. Printed and bound in Canada. Published in the United States in conjunction with the Mercatus Center at George Mason University. Cover design and artwork: Heather Akins Jalbout Library and Archives Canada Cataloguing in Publication Data What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity / Donald J. Boudreaux (editor). Includes bibliographical references. ISBN print: 978-0-88975-349-5; digital: 978-0-88975-350-1. Contents Executive Summary / v Donald J. Boudreaux, Editor 1. Entrepreneurship, Institutions, and Economic Prosperity / 3 Liya Palagashvili 2. Economic Freedom and Entrepreneurship / 37 Russell S. Sobel 3. Economic Freedom in the United States and Other Countries / 67 Robert A. Lawson 4. Special Interests, Competition, and the Rule of Law / 85 Roger Meiners and Andrew P. Morriss 5. One Nation, Ungovernable? Confronting the Modern Regulatory State / 117 Clyde Wayne Crews Jr. About the authors / 183 Acknowledgments / 186 About the Mercatus Center / 186 Publishing information / 187 Supporting the Fraser Institute / 188 Purpose, funding, and independence / 188 About the Fraser Institute / 189 Editorial Advisory Board / 190 Fraser Institute d Mercatus Center d iii mercatus.org d fraserinstitute.org Executive Summary Donald J. Boudreaux, Editor There is ongoing interest both inside and outside the United States regarding the nation’s tepid and abnormally slow recovery from the pronounced contractions in 2008. A number of scholars have explained components of the slow recovery but almost no analysis exists that provides a larger understanding for the country’s dismal economic performance. The collected essays inWhat America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity provide just such a framework, which allows readers to both understand the nature of the problem fac- ing the United States and equally as important the path to recovery and prosperity. The first essay, by Liya Palagashvili, sets the stage for prosperity by explaining the fundamental, central role played by entrepreneurs in a prosperous economy. Admittedly, this is not that controversial. Most people and even economists recog- nize the pivotal, even essential role played by entrepreneurs, innovators, and busi- ness people more generally in directing investment, creativity, and human effort. Simply put, modern economies require entrepreneurs for prosperity. Russell Sobel’s essay provides a critical link that is too often ignored or misunderstood, which is the relationship between economic freedom and entre- preneurship. Entrepreneurship does not exist or occur in a vacuum and Sobel’s work demonstrates the importance of economic institutions such as the rule of law, taxes, and regulations in promoting (or potentially discouraging) entrepre- neurship. Sobel finds that, not only does economic freedom increase thequantity of entrepreneurial activity, it also dramatically increases the quality—that is, the productivity—of entrepreneurial activity. The combination of the essays by Palagashvili and Sobel form the basis for the question answered by Robert Lawson regarding the state of economic freedom in the United States. The index published inEconomic Freedom of the World is an empirical measurement of economic institutions across 152 countries. Generally speaking, economic freedom has improved since 1970, the first year for which Fraser Institute d Mercatus Center d v vi d What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity comprehensive data is available. Professor Lawson notes, however, that there has been a slight decline since 2000 in the average level of economic freedom amongst the members of the Organisation for Economic Co-operation and Development (OECD), which encompasses the 34 most industrialized countries in the world. More importantly for the purposes of this paper, Lawson focuses on the per- formance of the United States. Readers might be surprised to learn that the United States is today (2012) only the ninth economically freest nation among the OECD countries. New Zealand is the freest, with Canada second. Equally as troubling is the decline in the United States’ performance over time. The US has fallen from third place overall in 1980 to twelfth place in the latest rankings. Simply put, the findings from Lawson’s analysis of the United States’ declining performance in economic freedom combined with the findings from Palagashvili and Sobel’s essays more than plausibly explains the nation’s sluggish recovery. The final two essays in the series explore in more detail two of the main rea- sons for the decline in the economic freedom in the United States: (1) rule of law, and (2) regulations. Roger Meiners and Andrew Morriss first examine the rule of law in the United States including its meaning, importance, and recent changes. The authors pay due attention to the relationship between the rule of law, entrepreneur- ship, and business startups. Meiners and Morriss demonstrate how the rule of law has been eroded in the United States—an erosion that accelerated over the last decade or so—through a series of legal and other interventions by government. While painting no rosy picture of the current health of the rule of law in the United States, these scholars explain how the rule of law might be better protected and therefore improved through more jurisdictional competition. The final chapter, by Wayne Crews, probes the legal, political, and economic details of government regulation in the United States. Data are presented showing the massive growth of bureaucratic intervention. Consistent with Meiners’s and Morriss’s argument, Crews demonstrates that today’s long and sweeping regulatory reach is evidence of a breakdown of America’s constitutional order—a weakening of the rule of law. Crews also documents the enormous economic burden of regu- lation. He estimates that regulation costs the average US household US$14,976 annually, or nearly one quarter of its before-tax income. In summary, the information and arguments presented here demonstrate unmistakably that the growth of government stymies entrepreneurship and threat- ens prosperity—a demonstration that, it is hoped, will help inspire efforts not just to slow, but to reverse, this growth and return to prosperity. mercatus.org d fraserinstitute.org What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity Fraser Institute d Mercatus Center mercatus.org d fraserinstitute.org 1. Entrepreneurship, Institutions, and Economic Prosperity Liya Palagashvili New York University & George Mason University 1. Introduction Entrepreneurs are agents of change who constantly create new environments that breed further opportunities for progress and development. We often think of the big names in the field such as Andrew Carnegie and John D. Rockefeller as the driv- ers of the economy. Carnegie was the industrialist responsible for the mass expan- sion of the American steel industry and Rockefeller revolutionized the petroleum industry in the 19th century. Though both of these entrepreneurs have substantially improved our economic well-being, they were only able to achieve their successes because of an existing entrepreneurial environment that allowed them to create and reap the benefits of their enterprises and build upon already existing innovations of previous entrepreneurs. Rockefeller, for example, achieved his successes by relying on the newly constructed railroad infrastructure, which was largely made possible by other entrepreneurs and innovators. And, while Matthew Boulton’s and James Watts’s steam engine played a key role in sparking the industrial revolution and the development of the modern world, it was only because of an already existing steam engine that allowed Watts to experiment with adjustments and create this new one. Many of these big name innovators whom we readily associate with economic progress and growth can often make us overlook a more important factor: the gist of economic growth comes not from a handful of grand innovators, but from a thriving environment of small, medium, and large-sized businesses in a competi- tive, entrepreneurial atmosphere where these entrepreneurs are constantly alter- ing the environment and giving rise to further entrepreneurial opportunities and Fraser Institute d Mercatus Center d 3 4 d What America’s Decline in Economic Freedom Means for Entrepreneurship and Prosperity innovations. This competitive striving is the essence of entrepreneurship. And this is the aspect of entrepreneurship I will be linking to long-run economic progress. In the last few decades, there has been a renewed interest in entrepreneur- ship as the driver of economic growth. This renewed interest stands in contrast to post-1950s mainstream or neoclassical economic theories regarding the