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Mar 30, 2004 10:07 am

Index of Economic Freedom

The Heritage Foundation and The Wall Street Journal has published the 10th annual 'Index of Economic Freedom,' and the U.S. has dropped from being tied for 6th place worldwide to being alone in 10th. [Click on nation's name at the ranking list to access detailed description]

Under the heading Monetary Policy for the US, the Index states,"From 1993 to 2002, the United States weighted average annual rate of inflation was 2.05 percent." I believe the figure is low. Greg Burns had a fascinating article in the Chicago Tribune,"Prices rising despite low inflation rate: Key indicators questioned," which I synopsize because accessing it involves registration and" cookies." The article opens,"At the same time the federal government is reporting inflation at rock-bottom levels, the cost of medical care, tuition and housing have shot up. From gasoline to coffee to gold, commodity prices are soaring to heights not seen in years." For example, food and medical prices are up 10% since last year. The article questions the method by which bureaucrats calculate inflation since the Bush administration has a vested interest in keeping those figures low, especially during an election year."Inflation may well be tamed in the manufacturing sector...the costs of finished products like computers, apparel, furniture and electronics. But it is pronounced in...'the essentials people need on a daily basis,' such as food and fuel." Thus, the official inflation rate of 1.7% over the past year does not reflect the reality of everyday purchases."Inflation's down except for what you actually buy," said portfolio manager Chad Hudson of the Prudent Bear Fund.

An example of how the government distorts inflation is"housing.""Instead of capturing the sizzling prices being paid in the latest home sales, the CPI [Consumer Price Index] uses an estimate of how much those homeowners could collect in rent. With home ownership soaring, rental rates are depressed, and the index is a full percentage point lower than it should be." Paul Kasriel, chief economist at Northern Trust in Chicago" compares today to the mid-1960s, when a long period of debilitating inflation originated, and he is unswayed by the Fed's reassuring message. 'When central bankers tell me not to worry about inflation, that's when I start to worry,' Kasriel said." Meanwhile,"unemployment remains elevated." In other words stagflation:" A combination of high inflation and slow economic growth. A term coined in the 1970s, stagflation described the previously unprecedented combination of high unemployment (stagnation) with rising prices (inflation)."

Increasing employment is a key to turning the economy around but this requires less regulation -- e.g. removing the laws and policies that make the American worker uncompetitive, such as mandated union benefits. The Index of Economic Freedom indicates that freedom brings prosperity...and with amazing speed sometimes. (Ireland, ranked 5th in freedom, is enjoying an incredible upward economic swing.) But movement here seems to be in the other direction with constant criticism of outsourcing, free trade, inexpensive imported goods, etc. Michigan has taken the frightening step of mandating job protectionism. The Detroit Free Press reports,"To help keep jobs in Michigan, Gov. Jennifer Granholm will sign a pair of executive prohibit the state from contracting with businesses that would do the work in foreign countries. In addition, companies now doing business with the state would be required to say who is doing the contracted work and where it is being done." This is the way affirmative action began in the US -- by imposing it as a policy on private business that contracted with government. Specifically: in 1965, President Lyndon B. Johnson established the Office of Federal Contract Compliance, which ensured that private businesses who did work for the federal government followed non-discrimination requirements. With this, a large block of the American economy adopted affirmative action. The rest is history; affirmative action expanded from government contractors and eventually became the de facto law of the land, largely enforced by court decisions. I hope job protectionism is not on the same course.

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Robert L. Campbell - 3/30/2004


I'd be tempted to put the big increases in tuition aside: unchecked administrative growth and (at state universities) reductions in government subsidies to institutions of higher education are driving that trend.

But enough other goods and services are going up in price to make you wonder whether the CPI is telling the tale.


William Marina - 3/30/2004

Dear Wendy,
A really fine piece! My wife and I have commented about this for years while shopping. All American housewives, I am certain, could provide an accurate Index on Stagflation. These kinds of government lies are perhaps worse, certainly more insideous, than those told about Iraq, etc.
Bill Marina