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an LBO special report
March 26, 2005
Every year since 1995, the Heritage Foundation and the Wall Street Journal put out an Index of Economic Freedom, ranking countries on their fealty to the precepts of free markets and free trade. Freedom being the unexamined rage since George Bush's second inaugural address (which used the word twenty-seven times), LBO decided to see whether the index had any economic meaning. Sorry to spoil the surprise, but it really doesn't.
The Freedom Index rates countries on a 1-5 scale on 50 factors, covering areas like trade policy, tax rates, regulation, inflation rates, and property rights. The report's authors are surprisingly reticent on that matter, allowing the reader to conclude that the virtues of "freedom" (meaning freedom to do business, not freedom from want, of course) are self-evident. They do devote half a page to arguing that countries that improved their Freedom Score show better rates of economic growth, and a page to showing how richer countries have higher freedom scores.
But as anyone who lasted a week in a basic statistics course knows, proving a correlation doesn't prove causation; it could be that increasing wealth causes the index to rise, and not vice versa. Strong growth attracts foreign investment, which would automatically raise a country's freedom score. Economic expansion can also raise the value of a country's currency, and weakn