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PETER CRABB: Regulation of property rights can slow economic growth

Ben Franklin once wrote that “They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.” This founding father knew the importance of freedom.

The question of freedom in economic affairs sparks strong debate. The question is of increasing importance in today’s current economic environment of high unemployment and financial market volatility.

Some argue the economy and financial markets must be strictly regulated to prevent unjust actions motivated by greed. Opponents to regulation argue that economic growth is impossible without free and open markets for both goods and capital.

To address the question, economists at the Fraser Institute of Vancouver, British Columbia, and other research groups have devised some measures of economic freedom, both nationally and at the state level.

The Fraser Institute measures five components of economic freedom — the size of government, the legal structure of property rights, monetary policy, the level of international trade barriers, and the extent of regulation on credit, labor and business. Previous research has shown that countries with more freedom and less regulation in these areas grow faster.

In the latest Economic Freedom of the World index from the Fraser Institute, the United States ranked 10th out of 141 countries for 2009. This is down from No. 3 in same study for 2000.

Similar studies seek to measure economic freedom at the state level. The Mercatus Center at George Mason University in Virginia publishes Freedom in the 50 States, ranking each state by public policies affecting “individual freedoms in the economic, social and personal spheres.”

In the latest study, Idaho is considered one of the “most free” states, ranking 4th behind New Hampshire, South Dakota, and Indiana. These three states saw a smaller decline during the recession and have an average unemployment rate today of only 6.2 percent, well below Idaho’s and the national average of 9.1 percent.

According to the authors of the Fraser Institute’s study, the decline in U.S. economic freedom is due to a rapid increase in government spending and borrowing, as well as increased regulation and a reduction in property rights. The authors cite specifically changes in asset forfeiture laws and new interpretations of eminent domain affecting real property investments. Stricter laws and interpretations in both these areas are being considered nationally and in Idaho.

The rapid increase in government spending and borrowing is the political hot button of the day. But property rights are at least as important for well-functioning financial markets and economic growth.

To address the high unemployment and volatile financial markets of today, policymakers may do well to consider less the government debt burden and more the current regulatory environment. More regulations and fewer property rights will reduce our capacity for economic growth.

A property right is the exclusive authority, or freedom, to decide how any particular resource, such as real estate or equipment, is used.

Government regulations that restrict these decisions limit the amount of capital invested. With lower capital investment, the economy grows more slowly.

Government regulations make us safer, but as Franklin knew, this may be only temporary. If we give up our essential freedoms for economic and financial safety, we do not deserve either.

prcrabb@nnu.edu

PETER CRABB Professor of finance and economics at Northwest Nazarene Universityin Nampa

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