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Estimating the Cost($) of Freedom

01.05.12

Estimating the Cost($) of Freedom

01.05.12

There has been a considerable discussion about the dangers of national debt in many countries in the wake of the 2008 financial crises. This concern has prompted a move toward austerity in many countries (the European Union) and squabbling over inaction on the debt in others (the United States). However, looking at the map, one gets a sense that the really dark red areas aren’t randomly distributed.

There is a curious paucity of high-debt countries in Africa, for example. Countries with more liberal policies (the European Union, North America) appear to be saddled with debt. In fact, countries in the most stable parts of the world seem to have the most debt. The good news is that it is data and can be tested. To test this, Freedom House rankings were used. Each year folks over at Freedom House rank countries on civil and personal liberties. Each country receives a grade of Free, Partially Free, or Not Free each year. It’s data is freely accessible here.

Data on the national debt load of each country and their population was pulled from Wikipedia. To get a frame of reference, let’s look at the percentage of folks who live in Free, Partially Free, and Not Free countries. Less than half of the world’s population lives in a free state. Less than a quarter lives with some level of freedom, and over a third lives without. Now, if debt were distributed equally without regard to freedom, we should expect 44% of the total world debt to be owed by free countries. Picture that graph in your mind. Got it? Let’s look at the reality.

FigureFree countries have a massive amount of debt relative to their less-free peers. For an even more dramatic example, let’s look at the sheer amount of national debt held by each country.

That’s right, free countries are responsible for about $56 trillion dollars of the almost $60 trillion dollars of total world-wide country debt. There are significant outliers that can affect this measure - but they actually make the comparison even more dramatic. China, for example, is responsible for 30% of the debt owed by Not-Free countries (yes, that’s right, China has a national debt too). You can subdivide debt by the amount owed per capita, the amount owed relative to GDP, but no matter how you cut it, free countries are far more profligate than their less progressive peers. And this is significant to the 99% confidence level (p < 0.01), a pretty strict standard for a two-sample t-test. Perhaps the most relevant measure for economists is the distribution of debt relative to Gross Domestic Product (GDP).

FigureThings begin to normalize a bit, though free countries still have almost triple the debt-to-GDP ratio as partially free countries. This calculation reveals just a wee bit of a double standard - Free Countries are seen as safer investments than Partially Free or Not Free countries. And, perhaps even more to the point, the large debt generated by Free countries is matched by larger GDP’s. The low-debt of Not Free countries is matched by much smaller GDP’s. Granted, political stability has an important role in these calculations, but you’d think that things like the actual amount of debt held would be important too.

FigureSo what exactly is the connection between freedom and debt? We can speculate a little about the causes. Free countries tend to frown on famine and starvation in their streets, so they set up social welfare programs. The United States is one of the more conservative-leaning free countries around, but it still spends about 43% of its annual budget on social welfare programs such as Social Security, Medicare, and Medicaid.

However free countries are not fond of paying high taxes in exchange for these government services. In fact, no one is really a fan of paying high taxes. Being free and all, they have their choice in leadership. Elected leaders that manage to remain elected leaders deliver good services with low taxes by leveraging their respective country’s debt. Now then, who owns all this debt?

Let’s use the United States as an example. The US has a debt-to-GDP ratio of 99%, above average for free countries but not the highest by a long shot. The average US citizen owes about $47,568. National debt for the US is sold as treasuries, which people invest in. State governments frequently hold the retirement funds of their employees in US Treasuries. About $40 billion of famed investor Warren Buffet’s estimated $47 billion fortune is held in US Treasuries. If you have a mutual fund, you may have a little of the US National Debt yourself. In fact, the national debt of Free Countries can be characterized as a system where the 1% (in Occupy-Wall-Street language) earns interest on government social welfare programs for the other 99%.

For those conservatives who value fiscal austerity above all else, there are countries to look to for inspiration. For example, Iran has a debt-to-GDP ratio of 4%. Iranian citizens owe only $170 on their country’s debt. Libya under Muammar Gadaffi’s was fiscally sound, it had a debt-to-GDP ratio of 9%, with each citizen owing $972. North Korea very possibly has no debt whatsoever. These are national debt numbers that US Republicans and British Tories can only dream of. It may only require a reduction in the freedom of citizens. In fact, we can pretty directly quantify that cost of freedom by looking at the debt owed by individuals in Free, Partially Free, and Not Free countries. Freedom isn’t free, but you can always take out another loan.

one comment
1 comments
BJ
BJ

Well done. The analogy never occurred to me or I doubt many others JK

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