The United States, unsurprisingly, has historically placed quite high on the economic freedom indexes released by various organizations. This year, the Heritage Foundation’s ranking saw the US drop. It’s still relatively high on the list, but the backward movement is disturbing. I try to explain why this development is significant in this week’s Acton Commentary:

If you’re known by pany you keep, then the United States may want to re-think its economic policy.

The 2010 Index of Economic Freedom, a joint publication of the Heritage Foundation and the Wall Street Journal, measures the world’s nations according to a range of criteria from the ease of starting a business, to protection of property rights, to various forms of government interventions. Among the 15 “biggest losers” during the past year was the United States, placing it among the likes of Libya, Uzbekistan, Mongolia, and Venezuela. (The inclusion of the relatively more respectable United Kingdom is fort.)

America’s plunge in the rankings is the result of a range of misguided policies, including increasing tax rates and exorbitant government spending. The Bush White House deserves some blame for setting the trajectory, but the Obama Administration has only taken Bush’s economic mistakes and amplified them.

The United States for the first time dropped out of the Index’s “free” category and into the ranks of “mostly free.” Many Americans, who fail to understand how much of the world has recognized the benefits of market-friendly economic reform and government restraint while their country has moved in an opposite direction, will be shocked to learn that Australia, Switzerland, and even Canada rank ahead of the United States on an economic freedom index. Asian city-states Hong Kong and Singapore continue to top the chart.

Why does this matter? After all, freedom and economic prosperity are not the only or even the chief measures of well-being anyway. Amelioration of poverty and protection of the environment, some would argue, are the sorts of concerns that should take precedence over the grasping of ever greater economic freedom and material accumulation.

But this view takes the wrong perspective. Advancing scores on the Index’s criteria of economic freedom are, more often than not, concurrent with poverty reduction and environmental improvement. The Index itself notes the correlation in its Highlights summary. During the last decade, countries improving in economic freedom have reduced poverty levels faster than have countries whose economic freedom has declined. Nations that enjoy vigorous property rights protection and free trade score higher on the Environmental Performance Index.

Both of these correlations fit the evidence from a long history of academic studies and lived experience that demonstrate the causations at work here: The institutions of free markets, private property rights, and rule of law create conditions conducive to economic growth; economic growth lifts an increasing percentage of the population out of poverty; as the poor are relieved of the desperate search for daily sustenance, they are willing to allocate more attention to other goods, such as conservation of natural resources.

Social benefits extend beyond the areas of poverty reduction and environmental stewardship. “Economic freedom,” the Index observes, “is also strongly correlated to overall well-being, taking into account other factors such as health, education, security, and political governance.”

Thus economic growth may be “morally neutral” in the abstract, but it certainly has moral implications in the real world. The recent experience of Haiti confirmed this point in a grim fashion. Obviously the devastation there is not reducible to economic factors, but it should be equally obvious that the country’s poverty—reflected in shoddy infrastructure and weakness in the capacities of both public and private institutions—intensified the human and material destruction.

People of good will may differ on a wide range of policy details without impugning their character. The specific connections between various policies and economic improvement are often debatable. But when pelling measure of economic freedom shows the United States in free fall, then every conscientious citizen should take notice. We’re headed in the wrong direction.