US Economy

US economy less competitive, and it is the legal system's fault: Expert

US President Gerald Ford at the White House in the Oval office in Washington, 17 October 1974.
AFP | Getty Images

What do Mauritius, Jordan, New Zealand and Qatar all have in common?

Aside from none of those countries being among the world's 20 most industrialized (G-20) economies, they are considered more economically free than the U.S., according to the latest Economic Freedom of the World Index.

In fact, the world's largest economy — the place most synonymous with free market capitalism — ranks at No. 16 on the list. That finding is borne out by similar rankings which underscore the steady U.S. loss of competitiveness in an environment of stubbornly sluggish growth after the 2008 financial crisis, where annual expansion has yet to crack 3 percent.

It's a state of affairs that prompted the free market think tank National Center for Policy Analysis to examine the reasons why America's economy, while growing, has yet to recapture its long-term trend rate. Citing the decline in economic freedom, the NCPA's analysis found that the attrition has "put the U.S. score back right around where the country was in the 1970s. In other words, we have regressed from the Reagan and Bill Clinton years back to the frustrating economic conditions of the '70s."

In large measure, it may explain why frustration with the economy has morphed into the strain of populism that's become a centerpiece of the 2016 election. Still, according to the NCPA, there's more to the story than people think — and it has to do with a gradual erosion of private property rights.

The think tank dismissed the reasons and policy prescriptions deployed by both liberals and conservatives about what ails the economy, and what's required to fix it.

"Increased government spending, regulation and inflation are not what is giving us this fall in economic freedom — at least so far," the NCPA wrote. Instead, a legal system where private property rights are being eroded, and "surprisingly, a rise in the cost, and declining ease, of trade across borders," is behind the economic stagnation, the report said.

"The quality of the legal system in the United States has declined in the sense that it no longer delivers the rule of law or protection of private property like it once did," Ryan Murphy, a professor at Southern Methodist University's Cox School of Business who authored the report, told CNBC via email.

Peter Dazeley | Getty Images

For years, two key planks of property law have been singled out for criticism: Aggressive asset forfeiture and bankruptcy filings that let many debtors skirt obligations.

The former has been singled out by the American Civil Liberties Union as a "deeply flawed" patchwork of regulation that allows law enforcement to seize, then keep or sell property. Meanwhile, critics from both the left and right have taken aim at the 2005 landmark "eminent domain" decision that grants the government the authority to confiscate property from one private owner and give it to another.

Separately, the controversial reorganization of General Motors — in which labor union claims were treated differently than unsecured creditors — also set a troublesome legal precedent that has undermined faith in the civil legal system, according to Murphy and other experts.

Taken together, "the rule of law and property rights, the two most basic institutions of capitalism, are not in good shape right now in the United States," Murphy told CNBC.

The stagnant wages puzzle

If the United States continues its decline, we should absolutely expect continuing anemic long-run growth rates
Ryan Murphy
professor and economist

Economists of all political stripes argue that finding the right palliative for flat wages has taken on increasing urgency in the face of a frustrated and restive middle class.

A somber study issued this week by the McKinsey Global Institute found that about 66 percent of households in the U.S. and Western Europe saw their incomes stagnate or fall between 2005 and 2014.

With political winds that have shifted against free trade, it bodes ill for long-term growth prospects, Murphy told CNBC. He said "all bets are off" if anti-free trade sentiments lead to higher tariffs, which other economists warn could lead to a trade war.

Murphy said the U.S. has "stopped the bleeding" from an economic standpoint, but that he expects only a modest bounce from current levels. In the first quarter, the U.S. economy grew by just 1.1 percent, government data showed.

However, halting the economy's longer-term decline may be a dicier proposition, the economist added.

"Moving the United States back in the right direction will be difficult for a few reasons," Murphy said, adding that "whatever is happening to economic freedom in the United States is happening to the other major advanced economies of the world."

In fact, many of the world's most advanced industrialized economies rank fairly low on the EFW economic freedom scale relative to their counterparts around the globe. Canada and the U.K. ranked the highest at Nos. 9 and 10, respectively. Yet Germany and the rest of Western Europe's economies ranked even lower than the U.S.

"If the United States continues its decline, we should absolutely expect continuing anemic long-run growth rates," Murphy added.