Sometimes the truth hurts, and there’s no way to hide it. The latest Economic Freedom of the World Report, which ranks 144 nations, constitutes such a moment for those of us who cherish freedom in the United States.

After achieving a ranking of No. 2 in 2000, behind only Hong Kong, the United States has plummeted to No. 18 as of 2010. In just 10 years, supposedly overgoverned European welfare states such as Denmark, Finland, and even the United Kingdom have surpassed the United States. So too have Canada, Ireland, and the former Soviet state of Estonia.

According to the authors of the Fraser Institute report, “The United States has now reached a point where even small additional decreases in the rating will cause large ranking changes because there are so many more countries clustered in this range of the index.” In fact, on the trajectory since 2005, the United States will most likely fall out of the top 30 nations when 2012 data become available.

At what point does the “land of the free” line no longer apply?

You’re no doubt asking: What goes into this ranking, and is it reputable? I was curious to know, particularly since my home country of New Zealand came in third — and New Zealand is hardly ideal from a free-market perspective.

Unfortunately for the United States, a lot goes into the 322-page report, and in a careful, rigorous manner.

The brainchild of Milton Friedman, the index dates back to 1996 and has been the subject of continuous refinement. All data is from international sources, as opposed to government statistics bureaus, and not subject to value judgments of any of the authors.

The entire data set is publicly available, well-explained, and 42 distinct variables measure these categories:

1. Size of government;

2. Legal system and property rights;

3. Sound money;

4. Freedom to trade internationally;

5. Regulation.

Surprisingly, the sound money category is the only one of the five to hold steady for the United States. However, anyone following the Federal Reserve’s expansionary activities can see that even this category is hanging by a thread.

Regarding the other categories, the more one looks, the more one sees, and it isn’t pretty. Who would believe, for example, that the United States could rank No. 73 in the world for size of government? That is a measure of government consumption, transfers and subsidies, government ownership, and the top marginal tax rates. Further, the report identifies a host of troubling trends: increased use of eminent domain, higher costs and delays associated with international trade, violations of the rule of law, and more burdensome regulations.

One thing has become clear from the index over the years; “countries with institutions and policies more consistent with economic freedom have higher investment rates, more rapid economic growth, higher income levels, and more rapid reduction in poverty rates.” Life expectancy, for example, is 79.5 years in the top quartile but only 61.6 years in the bottom quartile.

In terms of long-term gross domestic product, a one-point decline along the 10-point scale is associated with a 1.0 to 1.5 percentage points reduction annually. That means “unless policies undermining economic freedom are reversed, the future annual growth of the U.S. economy will be half its historic average of 3 percent.”

Fergus Hodgson (@FergHodgson) is Director of Fiscal Policy Studies for the John Locke Foundation.