Economic Freedom Helps Poverty More Than Government Aid

NCPA March 19, 2014

Economic freedom does more to alleviate poverty than government aid, says Julian Adorney for the Foundation for Economic Education.

A study from Daniel L. Bennett and Richard K. Vedder analyzes economic freedom and income inequality in the United States, finding that economic freedom decreases inequality, benefiting the poor and middle class more than the wealthy.

Looking at the 50 states, and using limits on government to measure economic freedom (the authors looked at size of government, level of taxation and labor market regulation), the study found that most gains went to the wealthy during the initial stages of economic freedom. However, at a certain point (and 21 states had already hit this point by 2004), that result shifts, leading income inequality to decline as states grow more and more free.

What is behind this decline? Is it a loss of wealth by the rich or an increase in wealth to the poor? The latter, according to research from Nathan J. Ashby and Russell S. Sobel.

• Analyzing the 48 continental United States over two decades (the 1980s to 2000s), Ashby and Sobel determined that increasing the freedom of a state by one unit (which was the equivalent of the 40th freest state moving to become the 7th freest state) increased the income of the poorest residents by 11 percent and the incomes of the top 20 percent by 4.3 percent.
• Increases for the middle class fell somewhere between these numbers.
• The authors controlled for education, geography and median income in order to prove that it was not the case that wealthier states needed less government because they had less poverty.
• In fact, the results indicated that it was economic freedom that reduced that poverty.

The Fraser Institute's Economic Freedom of the World (EFW) Annual Report echoes this notion. The poorest citizens of the top 25 percent most-free nations earn an average of $10,556 per year, compared to the poorest citizens in the middle 50 percent of countries who earn less than a third of that amount.

Source: Julian Adorney, "Free the Poor," Foundation for Economic Education, March 7, 2014.