fred mcmahon - the economic impact of economic freedom on poverty and posperity

8/9/2019 Fred McMahon - The Economic Impact of Economic Freedom on Poverty and Posperity

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The Impact of Economic Freedom

on Prosperity and Poverty

12thAnnualTexas Public Policy Foundation

for the Texas legislature

Fred McMahonMichael al!er "hair ofEconomic Freedom #esearchThe Fraser Institute


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Than!s to "huc! $e%oreand &hannon Tracy

' Plan of Attac!

( )rief overvie* of economic freedom

( Its relation to prosperity and poverty reduction

(A loo! at the international evidence

( hat do *e !no* about its effects on povertybet*een states+


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Economic Freedom ProjectEconomic Freedom Project

' ,b-ective. find a *ay to measure economic

freedom and explore the connection bet*een itand other variables

' /early 0 year pro-ect

' ed by Michael al!er and the late Milton and

#ose Friedman' Involved 3 of the *orld4s top scholars5 including

three /obel aureates


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What is Economic FreedomWhat is Economic Freedom

Individuals have economic freedom *henproperty they ac6uire *ithout the use of force5fraud5 or theft is protected from physical

invasions by others and they are free to use5exchange5 or give their property as long astheir actions do not violate the identical rightsof others+ An index of economic freedom

should measure the extent to *hich rightlyac6uired property is protected and individualsare engaged in voluntary transactions+

James Gwartney et al. 1996


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Components of the EconomicComponents of the Economic

Freedom of the World IndeFreedom of the World Inde

' &i7e of government and taxation

' Private property and the rule of la*

' &ound money' Trade regulation and tariffs

' #egulation of business5 labour and capitalmar!ets

These are the foundations of free mar!ets5 so the!ey 6uestion is.

Do freer markets reduce or increase poverty?


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Components of the EconomicComponents of the Economic

Freedom of !orth "mericaFreedom of !orth "merica

' &i7e of government

' Ta!ings and $iscriminatory Taxation

' #egulation

(A. abor Mar!et( B: Credit Market

( C: Business Regulation

' Private property and the rule of law

' Sound money' nternational !rade

#h$s% the inde creates a map to free mar&et

reform for states and pro'ides the scorecard.


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#al& a(o$t ma&in) a difference *#al& a(o$t ma&in) a difference *


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World "'era)eWorld "'era)e

Economic Freedom ,'er #imeEconomic Freedom ,'er #ime

Source: The FraserSource: The Fraser


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Why is Economic FreedomWhy is Economic Freedom

Important-Important-' Economic rights are fundamental rights in

the sense that *ithout them there can be

no political freedom or civil freedoms' They are a prere6uisite for gro*th and

development

' They are a prere6uisite for broader humandevelopment


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The impact on prosperityThe impact on prosperity

and developmentand developmentinternationallyinternationally


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Per "apita Income and EconomicPer "apita Income and Economic

Freedom 8uartileFreedom 8uartile

Sources: The Fraser Institute; The World Bank, World Development Indicators,Sources: The Fraser Institute; The World Bank, World Development Indicators, 20!20!

+ost Free *****. east Free+ost Free *****. east Free


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Economic Freedom% the Poor% andEconomic Freedom% the Poor% and

Ine/$alityIne/$ality


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Income 0hare of the Poorest 12 andIncome 0hare of the Poorest 12 and

Economic FreedomEconomic Freedom

Sources: The Fraser Institute; The World Bank, World Development Indicators,Sources: The Fraser Institute; The World Bank, World Development Indicators,

20!.20!.



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Income of the Poorest 12 andIncome of the Poorest 12 and

Economic FreedomEconomic Freedom

Sources: The Fraser Institute; The World Bank, World Development Indicators,Sources: The Fraser Institute; The World Bank, World Development Indicators,

20!.20!.



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One more thing!One more thing!


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Economic Freedom andEconomic Freedom and

ife &atisfactionife &atisfaction

Sources: The Fraser Institute; "app# $lanet Inde% 20&Sources: The Fraser Institute; "app# $lanet Inde% 20&



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Economic Freedom

of /orth America


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9& state economicfreedom scores


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Proven effects of Economic Freedom.orld and /orth America

' "reates prosperity

' )oosts economic gro*th

' Encourages entrepreneurship

' Increases in:migration

' Enhances -ob gro*th

' T*o important results sho*n for the *orld index but

re6uiring further research for the /orth American index( $oes not increase ine6uality but li!ely does not reduce it

( o*ers poverty


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9& &tates Economic ;ro*th.$eviation from Mean Percentage points

;$

PPe

r"apita;r

o*th


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ea!er poverty signal from&ub:national index

' &ub:national index does not include at thestate level !ey factors for reducing poverty( &ound money

( #ule of la*

( Many regulatory factors

' These are uniform across states in current

index(


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&tate:level economic freedom5gro*th5 and poverty

&ince economic freedom has been sho*n to boost gro*thboth globally and in /orth America5 an increase in EconomicFreedom *ill cause.

'Poverty to rise( If ine6uality increases faster than gro*th

'Poverty to fall

( If ine6uality declines or increases at a slo*er pace than

economic gro*th

')e*are of statistical traps

( French competitiveness


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&tatistical poverty traps. 1

' Poverty data can be problematic

( Is poverty or ine6uality being measured

( $odgy stats' "anadians *ith million dollar homes and under

=15 in income

( "ost of living

( )asic modern needs approach


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&tatistical poverty traps. 2

' Inter:generational exclusion

(Are regulatory barriers and high *elfare!eeping people out of poverty and thelabour mar!et ( a tragedy for futuregenerations

' In:generation mobility

(Are people poor for short periods+


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#esearch on Economic Freedom relevant to povertyin the 9nited &tates. Ine6uality

' ebster5 )radely5 nternational Business and "conomics Research#ournal$ %&'(( )o ine*uality relationship

' Ashby5 &obel5 Pu+lic Choice$ %&&,( >Positive? changes in economic freedom are associated *ith higher income levels and gro*th @across

the board5 and *ith reductions in relative income ine6uality+

' )ennett5 %edder5 #egional Analysis and Policy5 210( >?e find evidence of an B 9:shaped curve bet*een income ine6uality and economic freedom+ This

suggests that beginning from a lo* level of economic freedom5 increases initially generate moreine6uality as the upper part of the income distribution benefits relatively more than the lo*er partCho*ever5 as enhancements of economic freedom continue5 this reverses and the lo*er part of thedistribution experiences larger relative income gains+

' Apergis5 $incer5 Payne5 #ournal of "conomic -iterature( ./ne*uality may cause states to implement redistri+utive policies causing economic freedom to

decline0 1s economic freedom declines$ income ine*uality rises even more0 n other words$ it is *uite

possi+le for a state to get caught in a vicious circle of high income ine*uality and heavy redistri+ution0

Key Point: Low taxes and flexible labour regulation do reduce inequality!


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#esearch on Economic Freedomrelevant to poverty in the 9nited &tates.

Dobs' ;arrett5 #hine5 Federal #eserve )an! of &t+ ouis

( >&?tates *ith greater overall economic freedom have greater rates ofemployment gro*th+ ;enerally5 a one:unit increase in the economic freedomindex @roughly e6ual to one standard deviation increases employment gro*thby 1 to percentage pointsB In addition5 roughly 2 to percent of the variation

in employment gro*th across the states is explained by economic freedom+' 2eller$ Stephanson$ Contemporary "conomic Policy

( GT?his article examines the relationship bet*een economic freedom and theunemployment rate5 the labor force participation rate5 and the employment population ratio+ After controlling for a variety of state level characteristics5 theresults from most specifications indicate that economic freedom is associated

*ith lo*er unemployment and *ith higher labor force participation andemployment population ratios+

#he most important social pro)ram is 3 a jo(4


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#esearch on *ell:being and EconomicFreedom in the 9nited &tates

' )elasen and


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Policy Concl$sionsPolicy Concl$sions0$(5national Economic Freedom

Proven

' Increases prosperity and gro*th' Improves 6uality of life

' )oosts -ob creation


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fred mcmahon - the economic impact of economic freedom on poverty and posperity

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