Economic freedom and inequality

Tim Worstall brings to our attention this new paper entitled, Economic Freedom and the Trade-off between Inequality and Growth (pdf). In the paper economic growth is defined as the real growth in per capita gross domestic product (GDP) in U.S. dollars. The results of the paper are given as

All else equal, the central findings are:

• Freer economies enjoy higher rates of economic growth than less free ones.
• Freer economies are more equal economies; economic freedom reduces inequality by increasing the share of market income going to the poor and lowering the share going to the rich.
• Economic growth increases income inequality, but the effect is small.
• Overall, the increase in inequality from economic growth is outweighed by the reduction in inequality caused by greater economic freedom — creating a net benefit to lower income groups.

Conversely, nations in which the government more aggressively redistributes income have significantly lower rates of economic growth. In the long run, this income redistribution hurts the poor. For example, among the countries analyzed in this study:

• Lowering a country’s Gini coefficient by 0.01 would require reducing the income share of the rich by 0.6 percent and redistributing it to others.
• However, this would lower the economic growth rate by 1.6 percentage points (from 2.3 percent to 0.7 percent).
• With the transfer, but a lower growth rate, average household income in the lowest group would reach only $8,050 after 25 years, instead of the $10,320 that would be achieved without the transfer.

So the study tell us that the largest economic benefits for those who are the lowest income earners comes from a relatively free market with a limited role for government. The upshot being that the greater income that comes from economic growth ultimately raises the incomes of the low-income groups more than an increase in the equality of incomes brought about by a redistribution of income.

As Worstall puts it

... we can be more free, more equal and richer, or less free, less equal and poorer.

The choice does seem obvious.