Tuesday, February 16, 2016

A Libertarian Perspective on Economic Inequality

This was slated for Prairie Fire but it has been shuttered, perhaps for good, so I post it here.

It is one thing to document income and wealth disparities, as the Urban Institute has done (republished in Prairie Fire), and quite another to explain why the disparities exist and persist. Conservatives are infamous for blaming the poor (culture, personal characteristics, race) while liberals tend to castigate society (capitalism, racism). As the Urban Institute’s troubling research has shown, neither side has helped matters because economic inequality continues to grow. Perhaps it is time to consider a libertarian view of the problem

Based on data collected by the Fraser Institute, many libertarians believe that “economic freedom” leads directly to national prosperity. Estimating economic freedom is complex but the concept itself is simple. According to researchers James Gwartney, Robert Lawson, and Walter Block, “individuals have economic freedom when (a) property they acquire without the use of force, fraud, or theft is protected from physical invasions by others and (b) they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others.” The correlations are striking. At the national level, more economic freedom, as defined above, is usually associated not only with higher per capita income but also with longer life expectancy, higher literacy, lower infant mortality, less corruption, and a host of other positive indicators of human health and happiness

Correlation does not prove causation, but so-called “natural experiments” strongly suggest that economic freedom does indeed stimulate higher per capita incomes. Korea is the clearest of such experiments because outsiders arbitrarily drew a line dividing the country into two, each of which was very similar to the other in terms of climate, culture, history, resources, and so forth. The economic freedom of the citizens of each nation, however, could hardly be more different: in the Democratic People’s Republic of Korea (North Korea), economic freedom is essentially zero, while in the Republic of Korea (South Korea), it is 29th highest in the world. Unsurprisingly for advocates of economic freedom, North Korea’s economy is so weak that famines still strike with regularity while South Korea was the world’s 30th richest country in 2012.

A similar experiment took place in Germany, which after World War II the Allied powers divided into a communist (low economic freedom) East and a free market (high economic freedom) West. West Germany was such a better place to live than East Germany that the Soviets had to build walls to keep the Easterners from fleeing into the sunset. Just a quarter century after reunification, the East is well on its way to catching up to the West. (By way of comparison, it took the U.S. South a full century to catch up to the North after the Civil War.)

Consider, too, China, which colonialism and war split into three pieces, Hong Kong, Taiwan, and the mainland proper. The first two were havens of economic freedom and thrived economically while the communist (again, read low economic freedom) mainland remained mired in poverty and famine until a long series of reforms (read slowly increasing economic freedom) unleashed its latent potential. Today, mainland Chinese enjoy some economic freedom (ranked 139th in the world) and some economic success (ranked 82nd in the world in terms of GDP per capita in 2012). Improvements in Chinese economic freedom stalled recently and, almost as if on cue, so too has the nation’s stock market. Meanwhile, Taiwan remains economically free (#14) and thriving (#18).

Recently, researchers at the Fraser Institute began publishing estimates of the economic freedom of the states and provinces of Canada and the United States of America and Mexico. Lo and behold, provinces and states that accord their denizens with higher levels of economic freedom, like Alberta and the Central Plains states (both Dakotas, Nebraska, and Wyoming), have more vibrant economies than jurisdictions, like the Canadian Maritimes, Maine, West Virginia (and most Mexican states), that are more restrictive. The differences within North America are less stark than those across the globe but no less compelling evidence for the centrality of economic freedom to key economic outcomes like per capita income and employment rates.

While writing a history of entrepreneurship (and hence economic freedom) in South Dakota, Little Business on the Prairie, it dawned on me that economic freedom could vary even within a state. The explanation for the great miseries experienced on the state’s Indian Reservations did not reside in culture or genes, as conservatives would have it, or in insufficient budgets for the Bureau of Indian Affairs, as many liberals have claimed. Rather, poverty was a simple matter of political economy: Indians who live on reservations have almost no economic freedom as defined by the Fraser Institute. Although U.S. citizens, they are more akin to North Koreans (or pre-unification East Germans, or pre-reform mainland Chinese) than to mainstream Americans when it comes to their ability to borrow to start new businesses, to obtain clear title to real property, and to have their property rights protected and respected by the government. No wonder poverty is endemic, measures of health are poor, and so forth!

The same critique could be extended to members of other groups, most obviously undocumented workers and prisoners. A case could me made that poor people of every race and color enjoy less economic freedom than wealthier people do. For example, impoverished wage workers cannot choose between unemployment and the minimum wage, they must accept the former if employers are unwilling to pay the latter. Higher income workers, by contrast, are free to accept a lower wage rather than lose their jobs. And it is notorious that in many jurisdictions, like intercity public housing projects, police do not enforce property laws. Rather than protecting all citizens, police often harass and even sometimes torture and kill members of minority groups.

A libertarian policy for addressing wealth disparities, then, would concentrate on economic freedom, basically on ensuring that all Americans, regardless of creed, ethnicity, gender, place of residence, race, and so forth, have equal access to the same set of protections, rules, and freedoms. Independent researchers at Fraser and elsewhere should measure the economic freedom of Indians and other suspected freedom-deprived groups to ensure actual convergence with national levels of economic freedom.
Once equal access is established, wealth disparities by gender, race and so forth should dissipate over several generations. Economic inequality will continue, but within a century of convergence no one should be able to predict anyone’s general income level just by looking at them, or so predicts this libertarian theorist.

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