Economic Freedom and Growth in U.S. State‐level Market Incomes at the Top and Bottom

Abstract

This paper investigates the relationship between economic freedom and income growth and inequality across U.S. states over the period 1979-2011. The focus is on market income at the top and bottom of the income distribution. Results show that increases in overall freedom are associated with average income growth. When viewed separately, an increase in overall freedom is associated with larger income growth rates for income earners in the bottom 90% relative to the top 10%. Interestingly, results show that increases in overall economic freedom are related to larger relative growth rates for the top 10% incomes within high-income states and larger relative growth rates for the bottom 90% incomes within low-income states. Top-to-bottom income ratio regressions suggest a negative and statistically significant relationship between economic freedom and income inequality. (JEL D63, P16, R11)

The Relationship Between Economic Freedom and Economic Dynamism

“…For example, are these negative results just coming from a firm of a particular size or age? For instance, Wiseman (Forthcoming) shows that an increase in TAKINGS is associated with an increase in income for those at the bottom 90% of the income distribution, but a decrease in income for those in the top 10% of the distribution . Wiseman speculates that this may be because lowering taxes constrains the amount of crony capitalism that disproportionately favors high income groups.…”

ECONOMIC FREEDOM & HAPPINESS INEQUALITY: FRIENDS OR FOES?

“…The figure suggests that as countries become more economically free, more people move from the bottom and top of the happiness distribution towards its upper middle part. Of course, the evidence in these figures is very preliminary and could be attributable to a third factor such as economic growth that is correlated with both happiness inequality (Clark, Fleche, and Senik Forthcoming) and economic freedom (De Haan, Lundström, and Sturm ; Hall and Lawson ; Wiseman Forthcoming).…”

“…There is by now a large theoretical and empirical literature that shows that economic freedom is correlated with many positive economic outcomes such as economic growth (De Haan, Lundström, and Sturm ; Wiseman Forthcoming), greater investment in human and physical capital (Dawson ; Gwartney, Holcombe, and Lawson ; Hall, Sobel, and Crowley ), lower rates of unemployment (Feldmann ; Heller and Stephenson ), higher levels of entrepreneurial activity (Bjørnskov and Foss ; Hall et al ), lower poverty rates (Azman‐Saini, Baharumshah, and Law ), and greater international trade (Sonora ), among others. As a consequence, people in more economically free societies face greater real opportunities on the labor and product markets, and therefore perceive greater control over their lives (Nikolaev and Bennett Forthcoming).…”

GROWTH, INEQUALITY, AND ECONOMIC FREEDOM: EVIDENCE FROM THE U.S. STATES

“…The single element common to most theories connecting income inequality to subsequent investment, labor supply, entrepreneurial activity, and productivity growth is that the consequences of income inequality are likely to depend on government policies. The effects of inequality and policies are thus likely to be heterogeneous, as argued by Wiseman (forthcoming), but in a particularly systematic way. Specifically, government consumption, taxation, and regulations, that all capture elements of redistributive policy and belong within the umbrella concept of economic freedom, are theoretically relevant as moderators of the effects of inequality.…”