The Moral Case for Economic Freedom

Kerrod Gream explains why economic growth is the best policy for ensuring the poor are lifted out of poverty.

“The rich are getting richer and the poor are getting poorer” is the catch cry of the left, but this statement is hardly based in reality. With Australia’s income statistics showing that the lowest income households had an increase of 5% between 2009-2010 and 2011-12, with middle income households having an increase of 4% in disposable income. This in addition to total share of household income between 2007-08 and 2011-12 increased for low and middle income households, and decreased for high income households. This holds true against the argument from the left.

[i] Figure 1Changes in Mean Real Equivaliesed Disposable Income

It’s common to just look at home for the overall quality of life, but of course being a first world nation even our poorest are well off comparatively to underdeveloped nations. It is however a problem of today that we don’t grant those nations the same benefit we had while developing, with calls to remove cheap energy sources such as coal and force them to use inefficient sources such as solar, and to only continue to buy goods from those of us better off. Economic freedom overall is something that should be looked at and the benefits to the poorest not only in first world nations, but in the most impoverish as well. It does have a casual link between economic freedom and the overall wealth the poorest in society hold.

With this being the case it’d be best to look at the relevant cases as to the effects of income when looking at economic freedom. The Fraser Institute does a yearly analysis of economic freedom based on a variety of factors, these being: size of government, legal structure and private property rights, access to sound money, freedom to trade internationally, and regulation of credit, labour and business. Australia regularly scores well on this metric having scored between 7.9-8/10 between 2005-2010, and scoring 7.88, and 7.87 in 2011 and 2012 respectively. Having been ranked 5^th in the world in 2009-10, in 2012 we had dropped to 8^th.

But these statistics are best looked at as a global analysis. Nations that are in the top quartile of economic freedom had higher GDP Per Capita; with the top nations having an average per capita GDP of $38,601 in 2013, compared to $6,986 for those nations in the lowest quartile.[ii] While GDP Per Capita does give a good overview we are best to look at the situation for the poorest 10% in each quartile.

In the top quartile of nations the average income of the bottom 10% was $9,881, with the bottom quartile’s bottom 10% of earners having just $1,629 on average in 2013.[iii] This however has improved since 2008, with the bottom 10% in the nations in the highest quartile having an average $8,474 yearly earnings, compared to $910 for those in the bottom quartile of nations with economic freedom. [iv]

[v] Figure 2 Economic Freedom and the Income Earned by the Poorest 10%

These benefits of higher income levels result in higher life expectancy, with the average life expectancy in the top quartile nations at 80.1, and the lowest quartile sits at 63.1 years.[vi] Those in more economically free nations report a higher life satisfaction, averaging 7.5 out of 10, compared to 4.7 in those in the least free quartiles.[vii]

This is all before addressing income share, this is the share of income between different sets of people. Income share of the poorest 10% is generally pretty consistent across all quartiles of nations based on economic freedom. With those in the highest quartile of economic freedom having the largest share of income at 2.64% this however isn’t reflected in the second highest quartile with the poorest 10% in those nations having the lowest income share. What this effectively shows is that the income share of the poorest isn’t highly affected by different government policies, and redistribution, but rather that it’s fairly consistent across the quartiles of economic freedom. This also shows that the poorest in society have a slightly greater share of the economic pie in economically free nations. With the best overall result in not redistributing produced wealth, but by increasing the size of the economic pie, as it were.

[viii] Figure 3 Economic Freedom and the Income Share of the Poorest 10%

[ix] Figure 4 Economic Freedom and Economic Growth

Looking on this basis the only moral argument to help the poorest in society is not by centralised government control, as that harms economic growth and income levels of the poor. We should continue to strive towards market solutions, rather than centralised solutions, and increase the overall share of wealth not just redistributing the wealth that we have. While the rich may be getting richer, the poor are also getting richer and the best way to help those in the poorest is to encourage economic growth with greater economic freedom, and less government intervention.