By John C. Goodman
Saturday, October 13, 2012
Capitalism favors the rich. Socialism helps the poor.
These are core beliefs of almost everybody on the left, including our
president. Ah, but it turns out that this worldview is completely wrong.
Economists associated with the Fraser Institute and the Cato
Institute have actually found a way to measure "economic freedom" and
investigate what difference it makes in 141 countries around the world. This
work has been in progress for several decades now and the evidence is stark.
Economies that rely on private property, free markets and free trade, and avoid
high taxes, regulation and inflation, grow more rapidly than those with less
economic freedom. Higher growth leads to higher incomes. Among the nations in
the top fifth of the economic freedom index in 2011, average income was almost
7 times as great as for those countries in the bottom 20 percent (per capita
gross domestic product of $31,501versus $4,545).
What about the effects on the poorest citizens? In the
2011 report, the average income of the poorest tenth of the population in the
least free countries was around $1,061. By contrast, the poorest tenth of the
freest countries' populations earned about $8,735. If you are poor, it pays to
live where capitalism is less hobbled.
What about equality of incomes? As it turns out there is
almost no global relationship between the distribution of income and the degree
of economic freedom. But in a way, that's good news. It means that the rich
don't get richer and the poor poorer under capitalism. Everybody becomes better
off.
There are also non-economic benefits to living in a free
society. Comparing the bottom fifth to the top fifth, more economic freedom
adds about 20 years to life expectancy and lowers infant mortality to just over
one-tenth of its level in the least free countries.
What about within the United States? Some years back the
Council of Economic Advisers (CEA) calculated a "predicted poverty
rate" based on economic growth alone. In other words, economic growth by
itself lifts people out of poverty, even if nothing else is happening. The CEA
results suggest that if there had never been a welfare state (no Aid to
Families with Dependent Children, no food stamps, no Medicaid, etc.) the
poverty rate would be lower today than it actually is! This adds to a wealth of
evidence that the welfare state is subsidizing poverty, not eliminating it.
I don't like to get into partisan politics, because, like
Milton Friedman, I believe in ideas and not politicians. But The New York Times
editorial page is becoming increasingly partisan. The unsigned editorials these
days are almost indistinguishable from the Obama campaign's talking points. Far
from being thoughtful, they are vehicles for White House propaganda. Many of
Paul Krugman's editorials read pretty much the same way.
So let's consider the two political parties. Think of
Democrats as being primarily responsible for the structure of the welfare state
(social insurance programs) and Republicans as being primarily responsible for
tax policy (including the Earned Income Tax Credit [EITC] — the embodiment of
Milton Friedman's negative income tax). Which policies have been better for
poor people? If you buy the CEA analysis and the work of Charles Murray, George
Gilder and a host of other scholars, the welfare state has led to more poverty,
not less of it. On the other hand, almost every Republican tax change has made
the tax code more progressive. That is, almost every time the Republicans
change the tax law, the burden of the federal income tax is shifted from
low-income people to high-income people! That's why almost half the population
doesn't pay any income tax at all.
[As an aside, Democrats have been very reluctant to give
money to poor people through means-tested social insurance programs. Whether it's
food, housing, education or medical care, almost all the cash goes to a
constituency that is definitely not poor. That's why it's hard to know how much
anyone benefits from these programs. On the other hand, when the
Republican-designed EITC delivers $1 to a poor family, the family gets $1 worth
of benefit. Of course, the EITC may do other harm through its implicit high
marginal tax rate, however.]
I'm not endorsing everything the Republicans have done.
Rather, I simply note that under Republican policies we are likely to have less
poverty.
All in all, the welfare state probably isn't the primary
reason poor people are poor. The main obstacles to success are (1) bad schools
and (2) barriers to good jobs in the labor market.
What is the biggest challenge in making bad schools
better? The teachers' unions. They are dedicated to the idea that the school
system is foremost a jobs program and only secondarily a place for children to
learn. Teachers' unions have steadfastly opposed almost every reform idea that
has any promise whatsoever in every city and town throughout the country. As
for barriers to entry into the labor market, who is the foremost backer of
minimum wage laws, Davis Bacon Act restrictions, medieval-guild-type occupational
licensing laws and labor union monopolies everywhere? You guessed it: the labor
unions themselves.
Yet who forms the backbone of the Democratic Party? The
very same organizations that are most responsible for keeping poor people poor
and closing off their opportunities to succeed in life. Further, their perverse
political influence disproportionately affects minorities. That is one reason
why the black teenage unemployment rate is almost 40% — double that of white
teenagers! It is one of the reasons for the very large student achievement gap:
black student test scores are 70% to 80% of the scores of white students.
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