Obamanomics, Crony Capitalism and Income Inequality
by Tom Donelson on May 12, 2014 at 3:47 PM
Inequality exists for the simple reason that we are not created equal. There was a discussion in the movie In a League of Their Own between the manager and his star player in which the manger reminds his star player that she had a gift and added, “If anyone could do it, they would.” Inequality exists simply because there is not an equal distribution of talent; however, the key question we face as a society is do we want a nation in which we have equal opportunities as opposed to equal results? These goals are incompatible with each other, but it strikes at the heart of the present debate between the left and right.
Obamanomics is based on the premise that government must directthe economic sphere to ensure equality, but it is not about opening up opportunity. This brings us to recent studies. One study, Does Wealth Inequality Matter for Growth? The Effect of Billionaire Wealth, Income Distribution, and Poverty attempts to answer the question, what is the effect of wealth inequality on economic growth? Their conclusion was, “We find that wealth inequality reduces economic growth, but when we control for the fact that some billionaires acquired wealth through political connections, the effect of politically connected wealth inequality is negative, while politically unconnected wealth inequality, income inequality, and initial poverty have no significant effect.”
Note that while they state wealth inequality as having a negative effect, it has a negative effect only if there is direct cooperation between the government and private companies or what we call crony capitalism. When wealth is created by entrepreneurs, then there is no negative effect on overall growth nor does it appear not have any significant effect upon poverty rates or income inequality. Only when wealth is created through political connection does it have negative impact upon economic growth and add to income inequality.
The lesson is that the more the government intervenes in the economy, the more negative impact on economic growth and nor does it not alleviate income inequality, but could add to it.
The Frazier Institute in study of economic freedom in North America found that economic freedom and economic growth are intertwined, as less government showed increase per capita growth (Fraser Institute and Free the World). Throughout the provinces and states of Canada, United States and in Mexico showed relations between economic growth and economic freedom. One study conducted on Mexican regional government shows that economic freedom matters as one study concluded, "economic freedom had a statistically significant positive relationship with average wages in Mexican states and that the growth of freedom was positively associated with growth of wages.”
Economic freedom encourage entrepreneurship and encourages individuals to start their own business. One study found “that economic freedom was positively and significantly associated with the growth rate of sole proprietorships in US states.” Studies also showed that states with higher economic freedom saw less lobbying activity by companies but the reverse showed that when states' policies produced less economic freedom, you see more lobbying activity and economic activity directed where the government wants, as opposed to allowing the market to direct economic opportunity.
As the authors noted, “The previous findings of a positive relationship between economic freedom and entrepreneurial activity were supported for business services (the second largest category by number of employees) and personal services.” If free market produced economic growth, what about income inequality. Criticisms of free market economy complains that capitalism creates more income inequality. As we have already seen, when government colludes with major corporations, we see weaker economic growth, and this does have a negative effect upon inequality. One study quoted by the Frazier Institute noted, “Both the level and growth of income in the lowest income quintile was positively associated with the growth in economic freedom. They found similar results for the middle quintile and the highest income quintile, but in the latter group only income growth (not income level) was statistically significant. They also found that the growth of economic freedom was negatively associated with the ratio of the highest income quintile’s income share to the lowest income quintile’s income share, meaning that increased freedom was associated with less income inequality.” Another study concluded, “Lagged growth of economic freedom was associated with a lower level of income inequality and with reductions in income inequality over time. They also found evidence of a parabolic (rather than linear) relationship between freedom and inequality. For very low levels of economic freedom, increased freedom was associated with greater inequality, but starting at about 1% above the mean value of economic freedom, increases in freedom were associated with less inequality.”
The left's strategy of emphasizing income redistribution produces lower economic growth, since the emphasis is not about making the economic pie bigger but splitting the pie that already exists. The Democratic left's policy is creating the Oligarchy they are forever claiming they oppose.
So what can we conclude? Economic freedom is beneficial for economic growth, and economic growth produces economic growth across the board as it is associated with less inequality and not more.