William Boyes has blogged about my paper on the effect of economic inequality on economic freedom. In what follows, he is in block quotes.
So, the apparent argument would be to have the government implement policies to eliminate inequality since that would increase economic freedom.
Yes and no. In the main text I do not make any argument about what the government should do. In the conclusion, I merely suggest, “One implication is that those who wish to promote economic freedom as measured by EFW should most enthusiastically promote liberalizations which also promise to reduce inequality. Reforms that do both could include educational reform, the elimination of corporate welfare, or intellectual property reform.” In other words, pursue policies that will increase economic freedom, but will most clearly also reduce inequality at the same time.
But this argument is flawed. Does government intervention increase inequality? Yes. Does inequality decrease economic freedom; according to Murphy it does. But, government intervention reduces economic freedom. So is Murphy measuring a simultaneity here rather than a causal relation? Again, yes.
My identification strategy addressed this. On the RHS I have the gini coefficient in year t as a control and I employ fixed effects.* On the LHS, I have the gini coefficient in year t+10. I’m curious as to what type of simultaneity Boyes had in mind that is missed here.
*Yes, so that means some specifications have Nickell Bias, but Nickell Bias sorta isn’t a thing.
Free, unfettered markets create some amount of inequality, but just the amount that enhances growth and increases freedom. Trying to reduce that inequality through interventionist policies reduces economic freedom, but leads to further inequality.
I don’t once advocate government intervention once in the paper.
Inequality is reduced when people are mobile both from one income bracket to another but also from one job to another, from one location to another, from one activity to another, etc. Government regulation and taxation have reduced mobility and thus enhanced inequality. Government monetary policies, especially the QEs, have increased inequality.
There is literature both ways on whether economic freedom reduces or increases inequality. I give the cites to both in the paper. While I would prefer to live in a world where freedom strictly always reduces inequality, there are plausible mechanisms where it doesn’t, e.g. subsidies to human capital formation. And I hope that acknowledging the possibility that subsidies to human capital reduce inequality doesn’t paint me as a socialist.
In any case, I do not take any position on the effect of economic freedom on inequality in the paper.