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.
John C. Goodman is President of the Goodman Institute and a Senior Fellow at The Independent Institute. He is the author of the widely acclaimed book, Priceless: Curing the Healthcare Crisis. The Wall Street Journal and National Journal, among other media, have called him the "Father of Health Savings Accounts.”
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