Only Economic Freedom Pulls People Out of Poverty (Vincent Geloso, June 20, 2024, AIER)

In an article recently accepted at Journal of Economic Behavior and Organization, James Dean and I argue that the potency of markets in alleviating poverty is deeply underestimated. As such, we shift the focus to the benefits of economic freedom — the alleviation of taxation, the shrinking of government, the reduction of labor market regulations, and the protection of property rights.

Four mechanisms connect greater economic freedom to poverty alleviation. The first is enhanced economic growth and job creation. A freer economy attracts more businesses and investments. Fewer regulations and lower taxes reduce the cost and complexity of starting and operating businesses, which encourages entrepreneurship and leads to job creation and economic growth. This means more opportunities for the poor to climb out of poverty. Second, lower taxes allow for greater rewards to effort, enhancing motivation. Third, the absence of regulation means that many regulatory barriers — such as costly occupational licences or business permits — are eliminated, which allow for new pathways out of poverty to emerge. Fourth, economic freedom flattens barriers to geographic mobility, such that people can move to places of greater opportunity. A contemporary example of this mechanism is land-use regulations in cities which restrict the supply of housing. By increasing the price of housing, these regulations make cities inaccessible to the poor, even if they are hubs of economic opportunities. As such, people are stuck in areas with limited economic opportunities. The removal of these barriers also complements the effect of lower taxes, as factors that demotivate people from trying new pathways are removed. As such, their removal acts as motivator.

Together, these four mechanisms produce an environment where the poor are given the necessary room to exert agency and improve their lives through their own efforts. The repeated result is sustainable poverty reduction. Notice that nowhere does this negate the possibility of some targeted redistribution — think of Milton Friedman’s basic income proposal or school vouchers — that help pull out the poor out of poverty. In other words, these mechanisms mean that we stop pushing the poor down!