Daniel L. Bennett

A Dynamic Analysis of Economic Freedom and Income Inequality in the 50 U.S. States: Empirical Evidence of a Parabolic Relationship

This paper examines the dynamic relationship between economic freedom and income inequality in the fifty U.S. states over the 1979-2004 period. Using fixed effects regression analysis, we find evidence that increases in economic freedom are associated with lower income inequality, but the dynamic relationship between the two variables depends on the initial level of economic freedom. This suggests that there may be an inverted U-shaped relationship between economic freedom and income inequality. The inflection point at which additional increases to economic freedom in a state result in less income inequality is estimated. The results are robust to various time periods and several alternative measures of income inequality.

Factor endowments, the rule of law and structural inequality

This paper provides an empirical test of the Engerman–Sokoloff hypothesis that factor endowments influenced the development of the rule of law, which in turn has perpetuated income inequality. Using a measure of the suitability of land for growing wheat relative to sugarcane as an instrument for the rule of law, as measured by area 2 of the Economic Freedom of the World index, we estimate the potential causal impact of the rule of law on the long-run net income inequality. Conditioning on geography, ethnolinguistic fractionalization and legal tradition, the rule of law exerts a negative impact on inequality that is both economically and statistically significant. The results are robust to additional control variables, two alternative measures of the rule of law, an alternative instrumental variable and the exclusion of strategic country samples and outliers.

On the Ambiguous Economic Freedom-Inequality Relationship

Previous research on the relationship between economic freedom and income inequality has produced mixed results. We provide a short survey of this literature, identifying potential causes for this empirical heterogeneity. Next, we replicate the results from two significant studies using six alternative measures of income inequality for an updated dataset of up to 112 countries over the period 1970–2010. Notably, we use the latest release of the Standardized World Income Inequality Dataset, which allows us to account for the uncertainty of the estimated Gini coefficients. We find that the results of previous studies are sensitive to the choice of country sample, time period and/or inequality measure used. We conclude with suggestions for future research in the area.

Give Me Liberty and Give Me Control: Economic Freedom, Control Perceptions and the Paradox of Choice

We explore the relationship between individual control perceptions and the degree to which a countrys institutions and policies are consistent with the principles of economic freedom. Using data from the World Values Surveys (WVS) and the Economic Freedom of the World (EFW) index, we find that people living in more economically free countries are more likely to perceive greater control over their lives. This effect is not diminishing at higher levels of economic freedom. One possible channel that explains this relationship is the perception of procedural fairness and social mobility. Decomposing the EFW index, we further find that the area of sound money is what drives the results.

Public policy, higher education, and income inequality in the united states: Have we reached diminishing returns?

Public policy designed to promote greater college enrollment rates has often been justified as a means to reduce income inequalities, yet there is very little evidence that higher college attainment is associated with less inequality. Economic theory at best suggests that the relationship between college attainment and inequality is ambiguous. An overview of some of the unintended consequences of public policies designed to promote greater enrollment is described. One such consequence is that the growth in college completion, which is at least partially attributable to public policy, may have actually contributed to rising income inequality. We hypothesize the existence of a U-shaped relationship between college attainment and income inequality, and using panel data for the 50 U.S. states over the period 1970-2004 provide empirical evidence in support of the curve. Prior to the mid 1990’s, increases in attainment were associated with less inequality for most states. Rapid growth in attainment since then has moved most states to the right of the inflection point such that attainment gains are associated with more inequality in most states.

Evaluating Alternative Measures of Institutional Protection of Private Property and Their Relative Ability to Predict Economic Development

Economic theory and a growing body of empirical literature suggest that private property rights are an important determinant of economic development. In this paper, four commonly used measures of institutional protection of private property rights are assessed, including their relative ability to predict the level of GDP per capita. The risk of expropriation measure from the International Country Risk Guide, the rule of law measure from the World Governance Indicators, and the property rights index from the Economic Freedom of the World exert a similar and robust positive impact on the level of economic development. The executive constraints measure from Polity IV exerts a much smaller impact, and is sensitive to the model specification. The relative strengths and weaknesses of each measure are also addressed. The analysis provides researchers with guidance on selecting an appropriate measure of private property institutions for studies of economic performance.

Myth Busting: The Laissez Faire Origins of American Higher Education

A common view among American higher education scholars is that the sector was governed by a free market during the post-Revolution antebellum period. An analysis of the political economy during the period within the framework of a true free-market for higher education suggests that it did exhibit elements of laissez-faire, but that it was also subject to a substantial amount of market-distorting state intervention. Institutional autonomy and the protection of private property rights post-1819, liberal regulatory regimes in many states, and evidence of market entry and exit support the laissez faire origins hypothesis. Direct and indirect government subsidization, the establishment of state institutions and protectionist policies in some states oppose it.

Educational Inequality in the United States: Methodology and Historical Estimation of Education Gini Coefficients

This paper estimates historical measures of equality in the distribution of education in the United States by age group and sex. Using educational attainment data for the population, the EduGini measure indicates that educational inequality in the U.S. declined significantly between 1950 and 2009. Reductions in educational inequality were more profound during the first three decades of the study than the last three, with the degree of inequality remaining relatively constant since the early 1990s. Educational inequality has historically been higher among males than females, but recently the gap has narrowed substantially. Older age groups have experienced greater declines in educational inequality compared to younger age groups. Research extensions of the data presented in this paper are discussed.

Subnational Economic Freedom & Economic Performance: Some Evidence for the United States and Canada

This paper uses panel data for the U.S. states and Canadian provinces over the period 1980-2010 to examine how subnational economic freedom effects income inequality through the former’s impact on economic performance. Using a 2SLS fixed effects framework, the results point towards an efficiency-equality trade-off, suggesting that economic freedom may exert a positive direct effect on economic performance and a positive indirect effect on inequality. Limited government and labor market freedom are associated with higher levels of GDP per capita and employment rates, respectively, which in turn are positively associated with income inequality. The estimates suggest that labor market freedom exerts a stronger and more robust impact on inequality than limited government.

A Tale of Two Capitalisms: Perilous Misperceptions About Capitalism, Entrepreneurship, Government, and Inequality

This paper examines two widely held perceptions about capitalism, challenging the popular view that capitalism is a villainous perpetuator and government a saintly corrector of cronyism and inequality. This characterization is largely driven by misperceptions. Capitalism is viewed as a system that favors the elite at the expense of everyone else (crony capitalism), rather than one that promotes economic liberty and opportunity for all (free market capitalism). The state is meanwhile viewed as a benevolent and omniscient corrector of market failures and provider of public goods (romantic view of politics), rather than a political system operated by agents whose actions may reflect their own self-interest and not the welfare of the general public (public choice view). These misperceptions result in not only a distorted understanding of the institutional structure that underlies capitalism and the mechanism in which income is distributed, but also lead to perilous reform prescriptions that undermine free market capitalism and generate unintended consequences that act to reduce individual and societal well-being.A theory is outlined that links an economy’s institutional environment to the type of capitalism, entrepreneurship, and inequality to emerge in society. Institutions that constrain the discretionary authority of government incentivize productive entrepreneurship and facilitate free market capitalism, giving rise to a natural or market determined income distribution and opportunity for economic mobility. Institutions that do not sufficiently constrain the authority of government incentivize unproductive entrepreneurship and facilitate the development of crony capitalism, resulting in structural inequality and little opportunity for economic mobility. Empirical evidence suggests that, in the long-run, sound monetary institutions and legal institutions that protect private property rights and uphold the rule of law are associated with free market capitalism, greater living standards and a more egalitarian distribution of income. The practical implications of this research for the future of capitalism are discussed.