New study shows that increasing economic freedom leads to lower poverty rates

Freedom is fundamental to economic growth. As economic theory posits, lower taxes and less regulation reduce the overall cost of doing business, making it more profitable for individuals and companies to engage in economically productive activities, such as work, innovation, and investment. These activities, in turn, increase production, leading to higher incomes.

This was particularly observed during the pre-pandemic era. Thanks to lower taxes and some deregulations under the Trump Administration, Americans — across all income groups — saw their incomes rise, as poverty reached historic levels.

That freedom is important to economic growth is so universal it has been proven many times over. Just recently, a new study by Colin Doran and Thomas Stratmann, found that higher levels of freedom are associated with lower levels of poverty.

Specifically, using the Heritage Foundation’s Index of Economic Freedom to analyze 151 countries between 1995 and 2015, the authors found that

a country’s market, public policy, integrity, and regulatory efficiency can help bring down poverty rates. For example, public policy that is associated with increasing the country’s integrity or government transparency, i.e. policy that reduces corruption and political bribery, correlate with lower poverty rates. According to their research, “a 10% increase in a country’s government integrity score is correlated with a 0.8% to 1.6% reduction in poverty rate depending on the poverty threshold used” (The Relationship between Economic Freedom and Poverty Rates: Cross Country Evidence).

Policies that lead to more freedom in the market also show a statistical negative correlation with poverty. Thus, “lower non-tariff barriers and lower tariff rates” lead to lower poverty levels in all three income thresholds. Furthermore, reductions in certain government controls of the financial industry are associated with lower poverty rates because banks are more free to extend credit and accept deposits (The Relationship Between Economic Freedom and Poverty Rates: Cross Country Evidence).