Inequality Is A Matter Of People, Not Numbers

From presidential candidates on down, everyone worries about economic inequality these days. In an era of stagnant job and wage growth, that’s a fair concern.

But inequality is a poor measure of how people are really doing and what would make life better. Rather than measure the difference between a CEO’s salary and her lowest-paid employee’s, policymakers should focus on making the poor better off. The job for policymakers is to remove barriers to opportunity and job creation.

Allow entrepreneurship and commerce to flourish. That requires adopting sound, pro-growth policies and ditching bad ones. In two new studies, we examine which policies can achieve those goals and which cannot.

Instead of policies that merely redistribute existing wealth, people need new opportunities and a chance to growth wealth. Pro-growth reforms include expanding access to capital and removing barriers to entrepreneurship, such as occupational licensing and burdensome regulations.

Those reforms are needed now more than ever. Many traditional forms of credit dried up in the aftermath of the 2008 financial crisis, despite near-zero interest rates. Banks severely cut back on loans, and mortgage and credit card issuance has plummeted due to regulations from the Consumer Financial Protection Bureau, created by the burdensome Dodd-Frank financial regulation legislation, and other big regulators.

Meanwhile, only two new banks have been founded since the financial crisis. That’s particularly bad news since new banks are more likely to lend to small businesses and start-ups. So it’s time for lawmakers to step in and liberalize the chartering of banks.

Lawmakers can also help increase access to capital by allowing entrepreneurs to offer new forms of lending and investing, such as crowdfunding and peer-to-peer lending, which promise to expand the market for capital beyond banks.

Occupational licensing is another impediment to entrepreneurship and the development of job skills. Nearly a third of American workers require government permission to do a day’s work, including in occupations where safety isn’t an issue. That is ethically wrong and economically stunting. There is no legitimate reason for an interior decorator or a hair braider to be required to undergo hundreds of hours of training in something they already know how to do. It’s long past time to end those government restrictions.

But policymakers must also take a harder look at the overall regulatory state. It imposes around $1.88 trillion in costs, an amount paid for by all Americans in dollars and lost economic opportunity. Congress could start by making regulators more accountable, such as by requiring Congressional votes on all new major regulations — currently defined as those with at least $100 million in annual costs. For old and obsolete rules, Congress should appoint a regulatory review commission to comb through the Code of Federal Regulations, assemble a package of rules to repeal and agree to a no-amendment, up-or-down vote.

Economic freedom is critical for prosperity. Nations that rank highest in economic freedom have a higher per capita GDP, which makes a huge difference in the living standards for people at the bottom of the economic ladder. Unfortunately, the U.S. has been slipping in that regard, dropping from No. 6 in the Fraser Institute’s annual Economic Freedom of the World Report in 2008, to No. 16 today.

To turn around our misfortunes and help people escape poverty, it’s time to get serious about reforms that matter. We must give people the freedom to prosper and build a better life.

Originally posted at Investor's Business Daily.