Friday, September 04, 2015

More Government Regulation Generates More Income Inequality and Slower Economic Growth

President Obama just announced plans to reduce, and ultimately eliminate, coal-fired electricity generation in the U.S. Data from the Department of Energy show electricity from existing coal-fired plants costs $38 per megawatt-hour compared to $106 per megawatt-hour from new wind facilities.

This action will contribute to rising economic burdens on low income families in the U.S. The bottom quintile of earners already spend five times more of their family income on electricity, compared to the top quintile of earners. Policymakers must consider potential impacts of this and other regulatory expansions on income inequality and economic growth.

Gauging income inequality with the 2013 Gini coefficient, measuring regulatory freedom with the Mercatus Center's regulatory freedom index, and capturing U.S. economic gains with 2008-13 Gross Domestic Product (GDP) reveals how rising regulation influences income inequality and economic growth.

When ranking the states from the most regulatory-free, Indiana, to the most regulatory-constrained, California, distinct relationships emerge. First, the 25 states with the most regulatory freedom in 2013 experienced GDP growth of 4.2% for 2008-13, compared to the 25 with the least regulatory freedom, which experienced a slower 3.3% GDP growth, and 3.7% greater income inequality.

Furthermore, the top 25 states, in terms of restraining regulatory growth from 2008 to 2011, experienced GDP growth of 4.6% compared to 2.6% for the 25 states expanding regulatory burdens. The 25 states growing relative regulation also suffered 2.9% greater income inequality.

This surface analysis should stimulate more in-depth research that examines how Washington's boost in regulation among the states impinges on both income inequality and economic growth.

Ernie Goss

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