Does Heritage’s EFW index correlate with GDP/capita?

The Heritage Foundation has published an “Index of Economic Freedom” in some form or another since 1992. (Or, at least that’s how far back their dataset goes.)

The EFW index grades the following 10 characteristics:

  • Business Freedom (low regulatory burden on business)
  • Trade Freedom (free trade)
  • Fiscal Freedom (low taxes)
  • Government Spending (low gov spending / GDP ratio)
  • Monetary Freedom (price stability, low price controls)
  • Investment Freedom (low restrictions on capital flow)
  • Financial Freedom (low financial services regulation)
  • Property Rights
  • Freedom from Corruption
  • Labor Freedom  (essentially, a lack of strong unionization)

Each of the above is scored 0-100, and then those scores are averaged for each country to yield an overall score. (You can read more about the methodology on the Heritage page if you’re interested.)

The first thing I did was to pull the data into Mathematica and append a column of GDP/capita using the CountryData[] function. Then, I filtered the data so that all the entries remaining in the array contained valid scores/numbers for each column, so that I wouldn’t end up with random zeros in the data. The only four years with totally complete data were 2005-2008, so those were the only years I studied. GDP was normalized in adjusted USD via the exchange rate as of last Friday (1/20/11, when I tabulated the data).

And, yes, I’m aware that GDP/capita does not necessarily equate to the “wealth” of a nation, per se, but it is most widely available/published metric that suits this purpose.

So, first, a log-plot of EFW score and GDP/capita (in 2008):

GDP/capita against overall EFW score. Correlation of 0.68 and a slope of .095 (on a log axis).

The plots for 2007-2005 look very similar. But, in case you’re not convinced, here are the ANOVA tables for 2005 and 2006:

ANOVA for 2005

ANOVA for 2006

ANOVA for 2007

ANOVA for 2008

I would like to point out the outrageously small P-values for the linear fits of these datasets. If we can conclude anything, it is that economic freedom MATTERS. We can go back and forth all day about whether or not there are too many extrinsic correlations between wealth and freedom for us to interpret the data appropriately, but these numbers suggest that Heritage’s index is a good predictor of the wealth of a country, causal relationships notwithstanding.

I’m still working on interpreting the relationships between the EFW sub-categories and wealth; it would appear that most of the subcategories do not correlate as well with wealth than the overall index does. (Property Rights and Freedom from Corruption correlate better than anything else, with values of .724 and .799, respectively, in 2008.) Additionally, I would like to look at whether or not adjustments in EFW over time affect GDP/capita, because it would help establish (or disprove) a causal relationship between the two. I’m also open to suggestions about picking a new measure of “wealth” via publicly available econometric data, if anyone has suggestions. GDP/capita looks sort of like productivity, except it does not take into account how much of the population is working. Perhaps GDP/working population or just raw productivity would be more accurate. (Since government spending is part of GDP and is a negative factor in EFW, it creates noise as a consequence of it being a factor in the EFW score. It doesn’t help, either, that deficit spending will have the effect of making those countries look wealthier.)

The raw data (without econometric data) is available for download on the Heritage site. Contact me personally if you want my filtered sets with econometric data.

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Why Prison Shouldn’t be Too Cheap

Over at Overcoming Bias, and argument for exile as a means of reducing the costs of our prison system.

I think, though, that it’s important that our prison system not become too inexpensive. The marginal costs of incarceration should be sufficiently high as to create a disincentive for the state to imprison people with impunity. (In particular, I think it should be high enough to get the government to reconsider whether or not it is effective, both from direct and societal costs, to imprison non-violent drug offenders.)

An interesting thought to consider: should we be incarcerating people convicted of non-violent crimes? Is the purpose of prison simply to keep dangerous people away from society as a whole, or is it also a means of discouraging crime? Or is imprisonment also a form of moral retribution? In which case, should the government be in the business of retribution, and, if so, is the death penalty a legitimate form of retribution?

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Is Automation a Severity/Frequency Tradeoff for Risk?

People make poor monitors for computers.

I think the thesis here is fundamentally correct. As automated systems become more proficient and more complex, the proportional number of “hard failures” relative to all system failures will increase. At the same time, though, those systems are also intended to reduce the likelihood of any system errors at all. So the question remains as to whether or not the actual “risk” (the probability of a failure times magnitude of the severity of that particular failure, summed across all failures) is greater in systems with high automation. I suppose this deserves to be inspected on a case-by-case basis.

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“Rick Santorum Does Not Know Drug Offenders Have Families”

The best headline I’ve read this month.

But, in all seriousness, I’m flabbergasted that a presidential candidate can claim, with such indigence, that we do not put nonviolent drug offenders behind bars. And it’s stories like this one that really bring it home:

Clarence Aaron, arrested when he was a student at Southern University in Baton Rouge with no criminal record, is serving three consecutive life sentences without the possibility of parole for arranging a meeting between a childhood friend and a cocaine dealer. He has been behind bars since 1993.

Opposing views on 2012

Bearish or Bullish?

I’m inclined to lean bearish. Maybe that’s just because being bearish over the last few years has been the right thing to be, but I can’t help but feel like we’re in this for the long haul. If this recession really is a deleveraging, then it’s going to be a while before things get going again economically. Here are a couple of my concerns:

  • Public Debt: We will eventually run out of money. I simply cannot feel optimistic about our long-term financial stability as a nation given the apathy of the political establishment on both sides to do anything meaningful about our deficit. We cannot expect to borrow at 2% yields forever (see: Europe.) We will be in very serious trouble if we find ourselves, all of a sudden, unable to manipulate interest rates.
  • Artificially Low Lending Rates: Something that Keynesians refuse to acknowledge, by and large, is that there is risk associated with providing easy access to capital. Low rates make it easier for banks to create enormous amounts of leverage, which is what gets us into liquidity traps in the first place. Really low lending rates reduce the incentive for borrowers to find something worthwhile to do with the money that they have borrowed; additionally, low rates create an incentive to lever up your investments, which leads to increased risk.
  • No Incentive for Policy Change: The two issues above work with one another in a positive-feedback loop. The Fed has created an environment that makes it easy for our government to borrow money, so policy makers have a disincentive to restrain money supply growth. Additionally, reversing course to market interest rates would create some economic hurting and probably some disinflation, but it has to happen eventually. These problems won’t simply go away if we ignore them.
  • More Deleveraging: Households have deleveraged a fair bit (we’re down to 1993 household debt levels), but we may continue to do so until we reach, say, 1980 levels. If deleveraging is part of a 50- or 60-year macrocycle, then we should expect the credit cycle reversal to take us back to levels before the credit cycle. As evidence that we’re still very much in the midst of deleveraging, I would point to extremely low interest rates in virtually every market. No one wants to take on debt.
  • Homes: In spite of massive government interventions, the negative equity problem in home mortgages persists. We’re forcing the market to clear much slower than it would otherwise, so  I would expect that we have at least another year of cleaning up to do. (On the policy front, I think that rather than forcing rates even lower, we should just create incentives for banks to lower the principal on the mortgages that they issued. Otherwise the negative equity problem will persists, and the principal of these loans as reflected on bank balance sheets will not reflect the value of the underlying asset.)

I’m not that worried about Europe, because we don’t have a tremendous amount of direct exposure, relatively speaking. (As James Altucher points out, the top 5 US banks are 8% exposed to European debt. In 1981, we were 260% exposed to South American debt.) Granted, though, their crisis will still have the effect of devaluing the dollar through increased US SDR holdings, among other things, but we could be much worse off in terms of exposure.

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On Truth and Objectivism as a Moral Philosophy

On the whole, I like objectivism as a philosophy. It deals with morality in the most concrete way possible, which is, as I see it, desirable. History has proven time and again that subjective morality is dangerous. I’m of the opinion that few (if any) human beings wake up in the morning and decide that they’re going to do something really evil that day. The roads to war, poverty, and genocide are paved with the best of intentions. (Stalin probably woke up every morning and thought about what a great place he had made Russia.) In truth, I would wager that humans cannot really coexist peacefully without some sort of objective reality; we need some way of understanding what is “right” or “wrong.” The question doesn’t just go away once we’ve installed a government that’s capable of telling us what’s legal or not. If anything, the question of right or wrong just becomes more important, because we’ve given the authority to the government to imprison us on the (tangentially) related grounds of legality. (There is, and should be, a distinction made between “right” and “legal” – an article for another time.)

As much as an objective reality is necessary for us to understand morality, objectivity in and of itself poses a problem for us.

Science is often touted as being the key to our ability to begin to understand the universe in an objective manner. And, for the most part, I agree; we can’t ever come to a significant understanding of the physical world if we do not use scientific reasoning to get there. But I think that objectivity needs to be qualified as followed: there exists an objectivity relativity, provided we allow for axiomatic truths.

Let me elaborate.

Newtonian physics works in virtually every context that we encounter in our daily lives, but it is still totally useless when we try to apply it to matter that is too large, too small, or is traveling too fast. Is Newtonian physics objectively wrong? No, not really. We just have to make assumptions about how the world works. We assume that the “stuff” we’re talking about is a lot larger than one atom and a lot smaller than a star, and is moving at a speed much slower than the speed of light. And it that context, the Newtonian framework works fine. In other contexts, we may require statistical mechanics, electrodynamic theory, special/general relativity, quantum mechanics, etc. But those aren’t strictly right, either. Quantum mechanics and general relativity still have yet to be unified; there is no one branch of physical theory that has successfully been able to describe how the universe operates, and yet all of these theories prove time and again to be experimentally true. So all of these theories are true, but only if we make assumptions about our initial conditions. In short, science requires assumptions. Therefore, our objective reality can only be objective if we all make the same assumptions about our “initial conditions,” which doesn’t sound a whole lot better than subjectivity to me. But qualifications notwithstanding, the claims that follow these assumptions are still held to high standards of scientific rigor, which is the key difference between qualified objectivity and organized religion. (Even if we assume God exists, the Bible, or any other religious text, does not become empirically true by means of our assumption.)

As a result, I think it’s imperative that we be absolutely clear about our assumptions about how the world works when we argue about morality. Our discussions must begin on common ground. (Any real debate at all must follow that rule.) We are never in a position where we can argue deductively without first being clear about what we assume to be true or of importance in the first place.

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Congressional Budget Fail

How not to sell a federal budget to the public: call it $4 trillion in cuts, then call it $38 billion in cuts, then have the CBO tell you it’s actually $383 million in cuts with a $400 billion increase over the current-policy baseline…and then be lambasted for “nihilistic extremism” and “ruinous spending cuts.”"...and then a miracle happens"

The new plan doesn’t commit to decreasing government spending below 23% of GDP, when our best-case-scenario revenue is about 19.5% revenue. So we can count on an anual deficit of greater than 3.5% of GDP, under optimal conditions. Additionally, social security, the largest item on the federal budget sheet, is left entirely untouched.

I like that “tax increases” are now called “spending cuts in our tax code” – which implies that all of our money actually belongs to the government, and we should be thankful for all the money it doesn’t take from us.

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Higher Ed Bubble

All I have to say about the matter, for the mean time:

On “Plausibility” and Reputability

Earlier today I linked someone this article (elsewhere on the internet) about irrational fears of radiation. Specifically, I was mentioning a statistic:

Studies of more than 80,000 survivors of the Hiroshima and Nagasaki blasts have found that … only about 500 [cancer] cases could be attributed to the radiation exposure the people experienced.

Now, when you use statistics to argue against people who are entirely unprepared for them, more often than not you will get a flustered response… like this:

This article is coming from a blogger who also said that child labor laws are hypocritical bc in America we have little girls selling girl scout cookies (hard labor!) nd kids doing school work. Just sayin… Where u get facts from is important…! There are a lot of official reports out there with facts that sound a little more plausible abt this topic!

You can’t make this stuff up. This is the sort of comment that almost defies response. To begin with, the first sentence is a textbook red herring. The statistic in the article is linked to a Washington Post article, so even if you have a beef with Hanson, it doesn’t matter. I’ll forego commenting on Robin’s child labor article (and it’s sequel), because they’re irrelevant to this conversation. (Kudos to Hanson, though, for writing an article that so gravely offended this commenter – if you’re not offending someone, then you probably haven’t said anything of consequence.)

My biggest beef is really with the “plausible” line. If you look for statistics that tell you what you are already convinced of, their scientific utility is null. Journalists want to publish articles that people want to read and believe, and consequently you run into this enormous positive-response feedback mechanism (see: anthropogenic global warming.) When people encounter counter-intuitive statistics, their initial reaction (usually) is to decry your sources as fraudulent, rather than to examine why it is that a particular scientific finding is in conflict with their beliefs. There’s a lot of bad science out there, and there’s plenty of good science, too, so to dismiss any scientific finding on the basis of its violation of your sensibilities is irrational. But, of course, it’s easier to attack people than it is to attack science or logic. It’s easier to talk about how you “feel” that something is incorrect, rather than to prove, at least inductively, that it isn’t so.

Needless to say, I give people an earful when is see this sort of my behavior. It drives me bananas.

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Quantity or Quality?

Quantity always beats quality.

Makes sense to me. You can always learn more from proving yourself wrong than attempting to prove yourself right. And, quite frankly, it seems we (as a species) are wrong very often. It doesn’t help that we’re all prone to an incredible positive response bias. The most important part of science is to learn from your mistakes, not be right the first time around. (Someone tell this to the AGW crowd, please?)