Category Archives: Public Policy

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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The New York Times

…has been factually incorrect on at least two occasions this week.

The first was just another case of “the boy who cried Kochtopus.”

As for GE and our corporate tax code, Megan McArdle at The Atlantic puts it rather eloquently:

For me, this is an argument against complexity, not an argument against GE.  Sure, maybe you’ll gin up enough outrage to cut back on the foreign tax breaks that GE now takes advantage of.  But they–or something else–will come back.  It takes a constant mustering of political energy to prevent a corporation from getting this sort of thing through; as soon as you let that energy flag for a second, they’ll slip through.  (So will the AARP!)  And not because of campaign contributions, but because congressmen are ill-informed about the many, many, many subjects they must vote on; because these corporations have headquarters in congressional districts; and because there are frequently at least some good arguments in favor of even tax breaks which are, on net, a bad idea.

So… eliminate the corporate tax. The latest Republican budget would lower the corporate tax by 10%, but there doesn’t seem to be much evidence that taking a highly burdensome tax and making it a fairly burdensome tax will greatly affect tax avoidance tactics and heavy corporate lobbying.

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On Nuclear Power

As I’m sure you are all aware, there has been quite a lot of fear mongering in the news about the meltdown of the Fukishima reactor in Japan, in spite of generous scientific evidence that the dangers are hugely overstated. (Here’s to outlawing Brazil Nuts!) See here for a good visual representation of relative radiation dosages. Note that the “extra dose” people near the reactor are receiving is less than one tenth the dose accumulated during an airplane flight from LA to New York.

Robin Hanson points out that hydropower is far more dangerous than nuclear power. More to the point, nuclear power is a clean and relatively inexpensive alternative to “dirty” fuels that get all those greenies seething. It’s puzzling to me why nuclear power is still dogmatic.

Personally, I’m in favor of adopting the miniaturized underground reactor. They can create energy at 10 cents per watt to 20,000 homes, and be placed virtually anywhere in the world. Clean energy need not be achieved through solar cells and wind turbines.

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