One of my favorite commenters (although we often disagree) is Statsguy. Tyler Cowen has just called his guest post over at Baseline Scenario a “must-read post.” Here’s Statsguy:
My primary contention below is that many of these measures used in the composite Heritage Index have nothing to do with less government, and a lot more to do with good government. It is these measures of good government that correlate to economic growth and drive the overall correlation between the “Freedom Index” and positive outcomes. Secondarily, I will argue that many of the other items in the index (like investment freedom) are not causes of growth, but rather outcomes of growth.
I also like the post. Although I left a comment, I thought it might be useful to repeat the comment here, where more people will see it:
Nice post Statsguy, I mostly agree. It is widely known that richer countries tend to have much bigger governments than poorer countries. Among really poor countries few people pay income taxes, and it’s hard to collect a lot of revenue. Of course there are exceptions-Brazil has a pretty big government. It’s also true, FWIW, that among rich countries the very richest (Singapore, HK, USA, Australia, Canada, Switzerland, etc) tend to have somewhat smaller governments than the next tier. Norway is an exception.) My hunch is that the same civic-mindedness that helps countries set up what you call “good government” also tends to lead countries to set up big welfare states (think Denmark.) I believe that in time the Singapore approach to social insurance will be shown to be better. But despite my right-wing reputation, I regard Denmark and Sweden as highly successful countries.
Using the carpentry metaphor, the Heritage Foundation is taking 9 measurements (or 10 depending on the year) to make a single cut. That is, they are using the 10 variables above to produce a single estimate of the economic freedom in every country. A relatively simple investigation shows that both the Fiscal Freedom and Government Spending variables are very poor indicators of economic freedoms and using them will actually produce less accurate estimates of economic freedom. Imagine a very earnest carpenter who takes 10 measurements in order to make precisely the right cut. However, for two of the measurements he was distracted and instead of writing down 12.3 and 12.2 inches, he writes down 21.3 and 21.2 inches. Averaging the 10 measurements will provide a much worse cut than averaging the 9 measurements that were appropriately recorded. I am not arguing that Government Spending and Fiscal Freedom were mis-measured, only that using these will produce a less accurate measure of economic freedom. Technical details of the statistical procedures, theoretical models and investigation that lead to this finding are [here].
I agree that the best way to measure economic freedom is with the 8 non-size of government categories, and when I did this a few years ago I also found Denmark to be the most free market economy. I prefer the term ‘laissez-faire’ for the small government model measured by Heritage (using all 10 categories) and ‘neoliberal’ for the model of free markets plus social insurance (such as Denmark.)
BTW, In my various recent posts on neoliberalism I took the shortcut of occasionally using the Heritage numbers for all 10 categories, knowing full well that the 8 category subset would have been better. But I’ve worked with these numbers enough to know that none of my generalizations in those posts would have changed much with the more appropriate figures (which I didn’t have at my fingertips.)