Or: Why the Heritage Freedom Index is a Damned Statistical Lie
This guest post was contributed by StatsGuy, a frequent commenter and occasional guest on this blog. It shows how quickly the headline interpretation of statistical measures breaks down once you start peeking under the covers.
Recently, a controversy raged in the blogosphere about whether neo-liberalism has been a bane or a boon for the world economy. The argument is rather coarse, in that it fails to distinguish between the various elements of neo-liberalism, or moderate deregulation vs. extreme deregulation. But if we take the argument at face value, one of the major claims of neoliberals is that countries in the world which are more neoliberal are more successful (because they are more neoliberal). I disagree.
My disagreement is not with the raw correlation between the Heritage Index and Per Capita GDP. A number is a number. My disagreement is with the composition of the index itself, and interpreting this correlation as causation between neo-liberalism and ‘good things.’
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.
The Heritage Index weighs ten items equally, and these items are derived using very different mechanisms (many subjective):
- Business Freedom
- Trade Freedom
- Fiscal Freedom
- Government Freedom
- Monetary Freedom
- Investment Freedom
- Financial Freedom
- Property Freedom
- Freedom from Corruption
- Labor Freedom
Here are the top twenty countries on the index, and their overall scores.
It strikes many that some countries we do not normally consider very libertarian rank quite high – Singapore (with the government actively manipulating the property market through its monopoly on land sales, or deploying investments through its massive sovereign wealth fund, etc.), Canada (with its state run health system), and others.
Likewise, on the negative side of the equation, we can observe several countries that score in the upper third on the Heritage Index that strike us as weak states. It turns out that Jamaica scores a rank of #58, and Colombia a #57. This is well above a lot of other countries like Argentina (#135), and even slightly above relatively successful nations like France (#63), Poland (#70), and Italy (#73). These types of scores tend to raise questions.
If we look under the hood, it turns out that Jamaica would score even better on the Heritage Index if it weren’t for two components on which it scores miserably. Here are Jamaica’s scores:
|Freedom From Corruption||31|
Those two scores are massively dragging down the average. This immediately makes one wonder how the various components relate to each other. Let’s take a look at the simple correlations:
|Overall Score||Business Freedom||Trade Freedom||Fiscal Freedom||Government Spending||Monetary Freedom||Investment Freedom||Financial Freedom||Property Rights||Freedom From Corruption||Labor Freedom|
|Freedom From Corruption||0.79||0.69||0.51||-0.32||-0.40||0.56||0.68||0.67||0.94||1.00||0.29|
Wow, there are some peculiar things about this table! Note, for instance, that Government Spending is negatively correlated with just about everything (except Fiscal Freedom). Note, also, that Property Rights and Freedom From Corruption have the highest bivariate correlation on the table (0.94). What if we were to try to visualize the relationships between the Heritage Index components, for example using a tool like MDS? We might get this (depending how you run it):
At first glance, it looks there are three groups of items: one focusing on property rights, corruption, and financial “freedom”; one focusing on structural factors in the economy (trade, business, labor, monetary); and one focusing on government spending (with fiscal freedom somewhere between government spending and the structural factors).
Let’s dig even deeper. If we open up the criteria for Financial and Investment Freedom, we find that both of these are subjective measures – using a point system in which Heritage deducts points depending on government interference with investments and finance. Subjective measures are problematic, because the individuals assigning points probably have a high bias to (unintentionally) favor countries that are successful overall. (That’s why drug trials require double blind tests.) But let’s give them the benefit of the doubt.
For Investment Freedom, Heritage penalizes points for several reasons, but half of the measure relates to legal recourse against appropriation of investor funds, bureaucratic controls over capital movement, and lack of transparency in investment law. . . . These sure sound a lot like Property Rights and Freedom From Corruption. For Financial Freedom, Heritage uses a 0-100 scale that is subjectively assigned based on the reviewer’s perceived influence of the government on finance. On this scale, the United Kingdom, which unleashed massive Quantitative Easing (not that I’m critical) and has tight links between large banks and Parliament scored an 80, near the top of the chart.
What about the variables in the lower left quadrant? Well, some of them we can probably ignore, like Monetary Freedom, which basically measures inflation and price controls. If we look at the standard deviation of these 10 measures across all countries, we get an idea of the typical influence of each variable on the final index score.
|Freedom From Corruption||21.0|
Monetary Freedom is flat, meaning that on average it accounts for little variation in the index score among countries. Property Rights and Freedom from Corruption typically account for three times as much variation in the final index. Even Trade Freedom and Fiscal Freedom are relatively flat compared to Property Rights and Freedom From Corruption. As one can see, the final index is (empirically) heavily weighted toward what I will call the ‘Good Government’ variables, rather than the ‘Less Government’ variables.
But let’s go just one step further. Let’s pull a measure of quality of life from the World Bank that uses something other than GDP. We’ll use Life Expectancy. While this is surely influenced by genetics, one must imagine it’s a pretty decent measure of quality of life as well. How does this measure correlate with the ten ‘Freedom’ measures above?
|Measure||Correlation With Life Expectancy|
|Freedom From Corruption||0.64|
Wow . . . Fiscal Freedom and lower Government Spending negatively correlate with life expectancy, even without controlling for other variables! A purist might observe that government spending could be an outcome, rather than a cause (i.e., government spending is a luxury good that wealthy societies engage in by mistake, but it doesn’t improve mortality rates). That sounds fishy, but even so, it still undercuts the neoliberal argument (less government = always better). Likewise, we observe very low correlations with Labor Freedom and Monetary Freedom, and one could argue that most of that correlation is spurious (that is, working through other factors).
Where are the highest correlations? Property Rights and Freedom from Corruption. . . . Again, our best measures of ‘Good Government’ in this index.
The second strongest pair of measures – Business Freedom and Trade Freedom – does seem to support the neo-liberal case. I will note, however, that Business Freedom is primarily determined by the speed/cost of starting, licensing, and closing a company. I will further note that this is heavily influenced by the efficiency of licensing agencies and the court system (especially bankruptcy courts). Again, these are measures of ‘Good Government.’ The neo-liberals do seem to have a case for lower trade barriers (‘Trade Freedom’), although a huge part of this correlation is driven by the fact that the entirety of Europe has relatively low trade barriers.
The Heritage Freedom Index is really a composite of measures that get at two different things: Good Government, and Less Government. Overall, the Good Government factors tend to dominate, and drive a lot of the correlation with good economic and quality of life outcomes. When one splits out the factors, the case for Less/Weaker Government weakens substantially, and the case for Clean/Non-Corrupt/Efficient government strengthens considerably.
This does not support many of the conclusions that are often drawn using the overall Heritage Index.
56 thoughts on “Good Government vs. Less Government”
Jesus this whole thing is pissing me off more and more, and now you guys add a post on it. Everyone is arguing past one another.
To the point of the post: You’re right. The ideas that are reflected in the Heritage index are not always clearly defined and are subject to some bias. Sumner would support this as well, and has said he wouldn’t trust the exact rankings. He only used it as a rough guide.
Now, to the context of all of this. Krugman put up a post that showed the Regan reforms did not give greater growth than was seen in the 1960s. He was arguing against the unnamed or archetype conservative that thought Regan was a savior.
Sumner saw the post, and thought Krugman was implying that the Regan reforms were unnecessary, given Krugman’s advocacy and criticisms of Regan. He thought a better test of whether the reforms were effective was a cross-country comparison. Although not rigorous, he selected a few countries that were either very or not at all neoliberal. The Heritage index was used as a very very rough gauge, to compare whether his selected countries were on the appropriate end of the spectrum.
The Angry Bear guys aren’t really worth addressing.
And now you’re jumping on the Heritage index, pointing out specific issues that Sumner would probably agree with. Great, that doesn’t mean Sumner was wrong.
If you want to help out here, help create a cross country comparison accoring to “true” neoliberal rankings and see whether it changes Sumner’s results.
StatsGuy — way to live up to your moniker.
Could the real lie be applying any label containing “liberal” to corporatist policies?
I gotta second engineer27’s comment — a great post with an excellent critique of the Heritage index using an effective statistical presentation. Thanks!
Excellent post, StatsGuy, as always.
I know this is whiny, but Canada does not have a state-run health care system. I don’t know why so many people seem to think this. They have a decentralized (administered by local governments) Medicare system that everyone qualifies for. Additionally, Canada’s government spends less on health care per capita than the US government.
Britain has a state-run health care system and it sucks. It is terrible policy. But apparently it’s also quite cheap.
Also, as a note, Singapore is possibly the single most neoliberal government in the world. It is very surprising that you are suggesting otherwise.
(1) Much of the way that you’re employing the good government/less government distinction seems suspect. The liberal idea is that less *coercion* leads to a more just and wealthier society. But many of the freedoms listed by Heritage are causally dependent with respect to the degree of coercion they cause and/or prevent.
Just to give one example, bad government and poorly enforced property rights puts all the other freedoms at risk. To be exercised as freedoms, stable property rights are required. And as you show, property rights are *hugely* correlated with the benefits neo-liberals cite which is their main argument: strong property rights means a freer and richer society.
The problem is that when you increase ‘good government’ you not only move up along the ‘good government’ dimension but the ‘less government’ dimension as well. The relationships between the two dimensions may be quite complex. For instance, I’m willing to bet that the ‘less government’ dimension will have much more causal impact when a society is high on the ‘good government’ dimension. Otherwise, your society sucks and it doesn’t much matter if taxes are at 20% or 50%. It’s pretty obvious in this case that the ‘good government’ dimension will be crucially important if for no other reason than it makes it possible *for the ‘less government’ dimension to matter*.
The liberal ideal isn’t as flat-footed as ‘less government = always better’ but rather that restrained use of government coercion leads to more justice and better economic outcomes. The good/less government distinction doesn’t exactly track the more/less coercive dimension.
(2) Your point about government spending won’t do by itself. What services are being paid for? And over how large and diverse a populace? If government spending is high, how is it financed? With debt? Do the services involve lots of regulation?
To judge whether the government spending variable runs counter to neoliberal ideas, you must answer these questions. If you don’t, you simply can’t address (in any but the coarsest fashion) the question of whether a less coercive society with limited government tends to produce better economic outcomes.
(3) The relative magnitudes of the benefits of ‘good government’ and ‘less government’ can’t be all that matter, right? Suppose that ‘good government’ tends to increase economic growth rates by 2% a year and ‘less government’ tends to increase economic growth rates by .5% a year. Given compound interest, less government could be *massively* important, even if it is *four times less* important than good government. You need to address absolute magnitudes if you’re going to attack neoliberals. Can’t they just say, “Yes, limited government is better but good government is really, really, really key.”
do you want to read the absolute best critique of the heritage index?? here it is. it’s a masterpiece
Click to access 41901015.pdf
the author is a colombian economist (it’s in spanish but i’m sure that won’t be a problem)
The argument is rather coarse, in that it fails to distinguish between the various elements of neo-liberalism, or moderate deregulation vs. extreme deregulation.
I don’t see any evidence that in practice there’s such a thing as a coherent “moderate deregulation” ideology or policy.
On the contrary once a system embarks upon neoliberalism as such, there’s never any logical line to be drawn in principle short of total dereg, nor does there ever seem to be any concerted will to find a place to draw that line.
Sure, the likes of Krugman may in some vague way want to deregulate and privatize “only so far”, but in practice they’ve never been able to put up much of a fight against the endless death march of corporatism, because once you agree with it in principle, and once even for a moment you’re on the same side as the die hard gangsters who want the complete liquidation of all public property and the entire public interest, there’s never a coherent way to “moderate” the ideology or the process.
That’s one of the fundamental untenabilities of corporate liberalism.
The alternative would be to maintain social democracy or something better and stronger as the baseline for ideology and practice and then allow individual exceptions where the evidence truly indicates them.
But corporate liberals start out agreeing with the hardline corporatists. They start with the principle that corporations should rule, that the basic policy should be deregulation, privatization, gutting the safety net and liquidating labor. But then in their feckless, incoherent way they want to put limits on it.
As should always have been obvious, that doesn’t work, conceptually or in terms of such inferior people being the ones who expected to be able to put up any real resistance against the sustained aggression of gangsters.
“A purist might observe that government spending could be an outcome, rather than a cause (i.e., government spending is a luxury good that wealthy societies engage in by mistake, but it doesn’t improve mortality rates). That sounds fishy, but even so, it still undercuts the neoliberal argument (less government = always better).”
It’s not fishy at all. In fact, it’s pretty obivous, and it’s preciesly what I was thinking before I got to this part. Forget life expectancy–I would expect to see GDP correlate positively with government spending as a percentage of GDP for the simple reason that a poor country can’t afford a government with a budget of 40% of GDP.
And “less government is always better” is a strawman. No serious liberal is going to argue that a country wracked with corruption and lacking severe property rights is going to perform well just because government spending is 15% of GDP. The claim is that, ceteris paribus, less government spending is preferable to more.
once even for a moment you’re on the same side as the die hard gangsters who want the complete liquidation of all public property and the entire public interest, there’s never a coherent way to “moderate” the ideology or the process.
This is a remarkable claim. What evidence do you have to support it? And how do you explain say the experience of NZ, where Roger Douglas say, had what struck me as a coherent way of moderating his ideology – he favoured opening up those parts of the economy that could be competitive markets to competition, and deregulating, but leaving the natural monopolies in government ownership, so eg selling power generators but leaving the transmission grid owner in public hands. He also supported substantial social spending, supported by a low-rate broad-base tax system. You might not agree with him, you might think he was wrong, but his approach strikes me as coherent.
As should always have been obvious, that doesn’t work,
Again, another remarkable claim. If it is impossible to put limits on “deregulation, privitisation, gutting the safety net”, once you agree with the neoliberal approach, then how come governments around the world still have substantial social spending and assets in public hands?
See for example the OECD data on public spending as a percentage of national income for OECD countries at http://dx.doi.org/10.1787/550420773523 – tab “Data-EQ5.2”. In 1980, before the neoliberal reforms, the NZ government was spending 21.3% of NNI.In 1988, at the end of Roger Douglas’s tenure, it was spending 24.6% of NNI. In 1992, after Ruth Richardson’s slashing of government spending it was spending 25.8% of NNI, then it started to fall a bit as the economy improved, but the lowest during the 1990s National government was 23.7%, still higher than before the neoliberal reforms.
If you look at the OECD countries more generally, none of them have had zero spending on social welfare. Korea and Mexico are low but started off very low but have been rising.
Do you stand by this line: “the neoliberal argument (less government = always better)”
It seems like a ridiculous thing to write, to me; a “strawman”.
If it is impossible to put limits on “deregulation, privitisation, gutting the safety net”, once you agree with the neoliberal approach, then how come governments around the world still have substantial social spending and assets in public hands?
With the entire position being driven back across the whole front, year after year.
Bush failed to privatize Social Security? Peterson and the WaPo are leading the charge again, and Obama’s enthusiatic. According to his “fiscal reponsibility” Star Chamber only war spending is off the table. You should know what that means.
And did you happen to notice a vicious Europe-wide “austerity” offensive over the last few years, and picking up steam today?
In ‘The Art of Problem Solving’ Russell Ackoff observes that “…getting rid of what one does not want is NOT equivalent to obtaining what one does want.” I’m wondering if it would be useful to explore what we DO want before we start jettising babies?
Thomas Frank’s thesis in The Wrecking Crew is that once you accept that money is something Good, and those that obtain it do so by being right, you allow money to do what it always does; which is to remake the rules so as to accrue ever more money, at the expense of everything else.
His extreme example is the Commonwealth of the Northern Mariana Islands. But he demonstrates that the CNMI illustrates a natural endgame of corporatism.
Your example of New Zealand, according to Frank, represents an unstable equilibrium that will ultimately succumb to the subverting influence of money, since even Roger Douglas thinks that money is something good to have around.
Proposal re: “explore what we DO want..”
1. A working definition of “good government.” Starting with the idea that it’s about SERVICE, not power and wealth and fame. SERVICE. SERVICE. SERVICE. (That right there disqualifies 99.999% of the folks currently in Washington.)
2. Before anything else, anything else, elected representatives MUST demonstrate CHARACTER. You know, consideration, respect, empathy, caring, trustworthiness (a biggie), and fairness. (Because if these are absent, I don’t care how many Harvard degrees are hanging on the wall…)
3. Next: qualities such as…
Insightful Collaborative Inquisitive Perceptive Playful Open Decisive Flexible Follow through
Balance of Intellect and Intuition
“Outside the box” problem solver
Capable of forethought
4. And the overall goal? To make decisions based on what’s ethical, moral, and supportive of the well-being of the Whole.
We keep thinking, if we only change the election laws, if we limit terms, add more regulations, repeal regulations, propose this, take away that, if we only…if we only…if we only…
Until we address the core issue – the actual character of the kinds of people who run for office, their genuine qualities, and their real reasons for running – we could spend lifetimes tweaking “The System” all we want…but at the end of the day, we’ll still be left with the same corrupt, stinking cesspool. (A new face does NOT a new “system” make.)
As has been demonstrated time and time again.
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 its 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 think in time the Singapore approach to social insurance will be shown to be better, but depsite my right wing reputation, I regard Denmark and Sweden as highly successful countries.
With the entire position being driven back across the whole front, year after year.
Actually no. Did you read the link I supplied? Social spending has consistently gone up in every country from 1980-2000, with the exception of the Netherlands, which has fallen from 28.3% to 24.3%, still well within the mid-range of OCED countries. Nearly every country’s social spending going up is not consistent with the entire position being driven back.
Bush failed to privatize Social Security?
And Bush’s failure is meant to make me think that the neoliberals always win and always gut the safety net and liquidate labour and privatise everything? On the contrary, Bush’s failure strikes me as more evidence against Russ’s propostion. Not perfect disproof, but it does raise my Bayesian probability that Russ’s hypothesis is wrong a bit.
Peterson and the WaPo are leading the charge again, and Obama’s enthusiatic. According to his “fiscal reponsibility” Star Chamber only war spending is off the table. You should know what that means.
Yes, it means that you don’t have any examples of neoliberals actually managing to deregulate everything, privitise everything, and eliminate the safety net, because if you did you’d’ve stated those examples, rather than relying on what some people might be trying to do.
of course, your lack of arguments here does not definitely disprove Russ wrong, there may be some examples out there that neither you nor I have thought of, due to our own share of human failities. But, well, the OECD data does rather contradict Russ’s story that it’s impossible to put limits on neoliberalism.
And did you happen to notice a vicious Europe-wide “austerity” offensive over the last few years, and picking up steam today?
No I didn’t. I expect for the simple reason that no such Europe-wide austerity offensive existed until this last year, and you instead made this statement up. If you can’t be bothered checking the link I supplied before stating silly stuff like “the entire position being driven back….” then I don’t see any reason why I should believe you on this point. I did notice a more recent austerity movement this year, but that doesn’t strike me as vicious, instead rather sensible. Raising retirement ages, cutting down on tax evasion, dropping some of the middle-class benefits like child bonds, not vicious. I can see describing what Ruth Richardson did as vicious – cutting benefit payments, but not the current round of budget cuts I know of in Europe. Of course, since you put scare quotes around austerity, perhaps you are talking about something else than austerity. What do you mean by “austerity”?
This is one of the best posts in a long time – I think you should dedicate MUCH more time/effort towards debunking the elements of neo-liberal reforms that have been proven specious over the last several decades. More here.
Also, I do believe that fighting corruption is one of the most important things we can do as citizens. Transparency International is one of the best organizations out there when it comes to anti-corruption research. Their Global Corruption Barometer uses many similar metrics as the Heritage index, but in general is more robust when it comes to corruption-related metrics, IMHO.
People believe what they want to believe, and can misuse statistics to substantiate their beliefs. But it takes a statistician to do it well. Good job, statsguy.
And I’m sure Frank is very impressed with his own hypothesis. But why should anyone else give a fig?
Does he have a list of countries that did not use money, and thus did not succumb? How long have these countries operated compared to those that used money? How does he explain that life expectancies risen sharply in the 20th century around the world (see http://www.worldbank.org/depweb/english/modules/social/life/index.html), if money “always accures ever more money, at the expense of everything else”?
If his hypothesis was right, I would have expected life expectancy to fall, as money accured. How does Frank explain that?
At the moment, that Frank apparently thinks that NZ represents an unstable equilibrium makes me think worse of Frank, rather than of Roger Douglas.
Interesting read, if only to learn the limits of Google’s Translate program :D
“Yes, it means that you don’t have any examples of neoliberals actually managing to deregulate everything, privitise everything, and eliminate the safety net, because if you did you’d’ve stated those examples, rather than relying on what some people might be trying to do.”
1. School Loans.
3. Central/South America in the 70’s and 80’s.
I shouldn’t have to describe the failures of the above deregulations, they’re fairly well known.
Either that, or you’re arguing the “no-true scottsman” fallacy, claiming that neo-libs have never really been able to do what they wanted, so therefore, you can’t disprove that they are wrong.
Funny how you took a post about deconstruction of some bad statistics and claim that Stats Guy is the one who is abusing statistics.
Thanks for the link, MoN, that’s what I’m on about. Naomi Klein deserves a new type of Nobel Prize. It’s the Shock Doctrinaires, people! Perkinsian hit jobs have been our official, albeit covert, policy for decades now.
Anyone else see Fisman’s article in Slate, reporting on conclusive evidence of the work of economic hit men?
And isn’t faking the data one of the chief functions of EHM?
It seems to me they’re applying the same kind of gear-headed thinking, that valorizes kinetic leverage above all else, that unleashed the nuclear-powered genie (and the oil-fueled genie, and the coal-fired genie, and so on; how’s that working out for containing radioactive wastes and weapons-grade HEU, BP’s oil gusher, or mine-tailings, BTW?) to finance.
Got a problem, any problem under the sun, sea, or earth, up to and including interrogations or economic hit jobs? Apply more leverage!
It’s the one and only commandment for EHM and their covert colleagues.
So I whole-heartedly second your call for busting the pseudo-scientific economic myths that are jacking us to hell and back, sticking us with the bills in every way.
1. School Loans.
I have no idea what this is meant to be. Which country are we talking about? And if it led to everything being deregulated and privatised and the social spending net going to zero, then how come none of the OECD countries in the file I provided showed public social spending going to zero?
I assume this is a reference to the military company. Last time I checked, the USA still had a publicly-funded military, plus many other goverment operations (Medicare, schooling pre-university age). Whatever the rights and wrongs of Blackwater, it doesn’t strike me as evidence that neoliberals in the USA have managed to deregulate everything, privatise everything and eliminate the safety net. And, I also note, that according to the link I supplied earlier, US social spending as a percentage of NMI rose from 14.9% in 1980 to 18.1% in 2005. This is not what I would expect of a country where the neoliberals managed to privatise and deregulate everything and cut the social safery net.
3. Central/South America in the 70s and 80s
Can you please cite some evidence that these countries in the 1970s and 1980s managed to deregulate everything, privatise everything and eliminate the safety net? After all, I thought the major privitisations in Argentina happend in the 1990s (see http://en.wikipedia.org/wiki/History_of_Argentina#Beagle_conflict)
Also in Mexico, which is in the file I provided before, at.., social spending as a percentage of NNI rose from 2.2% in 1985 (first year with data) to 4.1% in 1990. You may think that the level was inadequate, but the direction is rather hard to reconcile with the claim that neoliberalism always leads to gutting the safety net.
I shouldn’t have to describe the failures of the above deregulations, they’re fairly well known.
And how many failures of regulations do you know of?
Either that, or you’re arguing the “no-true scottsman” fallacy, claiming that neo-libs have never really been able to do what they wanted, so therefore, you can’t disprove that they are wrong
What does this have to do with Russ’s claim that it’s impossible to put limits on deregulation, privatisation, and gutting the safety net, which is, you know, the argument I was actually criticising?
I’m talking about disaster capitalism at its most vicious. I’m talking about capital criminals who intentionally crashed the global economy, who are now using this as the pretext for a Bailout via which they’re already stolen over $14 trillion in Bailout America alone and god knows how much elsewhere, with millions more stolen every day as the Bailout pushes onward, while using the same disaster as the pretext to try to completely destroy what little of a safety net, social spending, and public property remains.
I’m talking about history’s greatest robbery by far.
That’s what I mean when I cite the ideological term “austerity”. I’m describing the infinitely vile criminals who advocate it.
“The claim is that, ceteris paribus, less government spending is preferable to more.”
Permit me to offer a polite reply, which hopefully addresses several comments of others as well:
Ceteris paribus, when I am buying a new car, I prefer to spend less money. Particularly if I can spend less money, and get the same car. The same is true when buying a government service. Neoliberals confuse spending less money for a good car, and buying a cheap car.
The Heritage Index is frequently used to argue that we should buy less government. In reality, it really shows that we should focus on good government. Getting good government at a good price is even better.
But assuming government service is run well, then the jury is out on whether a country is better buying more or less of it (Denmark vs. Singapore) – or even whether it matters. However, this is clearly a secondary concern, even though neoliberals have generally made it their primary concern. Moreover, Heritage has generally used its Freedom Index to support attacks on state size/regulation and defend business interests, rather than support efforts to improve transparency and integrity in government agencies.
The link between the Heritage Index and economic growth/quality of life is often used to argue that less government is better; in practice, that linkage proves nothing of the sort, and may suggest the opposite.
There is no better example of the points above than the ‘Culture of Corruption’ in the MMS from 2000-2008, and the BP misadventure. Except, perhaps, the culture of corruption in the SEC.
Very interesting and informative post, StatsGuy, but I have to say I enjoyed the comments the most. Many of them are a little too gung-ho in their complete denunciation of neo-liberal reforms, though not unexpected given the typical audience of this site. But, and I’m sure you agree with this, they read too much into your analysis, no doubt due to shamelessly flaunted biases.
StatsGuy’s most convincing point is that Government spending is a poor measurement of economic freedom and prosperity. I’m not sure how anyone could disagree, especially in light of the highly successful European social democracies. But does this discredit neo-liberalism? Only if you equate a social safety net with “socialism” (the “government should own the means of production” kind), which, unfortunately, is the poor level of discourse we in the United States have to deal with. But it’s consistent to be a neo-liberal, yet advocate for a strong social safety net (see, e.g., the Economist). The most important neo-liberal reforms in the 80’s and 90’s were privatization, liberalizing the labor market, and reducing marginal tax rates from 80-90% to 35-50%. All of the currently successful first-world countries engaged in such reforms and it’s ridiculous to assert the uneducated likes of Naomi Klein deserve some Nobel Prize for writing a thesis that completely fails in the face of facts.
Excellent post as always StatsGuy. Now I have what may be a kind of an unrelated methodological question about the correlation table you created (which on my computer kind of extends into the text on the right hand side of the screen by the way). It’s been a while since I took any statistics courses, but it was my understanding that a simple correlation measures the strength of the LINEAR association between two QUANTITATIVE variables (sorry for the caps, I don’t know how to italicize on this website). Since several of these indexes created by the Heritage Foundation are not quantitative in nature can correlation coefficients really be reliably computed?
One example I can clearly remember from my intro to nonparametric stats class had to do with a study trying to ascertain the relationship between the number of students taking a given course and students’ perceptions about the pace of that course. Students were given a survey asking them to rate the speed of the course (1 = very slow, 2 = slow, 3 = about right, 4 = fast, 5 = very fast). After the results of the survey were compiled they were plotted against the explanatory variable class size. At this point my stats professor said it would be inappropriate to calculate a simple correlation because simple correlations require the underlying relationship between two variables be linear, and with surveys that use subjective criteria this cannot be determined with certainty. For example, even though the scale above has order, a score of four doesn’t necessarily mean the course is perceived to be twice as fast as a score of two. In cases where Likert scales are used to evaluate subjective criteria I distinctly remember one of my professors telling me non-parametric measures of association that do not require assumptions of linearity such as Kendall’s Tau or Spearman’s Rho should be used. So I guess this is a kind of long winded way of asking if creating a correlation table that includes indexes created using subjective criteria is appropriate.
I’m not trying to be critical, I’m genuinely curious. I’m currently doing some statistical consulting work for one of my education professors (even though I’m woefully unqualified to be doing this) and a similar issue came up about using questionnaires to determine students’ level of trust toward their teachers and relating those scores to performance on various student assessments (standardized tests, portfolio projects, etc…) I had said that calculating simple correlations would be inappropriate for the reason I explained above. Was I wrong? Anyone with more statistical expertise than me feel free to chime in. Thanks. And I apologize if this is a little long and not exactly on topic.
I was struck by the very high rates of correlation between several of the subindicies (the “nonsize” indicies of course). This suggests that the index perhaps should be revised through grouping some of the various indicies.
I also was struck by the lower degree of variation in some of the indicies suggesting of course that little of the overall variation is due to those indicies.
While the Heritage Foundation likes to tout the correlation between the index and GDP per capita it rarely mentions the fact that there is little correlation between the index and GDP per capita growth. One factor may of course be the failure to take into account GDP per capita at the beginning of the period (the phenomenon of convergence).
However, I am now curious, based on these results, if the inclusion of government size serves to hold back the correlation between the index and GDP per capita growth.
As an interesting aside there is a statistically significant negative correlation between US GDP growth between 1996 and 2009. The US scored lower in the high growth 1990s than it has in the slow growth 2000s.
For ordinal non-metric variables, one might avoid correlations. Heritage represents the measures as metric, which is to say that they represent a move from 30% to 40% to be comparable in magnitude to a move from 70% to 80%. So correlations are appropriate, subject to some small discretization bias. One could represent the Heritage variables as outcomes of a latent trait, model the latent process, and try to derive correlations in the latent trait, but it isn’t worth it.
If you have a discrete outcome variable in a GLM setting, most would use a latent variable model (ordered logit/probit, or a semiparametric model). If it’s a causal variable, the choice between representing an ordinal variable as a linear variable, or using a transformation, or representing it as a set of dummy/indicator variables is empirical.
I agree with most of what you wrote. I have some reservations with:
“The most important neo-liberal reforms in the 80′s and 90′s were privatization, liberalizing the labor market, and reducing marginal tax rates from 80-90% to 35-50%.”
Privatization was certainly good in some sectors, leading to lower prices and better services for customers. But in some sectors privatization went too far, I think.
Just as a simple example, water utilities. It´s a monopoly. No competition possible. Turning them into for-profit companies doesn´t strike me as smart.
Liberalizing the labor market:
I´m not quite sure what you include here?
Job protection laws? Union influence? Minimum vacation days?
Reducing marginal tax rates from 80-90% to 35-50%:
Well, one could argue that Western economies grew quite a bit in the 3 decades before the 1980s and 1990s. :)
And one could also argue that this reduction seems to have been accompanied with an “explosion” in management wages and bonuses in most Western countries. While the income of “average” wage earners has tended to rise much, much lower or even stagnated.
And the dot.com bubble, the merger mania and the financial crisis just in the last 15 years seems to indicate that a lot of managers were overpaid?
Oh, and you forgot to mention one other important goal of neo-liberal reforms?
The Free Market knows best?
Let´s remove regulations and emasculate government agencies overseeing the remaining regulations?
How do you define “very rich” compared to “rich” countries?
GDP per capita? PPP adjusted?
(And just as an added question. Probably too much here. Do we calculate GDP and inflation in the same way in each country? Probably not. Can we then adjust for these differences? Hedonics, substitutions, imputations whatever? Seems pretty difficult for me.
For example, here in Germany we don´t use checks that much. Meaning that we can´t add getting “free checking” provided by our bank to our GDP. Unlike the USA for example.)
And how do you adjust for “public-private partnerships”? Or privatized prisons?
It gives you a lower government percentage of GDP now because you don´t have to pay up-front for all the costs. You just pay (a lower lease per year) for a LOT of years.
Or education and student loans?
Which are normally much lower here in Europe than in the USA because most universities are state-owned.
In Germany the federal government directly gives you a student loan (-> larger government). As I understand it, in the USA the government simply guarantees a lot of student loans. Guarantees are not direct payments so -> smaller government.
With the students maybe paying a higher interest rate.
Just looking at the OECD statistics the “very rich” countries seem to fall into 3-4 categories?
– City states (Singapore, Luxembourg, HK etc.)
No need to send public officials to sparsely populated regions.
– Tax havens (Switzerland, Bahamas, Isle of Man)
You included HK as a country, so I included the Bahamas and the Isle of Man here. :)
And as long as the marginal tax rates aren´t completely insane, I don´t approve of tax evasion.
– Resource rich small countries (Brunei, Kuwait, Norway)
Maybe, just maybe, even countries like Canada and Australia fall in that category. Large countries but with most of the population concentrated in just a few regions.
– the USA
Small government. Low tax rates.
And borrowing $400-$500 billion per year in the last 10 years on average. A lot higher now in the recession.
Still GW Bush almost doubled federal debts in just 8 years. From $5.something trillion to $10.something trillion.
How did you adjust for that?
As long as it´s borrowed it doesn´t count towards a “large” government?
Look, there is a clear and obvious takeaway here:
Good government leads to less government.
Once government service is not an easy path of long term security (401K’s for everyone) once there is NO opportunity to gain wealth or arbitrarily wield power, it will have far less fake indignation meant to make government workers more meaningful.
SEIU et al, will be torn apart because PRODUCTIVITY GAINS through automation and self service – leads to needing less workers, and the above mentioned pensions.
And THEN, when a mid-level bureaucrat exercises power he’ll do it with the specific goal of causing the least damage to the private sector that supports him WHILE STILL doing his job.
And all of that is LESS GOVERNMENT – it doesn’t mean it does less, it just does it smarter and far cheaper than it does now.
Thanks for the response. I’ll have to break out my statistics to English dictionary for some of this =), but I think I catch the drift. Since I have a mix of quantitative and qualitative variables for my data I’ve been representing survey responses as a set of indicator variables in the simple least squares multivariate regressions I’ve been running. I have very little experience with non-parametric/semi-parametric models so it’s good to see the dummy/indicator variable option included in your last paragraph. Again, thank you for the response.
Could someone please explain where the “Overall Score” data in Correlations Table comes from? It is obviously not Jamaica but it wasn’t clear to me where it actually comes from. Sorry for the stupid question. I found the line of thought very interesting but couldn’t follow the argument after this without knowing the basis for the data.
I’d appreciate the help
Just wanted to throw out another “Thanks for the great post StatsGuy”, as always!
My takeaway is interesting, and I am certain not intended by you, nor foreseen by me. My take on this analysis, aside from its obvious brilliance (but I’m not a statistician, so not really a judge of the validity of your analysis), it points up something interesting in global terms. It points up the amount of arbitrage which is available to truly international organizations. The differences, some quite dramatic, between governance styles would permit, and do in fact promote, substantial arbitrage opportunities for the globally disposed. This gives substantial organizations, with lots of locations, a broad opportunity to strategize across political systems. The obvious problem, and one which we can identify quite easily, is that this also creates substantial economic disruption between economies (the EuroZone is a great example, as well as south Asia), and then opportunities turn south for the global mainstreeters (serf society, as it were). This is why, globally, poverty, disease, famine, etc., are on the rise. This is why EuroTarp was fashioned, not to stabilize governments within the EuroZone, but to stabilize finances, especially those of national central banks tied within the currency sphere.
So, while statistics don’t lie, they also can reveal the vast weaknesses of our internationalized economy.
Noticed that there has been no real examination or discussion of “Labor Freedom”–what it means, how it was determined by Heritage, etc.
As I working class person, I am curious about that.
Statstguy, this is a good post, but not all that difficult statistics. The telling thing is that Heritage isn’t doing this analysis on their own data before they publish.
It’s easy to build a composite index and then graph vs. some metric. Heritage doesn’t bother looking at what components of their composite are really important.
I looked at this a couple years ago, and actually got a response from one of the Heritage authors. His response didn’t show much training in stats or pattern recognition. If you’ve got noisy data with a bunch of different dimensions, which dimension is important? There’s a lot of real research in that area.
I thought exactly the same thing when I first saw this index a few years ago. And I’m just someone who took a handful of stats classes as an undergrad.
Is this a question of effective government—the ability to deliver goods and services; and, efficient government—minimization of time, cost, and effort working in destructive opposition to each other where economies of scale (Too-big-to-fail) and product leverage (Too-random-to-regulate) provide dysfunctional results past some tipping point?
Stephen A. Boyko
Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of articles on capital market governance.
Nice decomposition – very important to get at the underlying variation in any “index.”
I’m sure you know this, but Less Government is not independent of Good Government – MDS gives you a nice visual of the clustering, but perhaps you could try a principal component analysis or other orthogonal decomposition to get how much the two overlap in terms of explaining the variation.
That’s because most neo-liberals would argue that it is difficult (not impossible – see Scandinavia) to get Large, Good Government. The reason is incentives – the more government influences/controls via regulation, the more lobbying and corruption pay off. The more it pays for corporations to “invest” in politicians rather that true innovation. Big government also then encourages big business because lots of regulation mean smaller business are less profitable (hard to hire necessary compliance personnel and pay the fixed cost of compliance without scale).
As this blog has brilliantly advocated, big banks are trouble and need to be broken up. But unless that break up is followed by a corresponding downsizing in the size and scope of regulation, there will be a continued incentive for larger banks which makes the task Sisyphean.
An interesting analysis would be to look simultaneously at the size of government and the size of business (Avg MtkCap per capita?). My guess is that the two are highly correlated, but that countries with bigger business and smaller government have more corruption, smaller business and larger government have lower growth. Those with small business and small government would fit the neo-liberal economic perspective, and I’m not sure what to expect from large business, large government.
what about Cato’s EFW index?
Isn’t “Good Government” at the current trillion dollar scale an oxymoron?
Russ, I noticed that you are now changing the topic, from your original two claims, that you haven’t been able to support, to this new one about capital criminals. Does this mean that I have managed to convince you that it is indeed entirely possible to coherently moderate a deregulation and privatisation policy? And, also, that it is entirely possible for people, including perhaps Krugman, to limit neoliberalism?
I’d like to get this cleared up before we move onto your new hypothesis.
I think it would be interesting to plot the regulatory words in the Federal Register’s section for determining capital against the actual capital base for the ten largest financial institutions.
How about government just stopping the oil spill:
Great post! In regards to the oil spill; “I believe that anyone can err, but only the fool persists in his fault.” Quote by-Marcus Tuillius Cicero. This quote frames BP’s oil decision efforts in stopping the leak.
In regards to good government-My quote is; “Good government that makes good decisions needn’t worry about public opinion.” I believe this summs up much of the great statements made in this posting.
Sorry – I’m British, and to say that the British health care system “sucks” is pure, uninformed propaganda. It’s great. People complain about it all the time – sure – and they always will. But any political party that threatened to take it away, or privatise it, would die by their own sword. That’s because public healthcare in Britain is so popular. But I’d agree that Singapore is neoliberal on many points. It’s a tax haven, after all. And that’s another point about this post. A large share of the top 20 make their way by tax havenry – that is, attracting capital to their shores by undercutting other jurisdictions on tax and regulation. That’s not creating value, it’s appropriating value. So this factor needs to be considered too: considering each country in isolation fails to capture the big, and important, picture.
Had wondered Governor Crist’s meaning upon less goverment & more freedom espousings. Interesting: Upon a plead for his help and recognition to matters of Defraud Upon Tort Nuptial Real to Injury- Procured by fraud – Millions under provisions to injury agreement etc Including forged Mortgages, Company in my name, fraudulent foreclosue schemed x husb enrichment, Fraud & Conspiracy Upin Court, repeat battery etc etc. Governor Crist Response??? Well, I received two calls … One from Indigent provider services to food stamps and housing … The other for indigent medical counsel from Domestic Violence: Was I Safe? In Fear? Excuse me: Welfare Impose??? Remedy upon Elaborate Fraud??? Real Injury??? Theft mine home??? The indifference upon illegality, dishonesty, is egregiously unbearable and gross to barbaric … Frightening. I’ve caught myself crying and laughing same time … Painfully Absurd. Accountability Injury & Fraud: Zero Marital/Slavery Interest 16 yrs: Zero Husbands Retired Business: Wealth Preservation – Top Producer … False Affidavits appearings to an Ins Peddler. I apologize… But Welfare couldn’t be more grossly disproportionate …Nor more shockingly inhumane of insult. Anyway, appreciate your informative article. Thank you
Its a fun argument. How many wealthy Americans live full time in Paradise, ie.. Hong Kong and Singapore. Both are de facto one party states with no political freedom. Singapore has the additional benefit of whipping you for spitting in public and other attractive laws. Both, by sheer coincidence are tiny islands with very high population densities and essentially no freedom of movement for labor. No one has a choice other than the wealthy. The essence of what I hear from my Libertarian colleagues(off the record) is that benign dictatorship is the ideal government. The unwashed masses too often vote to tax the elite to provide government programs for the masses. Chile and Spain under military dictatorships are sited as the ideal living conditions.
I’m no statistician, but it seems manifestly evident to me that the axiom that ‘the government which governs least, governs best’ has become a favorite sound bite of many.
This conclusion naturally implies that government is bad. The flip-side of that conclusion is the assumption that the actions of individual actors are good.
In this context ‘good’ is derived from the idea that people are rational actors – they will always act in their own best interest. This is a false idea, for a number of now also manifestly evident reasons. In addition, the collective actions of individuals acting rationally doesn’t necessarily result in collective good. That’s why we have government – to drive the collective public good.
If the government isn’t doing it’s job, it’s not for us to just label it ‘bad’, and try and do away with it. That’s just a cop-out. It’s our job to ensure that government does A BETTER JOB.
Instead, we’ve been gleefully and energetically replacing one ‘coercive’ force with another. Replacing government power with corporate power. Then, retroactively, trying to convince ourselves that corporations are individuals, so our actions match our false assumptions.
This is bass-ackward, to put it kindly.
I would posit that a noose is a noose – whether you put a corporate or Public brand on it.
Most of those who draw the ‘less gov’t’ conclusion are not statisticians either – and many hold public office. While there may be many on these boards who actually try to analyze this conclusion using real data – most politicians subscribe to the conclusion blindly – and use it as a rule of thumb to exercise ‘Cliff Notes’ governing methods. They don’t analyze the data, they just react in a knee-jerk manner to implement their foregone conclusion.
The result is a self-fulfilling prophecy because governing via sound-bite thinking will always result in bad governance.
It has always been a puzzle to me why anyone would vote for someone who says, in effect, ‘the government sucks, so that’s the job for me!’
Government actions can result in bad outcomes AND individual actions can also result in bad outcomes. Neither are ever ALWAYS good or bad. Period.
This should be obvious, yet we persist in trying to prove/disprove one or the other.
Which is why we need to stop governing via ideological short cuts, stop electing officials via sound-bite driven glossy commercials, and individuals need to start using a little self discipline in their ubridled ‘me first’ bias – and begin to think about what is right for others as well as for themselves.
More successful? What is suppose to mean? My definition of success has nothing to do with individual rights or small government. My definition of success entails low poverty, high income equality, and high living standards.
And Denmark trumps Hong Kong in terms of my definition of success.
The only reason why neoliberalism is prevalent in Hong Kong is because Asians are hard-working and they don’t complain. Buddhists find pleasure in pain.
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