Tuesday, May 17, 2016

Ease Of Doing Business Index And Conservative Stupidity

John Cochrane is a conservative economist from the University of Chicago.  His name often appears in a list of potential Nobel Prize winners.  One of the features of conservative ideology is that the closer a nation gets to a market free from government regulation the closer it will be be to economic utopia.  Cochrane used an index that measures the ease of doing business to argue that improving the US performance on the DB index would make a substantial contribution to economic growth in the US.  Cochrane's article has been criticized by a number of economists.  I selected this article by an economist who really understands the DB index to show how ideology blinds otherwise smart economists like John Cochrane.  The article goes into a lot of detail about the DB index and its misuses.  Since there is more detail in the article than necessary to illustrate Cochrane's stupidity, I have listed the most salient points below:

The first point is that the DB index measures a nation's closeness to the DB frontier.  I perfect score on the index of 100 would place a nation at the DB frontier.  In other words, it is impossible to go beyond a score of 100.  Cochrane made the mistake of calculating the growth in the US economy if it raised its score on the DB index to 110.  He obviously does not understand the DB index.  It is not possible to go beyond the ease of doing business frontier.

Singapore has the highest score on the DB index.  Consequently, conservative economists who promote deregulation as a panacea for economic growth, frequently cite Singapore as a best in class nation that we should emulate.  One of the problems with this comparison is that Singapore is a city; it is not really a nation.  There are many cities in the US that have a higher DB score than Singapore.  It would make more sense to compare Singapore with US cities than it is to compare it with the US.

We should not conclude that making it easier to do business would not be good for economic growth. The reasonable conclusion is that moving every nation closer the DB frontier will not produce a measurable increase in economic growth.  More importantly,  raising the DB score of a nation like the US on the DB index would not have much of an impact on economic growth.  Conservative politicians, who preach the gospel of deregulation as the road the economic growth, can not take us to an economic utopia.

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