The true north really is strong and free these days. According to the Heritage Foundation’s 2010 Index of Economic Freedom, Canada now enjoys a greater degree of economic freedom than the United States. They enjoy the most economic freedom in North America, as it were.  Those of us who watch Canada with a weary eye took note of this trend way back in April 2009, when the U.S. passed Canada in size of government relative to GDP. Remember this graph?

Where you getting all this economic freedom all the sudden Canada? Just happen to find it laying around in the snow somewhere? Well it turns out we’ve recently misplaced a good deal of it around here. A little suspicious if you ask me.

Back to the Heritage index…Adam Pasick, new blogger at the Atlantic, points us an unconvincing critique of the index from John Miller:

So it seems that the Index of Economic Freedom in practice tells us little about the cost of abandoning free market policies and offers little proof that government intervention into the economy would either retard economic growth or contract political freedom. In actuality, this rather objective-looking index is a slip-shod measure that would seem to have no other purpose than to sell the neoliberal policies that brought on the current crisis.

He argues as if his criticisms show that the index “cannot and should not be trusted” and that it has “fundamental flaws”, but then conflates that with the argument that studies show that economic freedom as measured by the index don’t lead to growth.

His two objections to the methodology are that it only uses nominal and not effective corporate taxes, and that the size of government can be a good thing. On the first point he might be right that effective corporate taxes would be a better measure of government interference in free markets. But nominal taxes that lead to a high degree of tax avoiding behavior is still government interference. So you can certainly argue that high nominal taxes negatively affect economic freedom even if corporations are good at avoiding them. Either way, this quibble hardly renders the index fundamentally flawed or unreliable.

His other criticism is that the “third measure of fiscal freedom, government tax revenues relative to GDP, bears little relationship to economic growth”. He’s already argued that their measure of economic freedom doesn’t relate to growth, which is a point to make, but really completely unrelated to the accuracy of the index. The problem is that this point supposed to be one of the two pieces of evidence that the methodology is flawed, not more evidence that the index doesn’t relate to growth. I’m not sure why he thinks this qualifies as former rather than the latter, since it clearly is not.

So really all he has is a quibble about effective corporate tax rates, which I find to be pretty weak ground from which to declare the index “fundamentally flawed” and “not to be trusted’.  He clearly believes that the index does not relate to economic growth, and that the Heritage people claim that it does. That’s fine, it’s a debate to have. But that doesn’t really have anything to do with whether or not the index is good at measuring what it purports to measure. Unless of course Pasick or Miller have such strong prior beliefs that economic freedom relates to growth that any index that contradicts that fact must be flawed. Somehow I doubt this is the case.

About these ads