Friday, December 04, 2015

Isomorphic Mimicry run Amok: John Cochrane Edition

People, I am a big JC fan. But this time he's really way way way off.

He appears to be arguing that feasible deregulation in the US would create 20 years of 5.4% growth.

Even worse, he is basing in on a single graph.

YIKES!!

And here it is:


The graph shows the correlation between the base10 log of income per capita and a country's ease of doing business score.

But there are few things that should make us pretty nervous here. The first of course is causal identification, which John mentions.

But there are more basic problems.

First, according to his analysis, China is done growing. That is a pretty bold prediction.

Second, and this is really my main point, the scale of the vertical axis is disguising the incredible heterogeneity of outcomes associated with any value of the doing business score.

For example, at China's score of 63, they have a PC GDP of $7000. But Nepal has a very similar score and a PC GDP of well under $1000! Ghana has a similar score and a PC GDP less than half of China's value.

Where is the growth boom in those countries and the dozens of others with similar scores than China's but notably lower GDP.

Again, the graph makes them look close. But they are not. It's the scaling.

The same is true on the other side. There are countries with similar scores to China who are more than twice as rich, and not all of them are oil countries.

From 50 to 75  in the doing business scores there is incredible heterogeneity in outcomes in terms of the associated PC income levels.

This of course is what we know all too well in development economics. Simply adopting a set of laws or regulations is no guarantee of getting a particular economic outcome.

Growth accelerations are by and large unpredictable. Here is the money quote from Hausman, Pritchett and Rodrik's classic paper:


"Finally, and perhaps most importantly, we find that growth accelerations tend to be highly unpredictable: the vast majority of growth accelerations are unrelated to standard determinants such as political change and economic reform, and most instances of economic reform do not produce growth accelerations."

John. it's not mechanical. if it was we would have sorted this all out in development decades ago.  Heck if it was as mechanical as you are suggesting, the World Bank's advice would have actually worked and we would have solved global poverty decades ago!

Thursday, December 03, 2015

Cavalcade of Endogeneity: The Market Monetarist does Micro Edition


So on the Market Monetarist blog, I recently saw one of the worst examples of the correlation implies causality fallacy ever by a supposed professional economist.

There is a graph presented of a raw correlation between an index of property right protection in a country and an index of "environmental performance"

Look for yourself, here's the graph:



and then the hammer drops:

"So there you go. The one graph version of Free Market Environmentalism – if you are concerned about the environment you should really primarily concern yourself about the protection of property rights"

That is just a stunning leap from the graph.

Might we dare to think there is a third factor, I dunno, maybe income, that is causing both of these indices?

Or try it this way, if I presented a graph that showed government spending was positively correlated with environmental performance, would the Market Monetarist then conclude that big government was the way to protect the environment?

If not, why not? Why would my analysis be any worse than this?