Doug Wiken revs up my spreadsheet with his response to a new Time article that challenges the Republican mantra that regulation kills economic growth. Reporter Stephen Gandel compares economic growth over the last five years with the World Bank's rankings of 183 nations for their regulatory environments for doing business. Gandel finds that some of the strongest economic growth of the last five years has taken place in countries where the World Bank finds it is tougher to do business than in the United States. For example, the United States is the fourth-easiest place in the world to start and run a business, yet since 2006, 161 countries have enjoyed faster economic growth.
The World Bank calculates the ease-of-business rankings by ten subcategories. I ran the numbers myself to check correlations of rank in GDP growth not just with the overall ease-of-business ranking but with each subcategory ranking. Here's what I found:
| World Bank "Doing Business" Categories | Correlation with GDP growth (2006-2010) | p-value (statistical significance) |
| Ease of Doing Business Rank | -0.27 | 0.000 |
| Starting a Business | -0.12 | 0.12 |
| Dealing with Construction Permits | -0.33 | 0 |
| Getting Electricity | -0.24 | 0.00 |
| Registering Property | -0.04 | 0.59 |
| Getting Credit | -0.15 | 0.05 |
| Protecting Investors | -0.09 | 0.24 |
| Paying Taxes | -0.10 | 0.17 |
| Trading Across Borders | -0.33 | 0 |
| Enforcing Contracts | -0.18 | 0.02 |
| Resolving Insolvency | -0.27 | 0 |
Now read these numbers carefully. First, the ones that I've put in bold are the ones with statistical significance. So regulations and other conditions dealing with issues that aren't in bold—starting a business, registering property, protecting investors, and paying taxes—have no demonstrable relationship with economic growth over the last five years.
Let me put that in English for you, Kristi: making it easier to (for example) pay taxes doesn't appear to have anything to do with whether the economy will grow.
Rankings in six of the subcategories, as well as the overall ease-of-business ranking, do show statistically significant correlations with rankings in GDP growth. The correlations aren't big: correlations smaller than 0.4 suggest a pretty weak relationship, easily confounded by other events.
But even if the regulatory environment has some meager effect on economic growth, that effect appears to be the opposite of what Kristi Noem posits. Do you see those negative signs? They mean that as one ranking goes down, the other ranking tends to go up. In terms most relevant to America's political discussion, business-friendly policies not only do not correlate with greater economic growth but also appear to drag economic growth rankings down.
Even I find that result surprising, but until I see Kristi's counter-spreadsheet, I have to say numbers don't lie. But Kristi's Republican slogans apparently do.
Times like these make me feel secure that we have a college graduate as a respresentative... Oh, wait.
Regulation creates Monopolies, so it is who controls the economic growth that should be at issue. The GOP likes regulation, they say the opposite to attract anti-socialists conservatives.
Cory, you make me wish I had actually learned to use spreadsheets instead of scissors and tape. I will add a link to your comment to mine at Dakota Today. I hope people actually interested in reality instead of mythology will take a serious look at both your reasoned post and my rant as well. As I indicated at Dakota Today, the impact of the data may be tempered somewhat by the stage the economies may be in now, but I don't know that.
About fifteen years ago I was getting INC. magazine and they had a list of the 500 fastest growing companies and articles about them each year. There was a little grey box with a one paragraph article in the bottom corner of one page. It stated that Mississippi, Alabama and South Dakota routinely had the lowest taxes and wages and routinely took three of the bottom five places in number of fastest growing companies as a percent of population. Talking about being business friendly and having well enough paid customers to actually attract business is two totally different things.
These metrics are important. But they do not include the stifling regulations which are impeding any recovery. The problem are regulations which add cost of doing business.
I thought the problem on Wall Street that collapsed the economy was not enough regulation, especially in the area of credit default swaps, derivatives, the bundling of bad real estate loans and selling short. But then what do I know?
Most polls say regulation is not the problem, but rather, it's demand. Nobody's buying.
http://money.cnn.com/2011/10/14/news/economy/regulation_job_creation/index.htm
Maybe the nature of the regulation has more to do with these results than the sheer volume of regulation.
For example, antitrust laws should make it easier for small businesses to get going and stay going, by making it difficult for large companies to create monopolies and undercut Mom and Pop. Right?
Countries such as Germany and Canada, with lots of taxes and regulation, are doing quite well right now. Maybe it has more to do with personal responsibility than government regulation ...
People who like to "captain their own ships" will more likely create a society with lots of small businesses (all other factors holding constant) than people who like to "row ships for other people." Right?
I do not mean to suggest that we ought to ramp up regulation here in the USA (or in South Dakota) just because a certain statistical chart suggests a weak inverse correlation. We could do with some more finely tuned regulations, though, I think.
Hey Rog: Nebraska has plenty of dots on this map of bridled capitalism:
http://www.npr.org/series/142000896/poisoned-places-toxic-air-neglected-communities
I agree, Stan, that these results do not tell us to crank up regulation as a stimulus measure. The correlations are weak, definitely not the kind on which I'd bank my policy proposals. But that applies to Noem's fantasy politics as well, where she thinks she just has to wave her magic Reagan wand and make bunnies fart big GDP gains. The numbers seem to back your last line, that when we debate regulations, we need to look at tuning them properly to do the most good and not sweat the abstract and unsupported idea that regulations hinder GDP growth.
Douglas, I do agree there's a whole lot more analysis to be done, especially on stages of growth. Troy, I will acknowledge that the numbers above don't encompass all forms of regulation—for instance, I'm not sure where environmental regulations fit into these categories.
To learn more, check out the World Bank's own explanation of their "Doing Business" methodology. Yummy!
It appeared to me that the countries regulation status was the same for all. That suggests that the kind of regulations is not a problem evaluated or perhaps even relevant.
What this does indicate as Cory has stated is that Noem's anti-regulation rhetoric and "effort" is totally worthless.
Friends, ease of doing business from Govt regulations is necessity but not sufficient. Ultimately market will decide the success of failure of business. But easier regulations and quicker Govt decisions will certainly facilitate economic growth. Therefore its is also extremely important. To see its relevance you have to experience countries in the lower bracket of the ranking.