Must-Read: Very welcome backup from the very-sharp and extremely hard-working newly ex-academic Noah Smith. I very much hope his new career path is very successful: it deserves to be…
: Brad DeLong Pulpifies a Cochrane Graph: “I’ve always been highly skeptical of John Cochrane’s claim that if we simply launched a massive deregulatory effort…
…it would make us many times richer than we are today. Cochrane typically shows a graph of the World Bank’s ‘ease of doing business’ rankings vs. GDP, and claims that… if we boost our World Bank ranking slightly past the (totally hypothetical) ‘frontier’, we can make our country five times as rich as it currently is…. Brad DeLong, however, has done me one better. In a short yet magisterial blog post, DeLong shows that even if Cochrane is right that countries can move freely around the World Bank ranking graph, the policy conclusions are incredibly sensitive to the choice of functional form….
DeLong… decides to do his own curve-fitting exercise. Instead of a linear model for log GDP, he fits a quadratic polynomial, a cubic polynomial, and a quartic polynomial…. Cochrane’s conclusion disappears entirely! As soon as you add even a little curvature to the function, the data tell us that the U.S. is actually at or very near the optimal policy frontier. DeLong also posts his R code in case you want to play with it yourself. This is a dramatic pulpification of a type rarely seen these days. (And Greg Mankiw gets caught in the blast wave.)…
You’d think Cochrane would care about this possibility enough to at least play around with slightly different functional forms before declaring in the Wall Street Journal that we can boost our per capita income to $400,000 per person by launching an all-out attack on the regulatory state. I mean, how much effort does it take? Not much. And this is an important issue. An all-out attack on the regulatory state would inevitably destroy many regulations that have a net social benefit. The cost would be high. Economists shouldn’t bend over backwards to try to show that the benefits would be even higher. That’s just not good policy advice.
Play with the R-code if you want to see how much a more flexible functional form wants to say that the U.S. has the optimal “Business Climate”: http://tinyurl.com/dl20160505c. I.e.: