View source for Do Nordic Countries Really Have Less Regulation?

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[[Category:Matt Bruenig]]
[[Category:Regulation]]
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{{URL | url = http://peoplespolicyproject.org/2018/06/11/do-nordic-countries-really-have-less-regulation/}}
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{{DES | des = "The truth is that nobody has found a good way to measure the substantive regulatory differences between the Nordics and the US." | show=}}
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One of the Smart Conservative lines on the Nordic countries is that they have less regulation than the US has. The upshot of this is that they succeed because of their conservative attributes (low regulation and free markets) and not because of their left-wing attributes (strong unions, big public sectors, and substantial state ownership). This specific understanding informs a lot of the work of the Niskanen Center, including an April paper from Samuel Hammond.

The basic problem with these arguments is that efforts to measure regulatory differences between the US and Nordic countries don’t really pass the laugh test. Hammond relies upon the Heritage Foundation’s Index of Economic Freedom, which itself relies upon the World Bank’s Doing Business report. After applying some modest transformations to the World Bank data, Heritage reports that “Business Freedom” is higher in all Nordic countries than it is in the US.

But how does Heritage measure Business Freedom? The short of it is that they look at (1) how many steps it takes, (2) how much time it takes, and (3) how much it costs to (a) open a business, (b) obtain a construction permit, (c) close a business, and (d) get electricity. That’s it. The kind of regulations companies actually complain about — safety, environment, consumer protection, product liability, and so on — are left out entirely.

In addition to being largely irrelevant, this measure of regulation seems to really overstate how much harder it is to do this kind of stuff in the US.

For instance, starting a business in the US (New York City in particular) is said to take 6 steps versus 3 in Finland and Sweden, 4 in Norway, and 5 in Denmark. That is a big difference in percent terms (US is twice as hard as Finland and Sweden!). But it really does not seem like that big of a deal and certainly does not seem like good proof of the theory that low regulatory burdens are driving Nordic success.

The main driver of US regulatory inefficiency on this measure is that a New York LLC has to register with three different tax authorities instead of one, which does seem dumb, but also does not seem that hard to do. Also, I am not sure 6 steps even accurately describes the lived experience of registering a New York LLC given the fact that relatively inexpensive services like Legal Zoom will streamline the whole process for people.

The same story is true of the other measures as well. Getting a construction permit takes a few more steps in the US (though less days than in Sweden and Norway) and getting electricity for a new building takes a few days longer with a few more steps. There is no way these kinds of differences have any significant effect on the way these economies operate and there is no reason to believe that they are representative of how strict the kind of regulation people actually care about is.

The truth is that nobody has found a good way to measure the substantive regulatory differences between the Nordics and the US. The World Bank measures some stuff around business formation because that is information it can actually get its hands on and then the Heritage Foundation repackages it for the same reason. But throwing the resulting index number from those measurements into a regression and thinking you are capturing anything meaningful about regulatory burdens is beyond silly.

There have been more extensive efforts recently to measure regulation in the US, most prominently the creation of the RegData database. This database attempts to count all of the regulations by adding up the number of times the words “shall,” “must,” and so on appear in US regulatory codes. Once again, this is kind of a goofy approach, but notably Alex Tabarrok found that the level of regulatory burden so defined has had no discernible effect on trends in entrepreneurial activity.

So the cross-country regulation comparisons are so shallow as to be worthless and slightly less shallow US-specific regulation measurements do not support theories that regulations hold back economic dynamism. So neither the claim that the Nordics are lighter on regulation nor the underlying premise that lighter regulation matters is really supportable given the evidence available.
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