Laffer: Laughable As Always
R Davis spends a whole lot of words (and numbers) explaining why Arthur Laffer’s latest WSJ editorial is false and ridiculous, but those who think about data — at all — really only need to read one line. Laffer’s key error — which a high-school statistics student could spot — is to:
compare growth in GDP rates with government spending as a percent of GDP. He is testing for a relationship between two variables but expressing one of them (spending) in terms of the other (GDP).
So when Estonia or Ireland’s GDP drops, its government spending/GDP increases.
This is obvious proof that higher government spending causes lower GDP.
It’s hard to imagine that a well-educated person could not be aware of how specious this argument is. But I’m guessing that he really and truly does not realize it.
Cross-posted at Asymptosis.
You have hit on one of my pet peeves. Hardly a secret here, I expect. 😉 There are good reasons, as a rule, to express various variables in terms of their ratio to GDP. However, there is a temptation to ignore the denominator, at least among the mathematically unsophisticated.
One problem is, as you point out, that when people talk about, say, the deficit/GDP, and say that it is too high, they only talk about decreasing the deficit and do not talk about increasing the GDP. Now, as I said, you expect that from the mathematically ignorant. Before the current crisis, I did not expect it from economists.
It wasn’t written for you. A discerning or critical reader, that is. It is supposed to affect others–the faithful and the casual reader. They will say “I read it in the WSJ. Can’t argue with the data. A famous economist proved it. If you disagree, either you’re wrong or it’s just opinion and nobody really knows.” This is another case of professional malpractice by an economist for political purposes. Sad.
It is somewhat like “people who go to doctors frequently have more health probleme than those who go rarely. Therefore doctors make you sick.”
in Jonathan Swift’s day that was almost certainly true.
Even in my day it often looks true.