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 Angry Bear.
Comments
2 responses to “Laffer: Laughable As Always”
I have misplaced the clippings and have only my notes from the old computer, but:
Wall St Journal, 4 Jan 1995 (editorial), and
Investors Business Daily, 7 Feb 1995, and
Wall St Journal, 3 March 1995 (page A10)
all complained about slow economic growth, showed a graph of Federal Spending relative to GDP, and called the graph evidence of excessive Federal Spending.
The great irony is that the original complaint — slow GDP growth — invalidates the so-called evidence they offer.
Good post.
@The Arthurian
Art,
This is very similar to the error made by Milton Friedman, that we discussed earlier on your blog