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Sunday, August 19, 2012

Steve Roth — Laffer: Laughable As Always

R Davis spends a whole lot of words (and numbers) explaining why Arthur Laffer’slatest 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)."
Asymptosis
Laffer: Laughable As Always
Steve Roth
at

14 comments:

  1. Matt FrankoAugust 19, 2012 at 9:38 PM

    Is this just a High school math mistake which is evidence of complete incompetence/ stupidity .... or is this evidence of a conspiracy... ?

    I say stupidity... rsp

    ReplyDelete
  2. TrixieAugust 19, 2012 at 10:07 PM

    I actually see this quite a bit. Doesn't even phase me anymore.

    And people just can't get their heads around the fact that the economy suffered a major collapse in revenues, causing a loss of jobs, and with it a ballooning of gov spending in the form of automatic stabilizers.

    There was no massive increase in the "size" of gov, it's just basic math.

    ReplyDelete
  3. ClonalAugust 19, 2012 at 10:28 PM

    This is very similar to the error made by Milton Friedman, that formed the basis of his "inflation is monetary phenomenon." This was discussed by me and Art Shipman on his blog - New Arthurian Economics - a while back

    ReplyDelete
  4. yAugust 20, 2012 at 6:17 AM

    Btw, I sent an email to the Fed to confirm something and got this response:

    "Thank you for your recent correspondence to the Federal Reserve.

    As the provisions in the Federal Reserve Act gives Congress comprehensive authority over the currency and the monetary system of the United States, Federal Reserve notes, issued pursuant to Section 16 of the Federal Reserve Act (12 U.S.C. Section 411), are obligations of the United States government.

    I hope this information is helpful.

    Sincerely,

    JPD
    Board Staff"




    ReplyDelete
  5. yAugust 20, 2012 at 6:26 AM

    Of course,

    Treasury notes, bills and bonds are also obligations of the United States government. They are also referred to as US government securities.

    Which is interesting, again, as the Bureau of Engraving and Printing, which prints Federal Reserve notes (and which is part of the Treasury), also describes Federal Reserve notes as "US government securities".

    "The mission of the Bureau of Engraving and Printing is to serve as the Federal Government's most secure and efficient source of vital Government securities. The BEP manufactures the financial and other securities of the United States. Accordingly, the BEP designs, prints, and furnishes a large variety of security products, including Federal Reserve Notes, Treasury securities, identification cards, naturalization certificates, and other special security documents."

    (I've sent them an email too just to confirm that Fed notes are indeed "government securities")

    ReplyDelete
  6. paul meliAugust 20, 2012 at 7:29 AM

    y: Good work.

    As the saying goes "follow the money".

    ReplyDelete
  7. John ZelnickerAugust 20, 2012 at 8:12 AM

    Speaking of "following the money", can someone direct me to information on which entities actually hold the outstanding Treasury securities? I trying to get a handle on how much is actually held outside of other federal government entities by the public, foreign governments, etc.

    Thank you.

    ReplyDelete
  8. mike normanAugust 20, 2012 at 9:34 AM

    "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."

    Yes, Laffer does not understand it, which is a testament to how truly dismal mainstream economics has become.

    ReplyDelete
  9. mike normanAugust 20, 2012 at 9:36 AM

    @John Zelnicker:

    This gives all the foreign holdings broken down by country.
    http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

    ReplyDelete
  10. Matt FrankoAugust 20, 2012 at 10:35 AM

    Y,

    Yes good job.

    This is interesting from Section 16 of the FRA that they referenced in their correspondence to you:

    "5. Deposit to Reduce Liability for Outstanding Notes
    Any Federal Reserve bank may at any time reduce its liability for outstanding Federal Reserve notes by depositing with the Federal Reserve agent its Federal Reserve notes, gold certificates, Special Drawing Right certificates, or lawful money of the United States."

    This is where I think Beo's $1T coin comes in, ie it is "lawful money of the United States" and if the Treasury deposits a $1T coin into a Federal Reserve Bank, that Bank of course can reduce it's total liabilities by depositing this coin with the Fed....

    Interesting... rsp,

    ReplyDelete
  11. EdmundAugust 20, 2012 at 12:40 PM

    Laffer must have been taught regression analysis at some point. He must realize there's an endogeneity problem here - mustn't he?

    ReplyDelete
  12. Matt FrankoAugust 20, 2012 at 12:48 PM

    Ed,

    "He must realize there's an endogeneity problem here - mustn't he?"

    No he mustn't imo (this abstraction is apparently hard to impossible for many humans) .... rsp,

    ReplyDelete
  13. John ZelnickerAugust 21, 2012 at 6:20 AM

    Mike -- Thanks for the link.

    ReplyDelete
  14. Matt FrankoAugust 21, 2012 at 7:29 AM

    Here's FDO in a comment over at Warren's:

    "Your first point (and most important one) was totally wrong. The total government deficit as a % of GDP averaged 450 billion between 2003 and 2007. And nominal GDP averaged 6%."

    S--t happens...

    rsp

    ReplyDelete