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| As if we needed more proof that Laffer sucks at drawing curves... |
Anyway, his only real data here is the relation between spending from 2007-09 and rate of GDP growth over the same period. The rest is a lot of noise you'd see in, say, one of Thomas Sowell's lazy, phoned-in editorials.
This data tells us there is a weak negative correlation, -0.23, between governments' spending and their rates of GDP growth. That is, as one tended to decrease, the other tended to increase, and vice-versa. However, any statistician will tell you can't take two variables and draw conclusions about causality, especially with such a low correlation coefficient.
Indeed there are some big, unexplained outliers like Hungary, that increased spending only 0.7 percent but saw its rate of GDP growth decline by 9.9 percent. That's a greater decline than in the U.S., which increased spending 7.3 percent. Or take Israel, which cut spending 0.9 percent but still saw its rate of GDP growth decline 6.2 percent. Or Switzerland, which also cut spending 0.2 percent and still lost 7.1 percent of GDP growth rate.
Laffer doesn't even try to explain these outliers because he can't; or if he did try, he'd have to admit that many more variables played a role, for instance (just thinking logically here), the percent of each country's pre-crisis GDP represented by banks and financial services.
Next, all these economies were going to shrink with or without stimulus spending. It was a question of how much. Furthermore, it is entirely reasonable to suppose that economies that were going to suffer the worst from a financial crisis, for example, those more dependent on the financial sector, knew they had to spend more on stimulus.
Finally, there is a timing problem here: three years is a long time and some economies tanked very quickly, whereas stimulus wasn't passed as a reaction until later. For instance, the U.S. recession started in December 2007 but Obama's ARRA (stimulus bill) wasn't passed until February 2009. Laffer's GDP analysis stops in 2009... effectively blocking out the effect of Obama's stimulus bill. Official data from the BEA shows us that U.S. GDP growth was negative in 2009 but then roared back 3.8 percent in 2010 and 4 percent in 2011 after the stimulus bill (adjusted for current dollars).
The truth is, we will never know how much worse it would have been without stimulus and automatic stabilizers to workers' income. We certainly would not want to find out firsthand.
By Arthur Laffer
August 5, 2012 | Wall Street Journal
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