Laffer up to his old tricks again

As if we needed more proof that Laffer sucks at drawing curves...

Popular views on the effectiveness of fiscal stimulus v. austerity measures will likely determine the outcome in November's elections.  That is why GOP hack economist Art Laffer is deliberately muddying the waters with his latest WSJ op-ed.  It's not surprising that this facile analysis came from the same guy whose claim to fame is scribbling an arc on a napkin for Dick Cheney.

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.

The Real 'Stimulus' Record

By Arthur Laffer

August 5, 2012 | Wall Street Journal

URL:  http://online.wsj.com/article/SB10000872396390444873204577537244225685010.html?mod=WSJ_Opinion_LEADTop

Krugman: Automatic stabilizers, not gov't expansion, explain deficits

I'm surprised that Nobel economist Paul Krugman didn't use the economic term for the phenomenon he described: automatic stabilizers. In other words, our huge deficits are mostly a result of 1) federal benefits already on the books for which millions more people in economic distress have become eligible, and 2) a huge decrease in tax receipts as a result of job losses and lower sales turnover.

Debunking the Myth of the Big Spender

By Paul Krugman

November 2, 2010 | New York Times

While I have written about this topic recently, there is a bit more to the story on how government spending has not, contrary to what you may have heard, surged in the United States under President Barack Obama.

Cue the usual suspects, shouting that I am lying.

Here is a calculation that should make things a bit clearer. If there had not been an economic crisis and a change in which party had control of government over the last three years, what changes would we have expected to see in total government spending — federal, state and local? Probably that spending would follow a growth trend in the economy — that is, real gross domestic product, which accounts for inflation, would grow with the economy's potential, and government spending would grow at the pace of real G.D.P.

Now, over the period between 2000-2007 — from business cycle peak to business cycle peak — real G.D.P. grew by 2.4 percent a year. So a reasonable estimate for trend growth is 2.4 percent per year, or about 7.3 percent since 2007.

Accounting for inflation — the G.D.P. price deflator metric rose 4.1 percent from the second quarter in 2007 to the second quarter of 2010 — "normal" growth in government spending would have been 11.7 percent over the past three years. Actual growth has been higher: about 19.5 percent.

So government spending is about 7 percent higher, or about $350 billion more, than a simple trend projection would have suggested. So what accounts for the higher spending? None of it is government consumption; it's all in transfer payments. Data from the Bureau of Economic Analysis is not quite as helpful as I'd like, but it is clear that a large chunk, roughly $100 billion, is unemployment benefits, which have surged along with unemployment, and another large chunk is Medicaid spending, which has surged because the slump has impoverished more people. Add more for other safety-net programs, such as food stamps. Also, Social Security and Medicare outlays have gone up about $85 billion more than my 11.7 percent projection — perhaps due to increases in health-care costs and the fact that baby boomers are aging and maybe even because some people retired early because they could not find jobs.

And that basically explains the growth in government spending. No giant expansion of the welfare state — just business as usual in the face of a horrific slump.

For all those who do not believe me, the simple graphic on this page showing government spending compared with revenue presents further evidence that government spending has merely continued to rise more or less on its precrisis trend. Revenue has plunged because the economy is deeply depressed.

The giant increases in government spending we keep hearing about are a myth. If there had been more truth to it, the economy wouldn't be as depressed as it is.

[He means, that if there had been additional spending that didn't automatically kick in because of high unemployment/low incomes, i.e. if there had been real fiscal stimulus, then aggregate demand would have been boosted and the recession wouldn't be so bad. - J]

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Backstory: Budget Cuts Appealing To Voters

The United States's federal debt has reached $13.7 trillion, and as the Nov. 2 midterm elections draw closer, Republicans have intensified their calls to cut spending as a remedy to this fiscal situation.

So far, this stance has proved politically successful — polls across the nation predict a Republican landslide.

However, Republican legislators have proposed only a few unspecific actions that might curtail spending. Several have demanded a repeal of new health-care legislation, while others, such as Representative Paul D. Ryan of Wisconsin, want to put in place cuts to programs like Social Security and Medicare. A careful comparison shows that Republican policies of the past 10 years will prove to be more costly than policies approved by the Democratic Congress over the last four.

The Congressional Budget Office, an independent government agency, calculates that the 2003 Republican-approved expansion of a government-funded prescription drug program will cost the United States $1.1 trillion over the next 10 years — more than the recently approved new health care initiative and President Barack Obama's stimulus package combined.

[Yeah, but gray-haired senior citizens worked hard all their lives and they deserve their Big Gubument handouts that will break the nation's piggy bank! - J]

While the results of the election will help determine the future path for economic policy, new ideas will likely be on the table. In districts where incumbents are running for re-election, 6 in 10 voters say it is time to give someone new a chance, according to a New York Times/CBS News poll released Oct. 27.