The Wall Street Journal, building on its solid reputation for providing a platform for moderately to extremely well-known economists to embarrass themselves, featured an op-ed today by Arthur Laffer. Laffer certainly qualifies as a well-known economist, and he takes full advantage of the opportunity provided so generously by the Journal to embarrass himself.
Laffer’s op-ed is primarily a commentary on a table constructed by Laffer, which I reproduce herewith.
For each of the 34 OECD countries, the table provides two numbers. The first number has the following description: “change in government spending as a percentage of GDP from 2007 to 2009.” This number is treated by Laffer as a proxy for the amount of stimulus spending to counteract the 2008-09 recession. The second number has the following description: “change in real GDP growth from 2006-2007 to 2008-2009.” The second number is treated by Laffer as a proxy of the effectiveness of stimulus spending. Laffer thus regards the correlation between the two numbers as evidence on whether government spending actually helped to achieve a recovery from the 2008-09 recession.
Now, there are multiple problems with this starting with the following: Laffer’s description of the first number is ambiguous to the point of incomprehension. Does Laffer mean to say that he is subtracting the 2007 ratio of government spending to GDP in each country from the same ratio in 2009? Or, does he mean that he is subtracting total government spending in each country in 2007 from total government spending in 2009, and expressing that difference as a percentage of GDP in that country in 2007. Which calculation he is performing makes a big difference. Suppose Estonia — Laffer’s poster child for Keynesian stimulus — kept spending unchanged between 2007 and 2009, but GDP contracted by one-third. If Laffer is calculating his first number by the first method, he comes up with an increase in government spending as a percentage of GDP of 33%, even though government spending did not change. That is just perverse. So how did Laffer perform his calculation? He doesn’t say. All he does is cite the IMF as the source for his table. Thanks a lot, Art; that was really helpful, but unfortunately, not helpful enough to figure out what you are talking about.
But I didn’t just give up; I persisted. I thought to myself: “maybe I can calculate the number both ways for the US using readily available statistics on GDP and government spending and see which method allows me to reproduce his result of a 7.3% increase in US government spending as a percentage of US GDP between 2007 and 2009.” And that’s what I did. Just one problem, though. Adding state, local, and federal spending as a percentage of GDP in 2007, I came up with about 35%. Doing the same calculation for 2009, I came up with about 40%, implying a change of slightly over 5%, well under Laffer’s number of 7.3%. Inasmuch as nominal US GDP in 2009 was greater than nominal US GDP in 2007, the alternative method would have given me a number even smaller than I got using the first method. So I have no idea how Laffer got his 7.3% number for the US, and I seriously doubt that there was any valid way by which he could have arrived at an increase in government spending as a percentage of US GDP between 2007 and 2009 greater than 7%. So why should I even bother checking any of his other numbers?
As if this were not enough, Laffer offers an equally mysterious second number, the difference between the 2006-07 growth rate in each country and the 2008-09 growth rate. But wait, 2008-09 was when there was a recession, not a recovery. So how does Laffer know that his second number is measuring the strength the forces of recovery rather than the strength of the forces of contraction? Answer: He doesn’t. He doesn’t, because he can’t, there being no way to disentangle the two.
Finally – by which I mean, not that I am exhausting the criticisms that could be made of what Laffer has written, but that I am exhausting my own, and perhaps my readers’, patience – suppose that Laffer’s numbers had been accurately calculated, and second that his numbers actually mean something approximating what Laffer purports them to mean. Does the not-very-strong negative correlation that Laffer finds between increases in government spending and increases in the rate of growth of real GDP imply that government spending is useless in stimulating a recovery, as he claims it does? Not at all. As a former member of the University of Chicago faculty, Laffer should be aware of the concept of automatic fiscal stabilizers that none other than Milton Friedman often referred to in his writings on fiscal policy. Because almost all countries have some sort of social safety net, recessions automatically increase government spending through programs like unemployment insurance, food stamps, Medicaid and others that provide services and benefits to people who lose their jobs in recessions. The worse the recession, the greater the automatic increase in government spending. Thus, the negative correlation between government spending and economic growth that Laffer purports to uncover is easily explained by the existence of automatic stabilizers. The worse the recession, the greater the induced increase in government spending.
Moreover, suppose we knew with certainty that government spending stimulates a recovery, and suppose that governments, secure in that knowledge, increased their spending in recessions to achieve a recovery. If you went out and looked at the statistics on GDP and government spending, what would you find? You would find that governments increased spending when the economy was contracting and decreased spending when the economy was expanding. So what empirical correlation would you expect to observe between government spending and growth in real GDP? Exactly the one that Laffer finds and claims proves just the opposite of what we “know” to be true.
Art, heckuva job.
PS If Laffer had the sense to read Nick Rowe’s blog he might not have made such a ridiculous argument.
PPS Lars Christensen and Brad Delong are also exasperated with Laffer.
Uneasy Money 
David, it seems that “President Derangement Syndrome” is strongly contagious and even people who used to be clever economists will be infected. It is hard to detect the source of this madness, but some evidence points and affiliation with the Wall Street Journal – also known as Crackpot Times.
But seriously, did Laffer seriously believe that other economists would just sit around a look at his data say “wauw – why did we have this discussion about fiscal policy for all these years. Laffer is of course right!”??
With friends like Laffer, Mulligan, Cochrane, Meltzer and Taylor it is pretty hard to be taken serious anymore…
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Lars, I am actually not as surprised by Laffer’s piece as I was by Meltzer’s. Laffer is a smart guy, but he long ago gave up any pretensions to academic standing, which was not true, at least until recently, of Meltzer. But standards about what is acceptable and what is not acceptable seem to be collapsing all around us. As the great Cole Porter put it prophetically a long, long time ago,
In olden days,
A glimpse of stocking
Was looked on
As something shocking
Now Heaven knows,
Anything goes!
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David, I am surely also much more disappointed by Meltzer. Meltzer, however, is getting is economics wrong. He can be forgiven for that – even though it is pretty bad. Laffer is MANIPULATING the numbers. That is certainly a lot more dishonest and it makes you think what he did in his “regular” research.
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Laffer is, well, sometimes a laugher.
BTW, I once pursued a real hottie in Los Angeles, and was snubbed by her (hard to believe, no?). About a year later she married Mr. Laffer. But, they soon divorced. I never saw her again.
I forgive )indeed, sympathize with) Mr. Laffer for any sins of the flesh, but this latest sin of the intellect is beyond the pale….
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The fundamental undeniable fact of the universe is that human beings act but with very limited knowledge of each other’s subjective values. Further, humans engage in voluntary cooperative economic exchange where each party believes he/she has improved her condition. There is no “equivalence” in such an exchange except for the approximate valuation given to the transaction by the use of money. Such transactions are often referred to as “spending” but that provides an incomplete picture because such a reference focuses only upon the buyer.
The fundamental basis of the Keynesian worldview is to ignore the underlying fundamental reality of human exchange and to suggest, without basis in fact or theory, that the exchange process is analogous to physics. According to this “windup toddler toy model” of economics, the process of voluntary exchange allegedly requires an external source to provide it with “momentum” or “stimulus”. The free actors left to themselves will allegedly not be able to generate the necessary “momentum” for the toy to spin to its full potential so that the process needs a source of ubiquitous external oversight in the form of the totalitarian-minded Keynesians to provide that “momentum”. How convenient.
Due either to stupidity or dishonesty (probably both), the Keynesians must always focus upon “spending” while insisting that two completely different phenomena, voluntary exchange and government “spending” are really the same thing. Not only that, but they insist that government “spending” can replace private “spending” in a positive manner. Not only that, but they insist that a lack of private spending suggests a lack of “momentum” which can be and must be provided by government “spending”.
In reality, the only thing that the creation of fiat funny money can functionally accomplish is to steal purchasing power from those holding the existing money to those getting the new money. It is likely that those getting the new money will probably “spend” it sooner than the real owners of the purchasing power would have, thereby making the dimwitted Keynesian think he has provided the necessary “momentum” to the “spending” process. The catastrophic secondary effect is to distort the pricing process, the information system necessary for informed economic calculation. The only thing that government “spending” can accomplish is to steal resources from others and [mis]direct those resources as the government chooses. Since the real owner of those resources was probably not “spending” in the present time as fast as the Keynesian deemed appropriate and while the government was “spending” in the present time, the dimwitted Keynesian can shout with joy that he has provided the necessary “momentum” (stimulus) to the “windup toddler toy” that is his “model” of free exchange. In reality, those resources have simply been misdirected, but the “spending” itself has distorted the price system and thus impaired informed economic calculation.
Because the “economy” is not a windup toddler toy and does not possess or lack momentum, the entire Keynesian theory and worldview is preposterous.
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David,
You were right to characterize Laffer as taking an anti-enlightenment stance for the WSJ. Allow me to place this in a slightly broader perspective. Several years ago, Texas was taking certain references about the enlightenment out of their textbooks – which especially matters as these decisions reflect on other public textbooks in the nation. Some people are now convinced that nothing really needs to be represented accurately anymore as knowledge supposedly is not near as important as real property! When did that attitude take over? Prisoners in some states now have limited access to books and even paper to write on. In the present I understand there are now battles over critical thinking and logic which ‘supposedly’ have no place in public education. I beg to differ, they do. I certainly could have benefited from those subjects when I was young, it would have made a difference in everything else I studied thereafter.
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I found out where Laffer got the change in government spending as a percentage of GDP. It’s on the IMF website, and it checks out.
If you look at the WEO and pick the G7 countries and then select the change in government spending as a percentage of GDP data index (as well as set the dates from 2006-2009), the numbers check out. He’s using percentage point calculations.
I have NO IDEA where he got the contractionary numbers representing change in RGDP for any of the countries listed. I checked on the IMF website ‘Change in GDP using constant dollars’ and they don’t check out…not even remotely close.
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“Bob”
Two points: 1) There are many fundamental facts in the universe, and some of them are relevant to macroeconomics – you should refocus on those facts. 2) Placing quotes around a position you wish to discredit is not an adequate substitute for making a reasoned argument against said position.
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Wow. You guys sure attract a high class of troll. I wish I had ones as dedicatedly loopy as Bob on my blog! (“It is clear that individual atoms act in a manner that can be explained by quantum mechanics. Therefore, Newtonian physics is a total crock, and velocity is clearly a fiction invented by dim minds that don’t understand what they’re looking at. And don’t even get me started on chemistry!”
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@Bob Roddis — If you can’t dazzle them with your brilliance, baffle them with your bullshit.
I’d dispute you point by point, but there really is nothing to be gained by that. It would be like having a conversation about astronomy with someone who can “prove” that the moon is made of green cheese.
Let’s just say that 80+ years of real-world experiences have proven the validity of Keynes’ arguments beyond the shadow of a doubt.
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I’d dispute you point by point, but there really is nothing to be gained by that.
Of course you could. That’s why you did it.
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“Due either to stupidity or dishonesty”
A perfect example of someone assuming that the nature of the social world is so simple, so transparent and so blatant that anyone who disagrees must either be an idiot or a knave. Those of us who believe in liberty have to ask ourselves: if the economy is too complex for any centralised manager to control, then isn’t it also complex enough that intelligent people might have major disagreements about it, without either being dishonest?
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Good job. I too am thoroughly depressed by the debasement of the discipline of economics – and indeed all scientific inquiry – by ideologues, clowns and fools. We have no choice but to persist with fact based inquiry but what a tough row that is proving to hoe in these troubled times.
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He gets the change in GDP growth by adding 2006 and 2007 growth and then subtracts 2008 and 2009 growth. All his “analysis” demonstrates is that the global economy suffered a severe recession in 2008 and 2009 and that government spending increased as a result.
He also dredges up the old canard that government borrowing rips money out of the private sector. It really is hopelessly flawed “analysis” which is quite frankly embarrassing.
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He also dredges up the old canard that government borrowing rips money out of the private sector.
Right. Only a MORON refuses to understand that resources (and everything else, for that matter) can be in two places at the same time.
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If we only had a nickel for each of your quotation marks, we might just stimulate the global economy.
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I just posted a new blog post on Professor Arthur Laffer’s op-ed in the Wall Street Journal and mentioned this post and Nick Rowe’s post on Milton Friedman’s Thermostat.
http://socialmacro.blogspot.com/2012/08/laffernomics-strikes-again.html
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Benjamin, So you and Art go way back. He actually wrote did some good work on international monetary economics when he was at the University of Chicago. But he obviously was interested in a career in politics.
Bob, Just wondering, since you have your own blog, why are you posting this as a comment on my blog?
Becky, There was much to criticize about the Enlightenment, but the notion that the way to respond to whatever one doesn’t like about the Enlightenment is to pretend it did not exist is obscurantist. I felt that Laffer was being an obscurantist because he was not being up-front about what his numbers meant or where got them from. The correlation that he purports to find is deeply embedded in how he defined his variables, not in the data as such. That is deeply misleading.
RJ, Thanks for finding the source. Your detective work led me to write a follow-up post in which I examine Laffer’s results in more detail..
Brian, Thanks. I agree.
sdfc, Thanks for figuring that one out. His results don’t matter one way or the other. You get essentially the same result, as I showed in my subsequent post by just subtracting 2007 growth from 2009 growth. The correlation that he finds is embedded in his definition of government stimulus as the change in government spending as a percentage of GDP which is definitionally inversely related with the growth of GDP.
Jullian, Thanks.
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To Bob Brodis: Keyneysian economics is to classical economics like quantum mechanics is to classical mechanics, ie the predictions from one will contradict the other or agree with the other depending on what one is looking at. When they contradict each other any physicist will chose the quantum mechanical answer. I claim the same to be true for Keynes and challenge you to prove otherwise (using quotes around a statement will not do it).
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Bob Keydis wrote ” they insist that a lack of private spending suggests a lack of “momentum” which can be and must be provided by government “spending”.”
Sure. First of all, the economy has a ‘momentum’ because it represents the flow of money for goods and services. There are flows, and stocks of assets. Even neo-Classical non-Keynesian economists would not be troubled by this description.
Second, what is so different if you had a gold mine and a gold discovery which increase the supply of money – precisely at a time when money was being hoarded? If people hoard money then spending falls – and the economy looses momentum. An increase in gold would offset that spending, increase the momentum and maintain spending. Modern Keynesian or monetary economists are simply arguing that the government play this role so that it is time during hoardings so that spending is maintained.
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That’s certainly true this is one of the worst recessions. The result is that we have seen an abundance of QE to stimulate the economy in a massively way. The notion that recessions = printing money is absolutely on point. We have been creating ever more dollars since ’08.
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