Wednesday, January 23, 2013

Voodoo Economics

Paul Krugman likes to show numbers in the manner which best favors his argument. Profits for big corporations are stated in raw numbers, for instance, because "Blowhard Corp made $23 billion in profit last week," makes big business look worse than saying that "Blowhard Corp made 2.3% profit on $1 trillion in sales."

Likewise, government borrowing is never related to total government revenue or spending, which would show a ratio of very nearly 50% and scare the crap out of everyone, but rather to the total economy or GDP, where it reflects a much smaller percentage. Krugman et al are unconcerned that the two numbers are only marginally related and that the comparison is much like comparing your personal borrowing to your employer's revenue rather than to your own personal income. Your mortgage is probably 150% of your annual income, which is pretty alarming, but it’s only 1.2% of your employer’s revenue so the lender can rest easy. That would make some sense, I guess, if your employer was paying your mortgage.

Unfortunately for Paul Krugman and company, government borrowing is becoming a rather alarmingly high percentage of current GDP. Krugman points out that this is partly due to the GDP being reduced by the depression, and that we should therefore look at government borrowing as a percentage of the potential GDP. By doing this, he illustrates that government borrowing under Obama has plunged dramatically, and he has a chart to prove it.

This is quintessential economic argument. If you can’t win your argument with real numbers, then just switch to using imaginary numbers.


bruce said...

If he used debt to income ratio (like any reasonable & prudent financiasl institution would) like you or I would be judged, he'd get his ass kicked out on the street.

Of course, he going to use obfusticatory language, big multi-syllabic words, imaginary numbers, etc. To do otherwise would, as you said scare the crap out of everyone.

If he's going to go even farther regular GDP - and use "potential" GDP, why not include the GDP of the rest of the planet? We're all a global economy, right? That would make as much sense as the other voodoo stuff he's pontificating about.

Thank you, Dr. Krugman on behalf of math majors everywhere for proving there is another place for imaginary numbers.

(Full disclosure, I did use imaginary numbers in transform analysis in electronics studies).

Jayhawk said...

Well, sure, I used imaginary numbers in thermodynamics, too. Dr. Reinders, our thermodynamics instructor in Nuclear Power school, went even further; he crossed out all the numbers and solved problems with no numbers at all, telling us that the numbers were not important.

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