Saturday, December 1, 2012

Embarassingly Bad Arithmetic

Happy birthday, Dad.

I have many times criticized Milton Friedman's work as bad arithmetic. Friedman's famous graphs show that inflation follows a path unbelievably similar to his "money relative to output" ratio. This ratio is the problem.

The "output" in Friedman's ratio is the value of output after adjusting for inflation.

Inflation is removed from the denominator of Friedman's ratio. This arithmetic is identical to multiplying inflation into the result. Friedman's famous ratio shows a similarity to inflation because he multiplies inflation into his result. It is just bad arithmetic.

Economists seem to think Friedman's graphs are good evidence. I am telling you I don't care how good Friedman's economics is; simple arithmetic shows that his graphs are no better than a hoax.

But Friedman is not the only economist who cannot do math. The world is full of 'em, it seems. Recently I have been dwelling on the oft repeated thought that Federal spending growth is bad for economic growth.

But "bad economic growth" is measured as a slow rate of increase in GDP. And Federal spending is measured by comparison to GDP. So when GDP increases slowly, it makes Federal spending seem to increase rapidly.

The ratio "Federal spending relative to GDP" makes Federal spending appear to be increasing rapidly because GDP is increasing slowly. You might deny the causality that I here emphasize. But think about it: What do we know for sure? We know for sure that GDP growth is slow.

Everything else is just embarrassingly bad, agenda-driven arithmetic.

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