## Thursday, September 27, 2012

### No Matter What the Red Line Does

The black line is prices.

Multiply the red line by prices, and you get the blue line.

The blue line is similar to the black line. Similar to prices.

"Of course it is," you say. "That's what happens when you multiply by prices."

Well yes, of course it is. But dividing something by "real output" is just another way to multiply by prices. Surreptitiously. It is this multiplying by prices, in my first graph, that makes Federal Spending relative to output look similar to prices. It is this that makes labor cost look similar to prices. And it is this that makes Milton Friedman's "money relative to output" look similar to prices.

1. The red line is Federal spending as a percent of GDP. The blue has prices factored in:

 Graph 1: The blue line is very similar to prices

2. The red line is total labor cost as a percent of GDP (Index 2005=100). The blue has prices factored in:

 Graph #2: The blue line is very similar to prices

3. The red line is M2 money as a percent of GDP. The blue has prices factored in:

 Graph #3: The blue line is similar to prices

Of the three graphs, it appears that Friedman's "money relative to output" shows the least similarity to prices. Friedman's evidence is the weakest of the three.

Of course, it isn't evidence at all, really. It is only the surreptitious factoring-in of prices.

Rule #2: If "real output" is in the denominator, reject first and ask questions later.