Wednesday, September 26, 2012

The Lie

What's Wrong with this Picture?

Graph #1: Federal Spending Relative to Output

Hint: It uses "real output" in the denominator.

My sense of humor is a little off from the rest of the world. I'd best not leave it at that. Federal spending was not really so small, in the early years shown. Nor did it increase so rapidly in the years since.

Graph #1 is not the honest picture of "Federal Spending Relative to GDP". The honest picture shows Federal spending increasing, but nowhere near as much as on Graph #1. The honest picture is the red line in Graph #2, below:

Graph #2: The Blue Line is the Red Line with Prices Multiplied In

Graph #2 shows the same data as Graph #1 (blue, again) plus the honest picture (red). The red line does not use the "cheat" that I've been talking about for the past week. The blue line uses the cheat.

The cheat is to use "real output" in the denominator. It makes the resulting numbers increase more rapidly than honest numbers, in a pattern that mimics inflation. That's what makes the blue line so up-sloping on these graphs, and so similar to the trend of prices:

Graph 3: The Black Line is Prices. The Blue Line is the Cheat

The same cheat displayed in these three graphs is typically used in "Money relative to output" graphs and in "Unit Labor Cost" graphs. In all three cases, what seems to be a shocking increase is really just an outrageous lie.

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