June 29, 2004

Economic Theory 101

Mustafa Hirji (email) at 04:17 PM

Welcome to class Mandos. We have a lot to cover, so let's begin.

The sum of all things produced in a country is the GDP. Since money is conserved, all this money has to go to someone or something. Some of it goes into government coffers. Some into private bank accounts as salary income. Some is acquired by companies. Some is invested. Some leaves the country (e.g. through trade deficits). There are many things that can happen.

Now, your friend Brad is right that the total amount of the GDP flowing to government coffers has decreased. But that's not the point Frum is making. Frum is arguing that more has flowed into government coffers than into people's bank accounts. And that's where the 31% v. 45% comes from. Of course, this simply means that both people and government are getting less of the GDP. But it doesn't refute that the people aren't getting less than the government. That's why I said to look at what each the people and the government are getting in increases and not to be distracted by these other numbers. Those numbers are correct. They don't tell us anything about the relative division of the GDP between the people and the governement.

DeLong showed that government's share of the GDP decreased. If he did the calculations for personal incomes he'd see an even sharper decrease. Frum's argument isn't about the share of the GDP change in personal or government income. Rather it is the difference in change in the share of personal and government income. And there, the personal share fell relative to the government's share. Both just happened to fall as a share of the total GDP as well.

Of course, if both the people and the government have less of the GDP, then someone or something is getting more. Who or what is that? Unfortunately, I can't help you there. I'm not an economist.

Now that we've established that you're misinterpreting the numbers and that the people have, in fact, seen their incomes rise less than the government's income, let's deal with your other complaints.

You point out that the 31% is an increase in something different from the 45%. You're correct. However this doesn't necessarily make the number incomparable. If the government's income is mostly derived from taxing personal income (which it overwhelmingly is), then a certain percent increase in personal income should correspond to the same percent increase in government income— the latter being approximated by multiplying the former by the tax rate. Now, there is an issue of the tax rate being staggered. However, the moving between tax brakets is minimal and won't make a major dent simply because a few percent of tax on a few people doesn't amount to a whole lot of government revenue. So, we can say with confidence that government income should increase approximately as much as personal income. We may be comparing two different fruits, but they're of the same specie so we can assume they are about the same.

Of course, personal income and government income didn't rise together; government income rose at a rate almost 50% larger. Which is Frum's whole argument.

Frum is focused on personal income vis-a-vis government income. Yes both rose in the absolute sense. Yes, both fell as a percent of the GDP. Both are correct, but that's not what Frum's writing about. He's writing about the change or personal income relative to government income. And on that point he is correct.

Finally, concerning your cheap shot of Frum's former role as a speechwriter to the President. First, he was an economic speechwriter and didn't deal with foreign affairs or military matters. Second, he had quit that job well before Bush even began talking about Iraq and it's likely non-existant WMDs. Third, he was a speechwriter, not a policy maker or policy advisor&mdas;he wrote what the President told him to write; he didn't make decisions or policies. And fourth, I don't see how his logic on this matter (which is, incidentallly correct) has anything to do with the stupid rationale of going to war in Iraq. If you want to make this claim, you'll need to explain the similarities in logic.

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June 29, 2004 05:59 PM: "you can't ignore where the rest of the 67% went" posted in response at The Backroom Brief.