My comments posted on this blog yesterday on the relationship between GDP and overall tax rates within an economy provoked some furious responses from some people who might best be described as economic trolls.
The accusations were that I did not provide regression data to prove my claims and implied, despite that fact, that it might be possible that there was a positive relationship between these issues i.e. that as GDP rises tax rises, and vice versa. Apparently I was not allowed to do this, and in the eyes of at least one commentator was a charlatan for making such a claim. The same commentator also suggested that Charles Adams, whose work I also referenced, clearly knew nothing about maths. Charles is a professor of physics at Durham, who happens to also study economics.
Apparently neither of us also appreciated that correlation does not prove causation. The fact that this implies that we had established correlation is a point I will ignore. Instead let me address my approach to data.
Some time ago I created the acronym CRAP to describe most data. It stands for ‘completely rubbish approximations' to the truth. I first used it with regard to the Government Expenditure and Revenue Scotland statement (GERS) but it can be used for vast quantities of data.
Virtually every set of accounts is, for example, CRAP. The accounts of large companies are, I suggest, complete works of fiction. That's because there is no company that undertakes the transactions that those financial statements report. And the view presented of the transactions by group companies is deeply selective. That's partly because which companies are in the group is open to abuse, whilst vast numbers of transactions between these companies - where all the tax abuse happens - are hidden from view. In addition, accounting standards are open to serious manipulation. Despite that economists treat them as if they are factual, which is ridiculous.
GDP is also CRAP. It includes completely made-up numbers, like the annual rental value of owner-occupied properties as if rent was paid on them, which it isn't. And as Eurostat once told me, there is massive denial on the size of shadow economies within GDP data.
Tax revenues also ignore tax gaps in most cases, so they do not represent what should happen, but are declared net of abuse, which is not terribly meaningful and means that the data is riddled with distortions.
Add up data these distortions and others throughout the micro and macro economies and the data I compared - GDP and tax revenues - is all about comparing CRAP with CRAP. Applying a spuriously accurate statistical technique to this data just produces garbage in that case.
This is the mistake almost all economists always make. Not only are they not good at maths, but much worse than that they never seem to appreciate that they spend most of their time working on CRAP data to produce meaningless outcomes they then claim to be reliable. They aren't. Bluntly, those economists are no better than unthinking technicians when working in this way.
In contrast, what I do is work as a finance professional, which I have been qualified as for forty years. Note the word professional. It means I profess. That is, I offer an opinion. It's subjective. When forming that opinion I allow for the quality of the data. And I bring my experience to the issue.
Doing so I know that correlation does not prove causation. But I know higher incomes invariably result in higher taxes paid. That's a fact. I also know that increased government spending both provides the means to pay more tax and increases GDP, since it is a component in it.
I do not need regression to confirm my suspicions in that case. Like 99.5% (or more) of all practicing accountants I never did a regression analysis for a client. Nor would they have appreciated me doing so. I used my professional judgement to advise based on the available data, on which I relied to the extent to which I considered it reasonable.
That's what I also do on this blog. I profess opinions here based on experience, knowledge of how markets work and what the available data, for all its weaknesses, implies. Here the data confirms my prior suspicions - and yes, finance professionals are allowed them.
But data is only a component in any sound judgment and spurious accuracy based on unsound data should always be taken as a warning sign of unsound opinion.
I really don't care if economics technicians disagree: until they can prove their data is both suitable for use and is reliable their spurious accuracy is always to be questioned by those with better judgement. I will not be changing my approach to data, in other words.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
You posted the formula for GDP recently
Given that its basically Consumer Spending + Government Spending + Investment + (or -) balance of payments it doesnt take a PhD in the Bleeding Obvious to realise that if Government is taxing, and then spending more it will have an impact on GDP if only because its the one bit of the equation Government’s control directly
I first read this as a Soviet economist applying for a job but can’t find it. Ja Hoon Chang or Stephen Keen?
But the punchline is the same.
A mathematician, an accountant and an economist apply for the same job.
The interviewer calls in the mathematician and asks “What do two plus two equal?” The mathematician replies “Four.” The interviewer asks “Four, exactly?” The mathematician looks at the interviewer incredulously and says “Yes, four, exactly.”
Then the interviewer calls in the accountant and asks the same question “What do two plus two equal?” The accountant says “On average, four – give or take ten percent, but on average, four.”
Then the interviewer calls in the economist and poses the same question “What do two plus two equal?” The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says “What do you want it to equal?”
Not sure it is relevant but if its not delete.
As an economist (sorry!) I would argue that Ian has got the economist and the accountant the wrong way round. Don’t you agree, Richard?
Probably
Colin I couldn’t find the original so I looked on the web. This seemed to be the nearest.
What would the politician say?
Well, thank you for your explanation but you’ll never have to apologise to me!
Unlike all the idiots I’ve had to listen to on the news recently who are either lying or do not know what they are doing, I trust your work and you also confess when you’ve made mistakes.
Politicians everywhere please note.
And that is one of the reasons I follow your blog. I don’t always understand it, but when I do it is enlightening.
And the idiot award today instead goes to a man child by the name of Simon Clarke
https://www.reuters.com/world/uk/uks-mini-budget-will-be-game-changing-minister-2022-09-23/
His interview on Radio 4 this morning was dire
Dear Professor Murphy
I am impressed by your work and believe that in general I share your values, including the value of reasoned argument. So please do not take this note as an attack.
1. I think your article yesterday was, perhaps, not one of your finest, as the charts are by no means conclusive, and the conclusions you draw are perhaps overstated as they stand. And yes you do say at various points that correlation is not causation: What is missing is e.g. the argument in the original blog about tax and GDP, and a note on this would have been helpful and avoided some confusion. Equally, you did show fitted regression lines, and, as I suggest below this, can be a source of confusion
2. That said, the only comment that I can see (or the only one that survived ?) that criticized the absence of statistical apparatus was “Ed”, and I do not think you should be too upset about it.
a) I entirely agree that his yearning for correlation coefficients, R2 &c. is ridiculous: I am surprised he did not ask for the correlation in the residuals, significance of the beta estimates and so forth
[ – not that that would be unreasonable in some contexts: I am constantly astonished at economists’ use of regression that explains perhaps 50% of the variance and with non-significant independent variable estimates to prove that poor countries do not work hard enough, or some such. ]
(But then I admit that I find regression a pretty useless tool anyway, as you can generally find several lines of almost equal goodness of fit but with very different equations – and additional data will require new equations, when it makes more sense usually to look for law-like or at least consistent relationships)
b) He overlooked the point in your original blog, that the trend line excluded iGDP per capita below $20,000, so his argument about bunching on the left hand side, otherwise sensible, is not. Equally he complained about Adams compressing the X axis, when in fact it was the Y axis that was compressed by taking readings in logs. (I am baffled though by Adams’ remark that the USA is an outlier, as it appears to be very close to the trend line.)
c) And yes he “accused” you of claiming “the chart” (which chart ?) shows that increasing tax rates increase GDP. What you said was that as tax/GDP rises so does income – this was a statement of association, not of causation.
I hope I have not added too many mistakes of my own to the argument. But what I really want to say is, “Bonne continuation”.
One of the first things I learned about investing in the markets was that company reports are complete b/s. In 2008 had the foreign banks sent eager young gophers to check out the US mortgages they were paying billions for, the young gophers would either NOT be allowed to examine in detail these mortgages taken out by so many that couldn’t possibly keep up the payments that would have had the alarm bells ringing or they would have seen for themselves that these packaged mortgages were complete CRAP and the Americans would have been left with all the CRAP.
As it is these bankers had’nt a clue what they were doing. That moron Brown who sold all our gold @ US250 p.o bailed out the bankers and the rich socialising all the losses. My question is Richard – I never seen an in depth rational answer – what would have happened if he hadn’t bailed out the banks. Yes I know lots of banks would have gone bust, the housing market would have crashed, taking with it all the parasitic BTL scum but what else? I would appreciate and I think others would your opinion.
The price of property in the UK is totally insane and if Sterling crashes which is quite possible then the housing market and the economy will undergo a reality reset. I live in France and I can’t imagine ever going back to live in the madhouse that the UK has become.