Economist's Advice of the Day

Remember this phrase:

"Correlation is not Causation."

Just because two things appear to be related (ie, they are "correlated"), doesn't mean they are, or aren't. This is ESPECIALLY true of very short timeframes. Someone should have to demonstrate (not just speculate) how A causes B, not just show that they moved in the same direction.

I have - far, far too often - heard the argument on conservative talk shows that the Bush tax cuts brought about the last few years of economic growth. It is perfectly true that they are correlated. But the causation is purely speculative. In fact, a much better answer is that the 2001 recession (1) lowered interest rates, as financiers struggles to attract spending, which (2) led to a boom in revolving credit (credit cards) and asset-backed credit (mortgages). This (3) fueled a run-up in home prices, especially in the West, which spurred both new home construction, and home-refinance spending, both of which (4) reduced unemployment and provided further economic stimulus. In reality, the economy is a very big, unimaginably complex thing, and those cuts were comparatively tiny. And the resulting debt will a much worse negative than the cuts were a short-term positive.

I like tax cuts because I like to control my own money and I don't trust the government with it any more than I have to, but just because they happened in 2003 and the economy started recovering in 2003 doesn't mean that the one caused the other. The above phrase also has an associated logical fallacy: post hoc ergo propter hoc, which says that just because A comes before B doesn't mean that A caused B.