Donald Trump will be inaugurated in a matter of days after having campaigned for big changes in key economic policies. A new Congress is already in session and legislatures are gearing up in all states. Economic arguments will be in the news everywhere. Here are a few cautions to keep in mind as you evaluate arguments from across the spectrum:
- Don’t fall for “post hoc” arguments. Named for a Latin phrase meaning “after this therefore because of this,” post hoc assertions often seem to outnumber sound reasoning. Nearly everyone uses one at one time or another. Last week, I came across an extended one made by a Nobel Prize winner.
In politics, these are particularly common for those attacking or defending presidents. Jimmy Carter was elected — and the U.S. had a period of strong job growth. Ronald Reagan took office — and inflation fell. George H.W. Bush became president — and the savings-and-loan sector collapsed. And (take your pick) Democrat Bill Clinton was president and Republican Newt Gingrich was speaker of the house — and the budget achieved near balance.
In all cases, the surface information is correct but the implicit or explicit cause and effect is false. Job numbers grew so strongly during Carter’s term because the highest-birth years of the baby boom had been 18-22 years earlier. Inflation fell during Reagan’s term because Paul Volcker, appointed to lead the Federal Reserve in 1979, had been crimping money growth for a year before the 1980 election. The S&L sector had been rotting to the core years before Bush 41 took office, and so on.
Post hoc arguments are seductive, and people with one or another particular political viewpoint swallow them eagerly. But erroneous conclusions lead to bad policy.
- “Fallacies of composition” are nearly as common but can be harder to tease out than post hoc errors. This mistake is to assume that what is true for an individual is necessarily true for a large group. A noneconomic example would be that since I can see better at a Timberwolves game if I stand up, everyone would be able to see better if all stood up.
A student of mine once argued that since his family’s farm made good money growing asparagus, all farmers could be prosperous if only they would switch from low-valued corn and wheat to growing asparagus. Obviously not true, but just a couple years later, a prominent financial pundit made the same argument that growing specialty crops would solve all ag problems.
Some economists, called Keynesians, argue that cutting taxes and increasing government spending will increase consumption spending and thus stimulate the economy. Another school, “supply siders,” argues that cutting taxes will motivate higher savings and investment and thus, after a lag, stimulate the economy.
Even if one accepts either of these arguments at the federal level, it does not mean that the same results would occur in any individual state. Governors Sam Brownback of Kansas and Scott Walker of Wisconsin don’t understand this. Any single state’s economy is highly influenced by what is going on for the nation as a whole. More spending from lower taxes won’t be limited to purchases within the state’s borders. Higher savings won’t all go directly to businesses operating in that particular state. And states don’t have the equivalent of the nation’s Federal Reserve. Wisconsin and especially Kansas are salient examples right now, but it is common in recessionary times to hear liberals call for greater state spending to stimulate the state’s economy.
Another example is that debt for a country has exactly the same dangers as debt for an individual. Excessive debt certainly can cause problems for a nation, but countries do not have finite lives. And individuals do not have central banks.
- The “fallacy of false precision” is not as dangerous a trap as the errors just mentioned, but it does skew thinking. A example is a recent news story about migrants from North Africa to Malta that described a foundering boat “164 yards from the Italian Coast Guard cutter.” That number is a precise conversion from 150 meters. But the 150 meters that probably was in a publication for non-U.S. readers was itself a round estimate.
Judging distances, especially at sea, is highly inexact. The sinking boat probably was more than 75 yards away and probably less than 300, but one should not say more than that.
Yet I recently read economists reporting their research showed only 13.8 percent of the decline in the number of manufacturing jobs was due to increased imports. Yes, that precise number was the point estimate reached in the study. But economic research necessarily involves many assumptions and uses data that itself does not come from precise measurements. So that “true” figure probably was above 10 percent and probably below 20 percent. Beyond that, one cannot be sure.
Most economist agree that trade plays a smaller role in structural change in the manufacturing sector than most people think it does. However, different studies come up with different numbers. Moreover, this is generally true for most empirical studies by economists. Take their results as an indicator of the direction and general magnitude of whatever is being estimated, but don’t assume it is an exact measurement. If multiple studies come up with estimates in the same general range, that increases the weight of the evidence, but never rely too much on a specific number cited in one study.
- Another error is to assume that an average over a whole group is true for everyone in that group. One often reads that the average U.S. life expectancy when Social Security began was about 64 years, and therefore hardly anyone ever lived to collect benefits. But that expectancy was greatly skewed by high infant mortality rates. Many people died between birth and 65, but many others lived well beyond that age. When benefits were first paid in 1940, there were about 9 million people older than 65 out of a population of 131 million. So the expectation of living to get some retirement benefit was not a vain one for most people paying in.
Similarly, one often hears that average Supplemental Nutritional Program benefits are very low. They are. But the benefit formula involves a sliding scale, so it is possible to get at least a small monthly benefit even as one’s income rises above the poverty level. A relatively large number of people get small payments, while others who are truly indigent get larger ones. The average over the whole group is skewed and misleads those unfamiliar with the details.
This is not to argue that benefits are lavish or excessive, but one should know that the low “average” often does not represent the aid given to the neediest cohorts.
There are lots of other pitfalls to clear reasoning in economic argumentation. Some are inserted deliberately by those wishing to deceive. Others are unintended by anyone on either side of an issue or the communication process in general. But look out for these simple and all-too-common errors, and you will have a better understanding of what is going on.