Two Charts

April 14, 2010

This isn’t going to be long. I’m just trying to show what you shouldn’t be allowed to say.

In medicine and economics, people try to make inferences about cause-and-effect without accounting for the underlying trend. People and economies are supposed to recover. That’s their underlying trend. But if you caught a cold, and spent seven days trying various home remedies and then got better, you would be wrong to conclude that whatever you did on the seventh day must have worked.

Look at the charts below and think about whether the GDP numbers reported below require extraordinary explanation. Think about whether a growth rate of 5.6% in the fourth quarter of 2009 is strong evidence that “the stimulus worked.”

[data source: Bureau of Economic Analysis website]

Economies are supposed to recover. Think about the underlying trend, and don’t fall victim to the post hoc, ergo propter hoc fallacy.

Update: By request:

What have we learned from this? GDP was much more volatile before WWII. Macroeconomic stabilization policies work! Oh, wait…:

Romer’s early work focused on a comparison of macroeconomic volatility before and after World War II. Romer showed that much of what had appeared to be a decrease in volatility was due to better economic data collection, although recessions have become less frequent over time.

That said, I agree with Robert, and I wasn’t trying to prove anything about government policy with this post, one way or the other. I’m just trying to talk about what counts as evidence that a policy has worked.


One Response to “Two Charts”

  1. Rrrobert! Says:

    Extend that graph out to 1920. Determining whether the stimulus worked is very complicated, but it would be just as fallacious to assume, without evidence, that the economy would have recovered at the same pace without the stimulus. Both arguments have to rely on evidence about the mechanics of macroeconomics rather than controlled experiments to make their claims.

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