Sunday, June 14, 2009

Krugman: Post Hoc Ergo Propter Hoc

One of the first lessons we learn in statistics is that correlation does not necessarily mean causality, and the farther one goes in learning stats, the more one understand just how important that point becomes. Unfortunately, the "elites" in American education have not learned that lesson, and heading the list is none other than -- drumroll, please -- Paul Krugman.

In his latest blog post, Krugman gives us a graph which shows that unemployment in the United States increased after the Reagan tax cut of July 1981. He puts in graph in answer to a comment made by House Minority Leader John Boehner of Ohio that the Obama stimulus program has been followed by higher unemployment.

Once again, we see Krugman's dishonesty in action. First, and most important, Krugman elsewhere has blamed recessions on tax cuts, as he was doing in the early years of the Bush administration. Now, an economic downturn must have a cause, so when Krugman declares that tax cuts cause recessions, he needs to have a causal mechanism. Not surprisingly, he fails to give one. (When one is a political operative, as is Krugman, one does not need to bring logic into the picture, and especially economic logic.)

Second, if he is going to blame the tax cut for higher unemployment because higher unemployment followed the tax cut, then such logic needs to be applied to the stimulus as well. Instead, we see the infamous post hoc ergo propter hoc fallacy in action.

Now, I would not be surprised to see someone like Rahm Emmanuel or Boehner use this fallacy, as politicians are famous for butchering logic. However, when a Nobel Prize-winning economist does it, we have to ask questions. Krugman carries a heavier burden than do politicians, for we expect nothing less than lies from them.

When Krugman butchers the truth, we have to ask questions as to his motivation. Krugman is famous for assigning mad motives to anyone who disagrees with him, but I would like to turn this back on him. Why should Krugman be free to fudge on the truth?

The thing to keep in mind is that to Krugman, there are no such things as economic fundamentals. There is no structure of production, and there is no capital malinvestment. Instead, the entire economy is a "blob" that operates on a mysterious "circular flow." Thus, if Krugman's logic is correct, then the implementation of a government "stimulus" should have immediate results. After all, this is a guy who wrote in his latest book that nearly all economic problems can be solved simply by having the government print more money. He really said that. No kidding.


Bob Roddis said...

As I recall, the ERTA tax cuts did not kick in until 1983, 5% in 1983, and 10% each in 1984 and 1985. Indexing for inflation did not start until 1985. In 1981 and 1982, we were still enduring the effects of Volker and the Fed raising interest rates to 21%.

Krugman's post is a complete fraud.

Bob Roddis said...

My prior comment contains some factual errors. ERTA kicked in on July 1, 1981, reducing rates only 5%. Rates were then reduced 10% for 1982 and 10% in 1983. Krugman's graph and post suggest that the entire tax cut took effect on July 1, 1981. Further, interest rates were above 20% on July 1, 1981 and stayed above 15% until at least August 1982.

Krugman also fails to note that TEFRA raised taxes in 1982 and that social security taxes went up in 1983.

As such, Krugman's insinuation that tax cuts do not cure unemployment is misleading once one considers the delay in the implementation of ERTA and the high interest rates in effect in 1981 and 1982.