Donald Trump will be inaugurated on Friday, Jan. 20, after calling for big economic changes. Congress is already in session, and state legislatures like Idaho’s are too. Economic arguments make news everywhere.
Mind these cautions as you evaluate arguments in the debate.
1. Don’t fall for “post hoc” arguments. Named for a Latin phrase meaning “after this therefore because of this,” post hoc assertions outnumber sound reasoning. Nearly everyone makes one at one time or another.
In politics, these are common when 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 implied cause and effect is false. Job numbers grew strongly under Carter because the highest-birth baby-boom years were two decades prior. Inflation fell under Reagan because Paul Volcker, appointed to the Federal Reserve in 1979, had been crimping money growth since then. S&Ls had been rotting to the core years before Bush 41. And so on.
Post hoc arguments are seductive. But erroneous conclusions lead to bad policy.
2. Watch out for “fallacies of composition.” These are nearly as common as post hoc errors but harder to tease out. The mistake is to assume that what is true for an individual is necessarily true for a large group. For example, since I can see better at a basketball game if I stand up, everyone could see better if all stood up.
A student once argued that since a farm profited nicely from asparagus, all farmers could prosper if they grew that crop.
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 either is true 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 do not understand this.
Any single state economy is highly influenced by 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.
Another fallacy of composition is the contention that debt for a country has the same dangers as debt for an individual. Excessive debt certainly can cause problems for a nation, but countries do not have finite lives. Individuals do not have central banks.
Yet another is that because U.S. Treasury bonds are the safest possible investment for an individual, putting FICA receipts into a trust fund containing only U.S. Treasuries is the safest option.
3. Beware the “fallacy of false precision.” It is not as dangerous a trap as others, but it does skew thinking.
News about migrants from North Africa 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. The sinking boat probably was more than 75 yards away and probably less than 300, but one should not say more than that.
Recently, economists reported that only 13.8 percent of the decline in the number of manufacturing jobs was due to increased imports. Yes, that precise number was the estimate reached in the study. But economic research necessarily involves many assumptions and uses imperfectly measured data. So that “true” figure probably was above 10 percent and probably below 20 percent. Beyond that, one cannot be sure.
Most economists 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 somewhat different numbers. Moreover, this is generally true for most empirical studies by economists. Don’t take any such estimate as a hard fact.
4. Do not assume that an average over a whole group is true for everyone in that group. One 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 involve a sliding scale. 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 that benefits are lavish, but one should know that the low “average” often cited is not the aid given to the neediest.
There many other pitfalls to reasoning in economic argumentation. Some are inserted deliberately. Others are unintended. Look out for these simple and all-too-common errors, and you will better understand what is going on.
St. Paul economist and writer Edward Lotterman can be reached at email@example.com.