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Post Hoc Ergo Propter Hoc?

Jul 16, 2010 • Economic Debates, Government, Macroeconomic Measurement • 86 Views    No Comments

Ed Koch, former mayor of NYC used to ask, “How am I doing?” We can ask the same question about economic stimulus spending. By going to recovery.gov, you will see that there were 682,370 new recipient reported jobs between January 1 and March 31, 2010. Correspondingly, the July 14 Council of Economic Advisors’ Report (CEA) estimates that stimulus spending created, to date, somewhere between 2.5 and 3.6 million additional jobs. 

Yes? Maybe. I wonder whether we can be sure that stimulus money created jobs. Perhaps they would have been there anyhow.

In a recent blog post, economist N. Gregory Mankiw questions the CEA’s conclusions. Sympathizing with their assigned task, he says it is very difficult to ascertain the impact of the stimulus program through their model:

1) He describes their Keynesian model as assuming that “no matter how bad the economy got, the inference is that it would have been even worse without the stimulus.” Consequently, whether the numbers go up or down, stimulus spending has to have had a positive impact.

2) He points out that the CEA presents data confirming that the economy improved after the stimulus passed. How he asks, though, can we know if the stimulus was the reason the economy improved with so many other variables also having an impact. His basic point? “Post hoc ergo propter hoc.”

All of this started me thinking about Paul the psychic octopus. As you probably recall, Paul accurately predicted 2010 World Cup Soccer results by the food receptacles he selected. Not quite “post hoc ergo propter hoc, ” but close.

The Economic Lesson

Most of us know whether we support more government or less as the thrust of macroeconomic policy. None of us though can statistically prove that we are right.

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