Irish Liberty Forum

More on Inequality and Misuse of Statistics

with 5 comments

Ever taken a statistics course? Most stats lecturers devote a special moment to highlight how statistics can be misused. For instance my tutor once showed us a graph like this:

Coincidence?

Coincidence?

We can clearly see that there’s a correlation between ice-cream consumption and deaths by drowning. But what can we infer from this? It’s possible that eating ice-cream causes drowning (due to stomach cramps while swimming). It’s also vaguely possible that drowning deaths cause increased ice-cream consumption (mourning relatives might go for an ice-cream to cheer themselves up). However the most sensible explanation is that both ice-cream consumption and drowning deaths increase is due to another factor: the weather. People eat more ice-cream and go swimming more often in summer.

However, such a straightforward explanation is hardly ever seen in economics. The empirical approach often remains unquestioned. Consider this syllogism: in the past, taxes were low. Today, taxes are high. We were poor in the past but now we are rich. Therefore, increasing taxes causes prosperity. Such a view is completely ridiculous, yet almost completely unquestioned.

Or take the suggestion in the graph below. Income inequality sharply increased before two major recessions. Therefore it’s fair to assume that one causes the other.

Why yes, yes it is.

Two possible conclusions one can reach from this graph are:

A) economic boom causes incomes in the top percentiles to rise

B) severe income inequality causes a recssion.

In my view, both are incorrect, or at least incomplete. A more accurate interpretation is:

C) years of easy money policy from a counterfeiting racket cause the economic boom. Rising incomes, and rising income inequality follow from this. This prosperity however is artificial and must eventually come to an end. Incomes, and income inequality fall during the recessionary phase.

There are however some people who argue in favour of proposition B. They are wrong.

Their theory on why income inequality goes something like this. As incomes becomes more and more unequally distributed, a dreadful scenario approaches. Since the rich save a higher proportion of their money than the poor, and since the poor are deprived of income there’s less spending taking place in the economy. The rich have the money but they don’t spend it. The poor don’t have enough money to spend. As a result, the entire economy goes into decline.

The counter to this can be summarised in a few points:

  • It’s the job of entrepreneurs to successfully forecast future market conditions. The wealth inequality thesis can’t account for the cluster of errors and an economic crash. If income inequality were the main cause of recession why doesn’t the economy go into a gradual slowdown?
  • At any level of income, at least some level of  consumption will continue to occur. It’s also doubtful that the rich do in fact spend proportionately less that the poor.
  • Even if the rich save more than the poor, savings constitutes demand for producers’ goods. In effect, to save is to spend, and savings is the most important element of a prosperous economy.
  • An economic crisis is usually marked by undersaving not underconsumption.

Thanks, Murray.

We have seen that it’s easy to turn your ideological desires into a relatively plausible science. It’s even easier if you have fancy graphs at your disposal.

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Written by 20000miles

October 9, 2009 at 5:51 am

5 Responses

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  1. Q If income inequality were the main cause of recession why doesn’t the economy go into a gradual slowdown?

    A Because of the asset bubble fuelled by fractional reserve lending/theft! As the pool ofsuckers for this poison diminishes as the return on capital norrowed falls, the Ponzi scheme falters and unless immediately addressed, say by a war, or dropping interest rates to zero, then al borrowing stops and the malinvestments are revealed as prices revert to the correct mean, often overshooting in the process!

    Pat Donnelly

    December 25, 2009 at 4:46 am

  2. q It’s also doubtful that the rich do in fact spend proportionately less that the poor.

    a In a kleptocracy, the poor when they have been fleeced and are over committed, have acheived the desiderata. The Rich then hope to make money on the downswing as did Redshield after Waterloo!

    Pat Donnelly

    December 25, 2009 at 4:48 am

  3. q In effect, to save is to spend, and savings is the most important element of a prosperous economy.

    a Not in a fractional reserve system aka kleptocracy! Manufactured capital a fiction later to be paid off by the new poor, will easily swamp genuine savings as a proportion of capital. Anyone investing good money when there is so much bad money out there is going to be part of the new poor.

    Pat Donnelly

    December 25, 2009 at 4:51 am

  4. q An economic crisis is usually marked by undersaving not underconsumption.

    a True. Because of my previous answers, this is obvious. Saving is deleveraging and should be accomplished just before the peak of mania and malinvesttment, while there are still plenty who tell you that you know nothing by selling out now while the boom is on! The mania causes under-savings until just before the crisis. Afterwards the overshoot to saving and repayment of now expensive debt, deflation adds to a zero interest rate and the real interest rate xabn reach 20% for some time, means even more withdrawal of consumption. But such withdrawal is always correct and is only available to those who have excess income! Ie not the poorest! Eventually, the kleptocracy uses psyops to cause another boom! But not if time has passed and those involved have been deposed by the new puritans or retired out of power.

    Pat Donnelly

    December 25, 2009 at 4:57 am

  5. […] not Go for a Swim after Having an Ice Cream A new study observed amazing correlation between ice cream consumption and drowning death. It is very likely […]


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