Our Current Economic Crisis And The Regression Fallacy

Understanding Today Is To Understand Logical Fallacies

I am fond of telling people I am simply applying logic in order to arrive at my conclusions.  I  then go on to present a line of reasoning which to many may seem like just another opinion.  One  that is no better than anyone else's.  Those who see it this way may think I'm just puffed up and  full of myself.  It is for those people and anyone who finds themselves in a discussion with  those people that I provide the content of this series of blog posts.

Many of today's popular views are heavily based on well acknowledge logical fallacies.  By "well  acknowledged" I mean logicians and other scholars who's professions depend on the use of logic  have long since come to agree certain ways of arranging facts or the lack there of are  completely wrong.  I will list some of my favorites with relevance to many popular views.  I  will deal with a couple, perhaps three or four if they're short enough, in each post across the rest of this month.

I will be quoting Wikipedia's List of Fallacies page for the actual fallacy definitions and then adding my discussion of the far too common examples of it in much of today's thinking.

Our Current Economic Crisis And The Regression Fallacy

"Regression fallacy – ascribes cause where none exists. The flaw is failing to account for  natural fluctuations. It is frequently a special kind of the post hoc fallacy."

Popular view number 1:  Our current economic downturn was caused by _______. 
You can fill in the blank depending on one's politics, but unless that blank is filled by  something along the lines of, "the inevitable ups and downs of the economic cycle", we have an  example of a regression fallacy.

The Bush tax cuts didn't cause this.  Lack of regulation of the mortgage industry didn't cause  this.  Excessive government spending didn't cause this.  The size of the national debt didn't  cause this.  Nothing caused the down turn.  

It was inevitable.  This is basic macro- economics.  Economies contract from time to time because they become too full of weak or bad  business ventures.  When large numbers of these ventures fail or get downsized around the same time, investors, lenders, and  consumers very reasonably become cautious and there's a downward momentum in the economy.  Many  reasonably solid ventures also start to suffer because of the lower availability of investment  funds and the reduction of income (due to less consumer spending).  At this point it looks like  a never ending vicious cycle, but eventually it stops.  

Eventually the  accumulation of idle investment funds is lured out by the increasingly solid business ventures  that remain.  These ventures are seen as solid precisely because they've survived thus far.   Once the investment funds start to not only flow more easily but are doing so into largely solid  ventures, the corner is turned.  The economy now begins to grow again.  Good new ventures and  the relaunching of some unfairly halted ones enter the picture and add to the growth even more.   The new jobs and greater incomes lead to more consumer spending which leads to even more  growth, and now we have momentum going the other way, a boom.  

This momentum inevitably starts  to carry even more weakly conceived and/or managed ventures, and they go further than they deserve to because of it.  This sort  of thing accumulates until ... you guessed it, we have a new economic contraction resulting from  all the eventual failures.  This is the economic cycle.  Not only is it inevitable but even if we had a way to stop it we wouldn't want to.  An economy without ups and downs would be very much like a person that can't feel pain.  We'd keep hurting ourselves and never know it.  Economic downturns are inevitable and even good in the long run.  What we can and should be concerned with is not making them more severe or longer than they need to be.

Government can't stop the cycle but it  can effect it.  If government does something to either encourage, prop up, or create weak  businesses it will cause the boom to be artificially high and the following bust to be more  painful.  These are the sorts of things we should be asking ourselves about.

Relevant to our current situation, we should be asking if bad mortgage loans had been  encouraged by government policies, propped up by government, or created by government?  The  answer is yes, yes, and pretty much yes.  The lack of regulations are pretty much a red herring.

"Red herring – a speaker attempts to distract an audience by deviating from the topic at hand by  introducing a separate argument which the speaker believes will be easier to speak to."

The regulations were a problem, but they were regulating a kind of loan that had essentially been created  by government policies and actions and were also encouraged by them, and not only were there too  many of these loans but they wouldn't have even existed without government intervention.  Blaming the lack of regulations is a lot like blaming a forest for a fire, when the better question is who started the fire.

The  government policies that gave birth to these loans came into place back in the 70's as a an  outgrowth of the civil rights movement, the Community Reinvestment Act most notably.  Not to fault the civil rights movement.  I'm just  pointing out that it wasn't just the lenders' greed and the politicians' lust for power that  created these bad policies, it was also misguided good intentions.

I suspect that's why neither major political party is willing to talk about the real major cause of this recession's severity, because to do so would be to admit that both of their sets of rhetoric about  how best to govern for most of the last fifty years has all mostly been wrong.  Both tax cuts and government spending can  stimulate economic growth but at least some times growth shouldn't be encouraged, lest we make  the inevitable bust bigger.  Likewise economic forces and their outcomes are not always  fair, but when government steps in to try to make them fair they will inevitably just move the  pain to another place, another time, perhaps another generation and while doing so make it greater.  The only way to overcome the unfairness of market forces is in the aggregate of all events.  Individuals must win some to compensate for the times they lost and shouldn't have, and government should try to stay out of the way.

People can disagree with me about that last conclusion, but that the current economic policy debate in Washington D.C. is all based on logical fallacies is undeniable.  Most notably they are based on the regression fallacy and red herrings.