Act on Causes not Outcomes

Properly reporting and interpreting the movement in the monthly unemployment rate requires one to have an understanding of variation.  Yes, while it may be a surprise to many, monthly outcomes do vary from month to month irrespective of whether there is an identifiable cause—you can call this random noise.  There are also variation patterns that are not noise but signal that something has changed, that something is different in the system. Being able to discern signal from noise is critical to the proper interpretation of what is going on (or not) in the system that produces the outcome—it informs sound decision-making.

The Hype

Statements in a recent New York Times article on job growth misrepresent the pattern in the unemployment rate, which has actually shown an overall decreasing pattern since October 2009. The statement, “August brought no increase in the number of jobs in the United States, a signal that the economy has stalled and that inaction by policy makers carries substantial risk” is using July results (9.1) as the anchor for judgment as to what happens in August as a signal of the state of the economy as represented by the unemployment rate. Looking out to August, from July, there is about a 1 in 3 chance that the August number will be lower, a 1 in 3 chance it will be higher and a 1 in 3 chance it will be unchanged. Looking at month-to-month movement is not the way to developing understanding.  Two points do not constitute a trend; all the data are relevant toward understanding the state of the system.

The Story

The story is not that August is the same as July, that there was no movement in the unemployment rate between two points.  The story here is that business has laid-off thousands of people, are squeezing huge profits from those who are employed and yet business is not willing to hire.

The story is that those in authority don’t seem to understand that consumption-production cycle rests largely on a population of consumers having an income that enables them to consume what is produced.  The author of the article astutely noted, “The problem is less that companies are laying people off than that they are not hiring.”  Being able to produce at a high profit will not keep the consumption-production cycle turning if there is no one to consume what is produced—business produces in response to demand.  In fact astute business people realize that they don’t just create and produce products/services they also create and produce demand—why else would anyone invest in advertising!  Henry Ford grew his car-making business by hiring and paying people so that they could consume what his business produced.  It is about the basics of business and not about high finance and econometric modeling.

Statistically speaking patterns of variation are revealed over time and not from one point in time to the next. When we focus our concern on month-to-month differences—or the highest or lowest month—then the pattern in the data become unimportant and imperceptible. The one point attracting our focus gets all the attention and the important (more) long-term developing patterns are believed inconsequential and thus we put them off.  Inevitably the effect of this misplaced attention is the source of a future crisis.

The Reaction

So doing what Mr. Obama has done—acting on a misunderstanding—by instructing the Environmental Protection Agency to pull back on more stringent standards on ozone emissions will do little for the consumption-production cycle.  So our air quality has a slightly better chance of getting worse, right along with the unemployment rate.  It is mere superficial action to give the appearance that something is being done in response to the unfavorable unemployment rate—the concern is for something else, not on those unemployed.  Recall it was the absence of regulation in support of unfettered profiteering that caused the recession, not the creation and enforcement of regulation.  Perhaps profiteering is keeping the situation from getting better.

It is like saying the brakes failed to stop me before hitting a tree, so I am going to put a bigger gas tank in the car.  A focus on the outcome and not the cause turns attention to the fact that the car is stopped, not why it stopped.  With this perspective of course a larger gas tank will enable the car to go—that is if the brakes don’t fail again.

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