Regression toward the mean
It is a simple concept that we often forget. Simply stated, it just means that results will cluster around their long term norms. This is comforting when things go bad. Next time will probably be better. We more often delude ourselves when things go well, thinking we deserve it always.
A good illustration of the concept and how we can be fooled come from Daniel Kahneman, who along with Amos Tversky developed ideas that became the basis for behavioral economics. He was working with pilots in the Israeli air force and trying to explain to the trainers that positive reinforcement worked better than criticism. The trainers objected that when trainee did something really well and they were praised, next time they did worse. But when they messed up and the trainers came down hard on them, next time they did better. Kahneman checked and found that they were right, but he thought about it a little more and found that it was not the inputs of shouting or praise that caused the result, but a simple regression to the mean.
When people are learning new skills, they will have good and bad days. An especially good performance is likely to be followed by one that is more normal. An especially bad performance is also likely to be followed by one that is more normal. This works for most things and it really interferes with our judgment. Cynical people take advantage of this misconception; they fool others and often fool themselves.
We are seeing that with the economy. We saw a steep decline in the economy in 2008. The Fed and the Bush and Obama administrations took steps that saved the economy from free fall. Most people expected the economy would return to its normal trajectory in 2010. Obama was counting on it. He has positioned himself to get credit for the return to normal growth and expected that by now he could be taking credit for fast economic growth and a unemployment rate of around 5%. Why didn't this happen.
IMO, things went wrong not in spite of Obama's best efforts but because of them. The crisis was over by early 2009. The economy needed to adjust to the new reality, especially lower home prices, and then it could begin to grow again. But Obama's expensive stimulus plan slowed adjustment. It moved some economic activity up, probably making the downturn in 2009 less severe, but it did this at the cost of massive debt plus at the cost of a slower recovery in subsequent years, i.e. now.
Obama is getting scared now with good reason. The economy is only now recovering from the recession and the effects of the Obama stimulus. Home prices have come down to about where they can be sustained and grow again. The economy will soon return to its normal long term growth, which is significantly better than we have seen under Obama. If he is reelected, Obama will be able to claim credit for this regression to the mean. On the other hand, if Romney replaces Obama it will look like his policies did the deed.
In either case it will be unjustified, but I can see the outlines of our debate already. If Obama is reelected, the economy will start to get better. Our liberal friends will credit Obama spending. This is a bad thing, since it will encourage more spending. Much like the trainers screaming at the trainees, it will seem to have worked. If Romney is elected, the economy will start to get better. I will credit Romney; my liberal friends will call me a hypocrite and they will be right, but I don't care. The lower spending and more efficient government will be good for the country in the long run. It is the right thing to do, if not the right justification for doing it. Beyond that, a Romney victory will help ensure that in the long run the "normal" growth rate is sustained.
Posted by Christine & John at September 8, 2012 11:27 AM
Christine and John, many years ago when I lived in Wisconsin and Vince Lombardi was coach of the Green Bay Packers I heard him say that practice does not make perfect. Instead he said…”Perfect practice makes perfect”.
Just read that Canada has withdrawn its ambassador to Iran and ordered Iranian officials in Canada to leave within five days. Canada cited numerous reasons for the action from sponsoring terrorism to failure to comply with UN sanctions on their nuclear program. Some have speculated that Canada believes the Israelis are about to attack Iranian nuclear facilities.
I don’t believe the US should take such drastic action but I am very concerned that Israel is going to do something militarily before the end of the year. Should this happen, I have no idea how our administration will react. Any thoughts on this?
I don’t speculate on this issue except to say that I am sure our president will react appropriately.
From the UK “Daily Mail”
“Just 96,000 American jobs were added in August in a bleak monthly jobs report as 368,000 left the workforce, bringing labour market participation down to its lowest level for 31 years and dealing a blow to President Barack Obama’s re-election chances.
The national unemployment rate dropped to 8.1 per cent, down from 8.2 per cent, but this was only because so many people gave up looking for work. If the participation rate had not dropped so precipitously, unemployment would have risen to 8.4 per cent.
Factory employment fell by the most in two years and temporary-help companies eliminated positions for the first time in five months. The 69.9 per cent labor force participation rate for men is at lowest level recorded since the US government began tracking it in 1948.
According to James Pethokoukis of the American Enterprise Institute, the unemployment rate would be 11.2 per cent if the labour force participation rate had remained what it was when Obama took office in January 2009. The U.S. Labour Department also said that 41,000 fewer jobs were created in June and July than previously reported.”
And obama, biden and other dems tell Americans we are better off then we were four years ago?
We are better off than we were four years ago, when we were at the bottom of the cycle. We are worse off than we would have been had we had more competent leadership.
It depends on what one is measuring C&J. With labour market participation down to its lowest level for 31 years, we are definitely worse off. We are $5 trillion deeper in debt. Food, clothing, health care and energy costs are higher. More Americans are at the official poverty level and more Americans are receiving food stamps.
I don’t think we can blame Obama for all of that. The economy mostly moved sideways. Obama was unable to solve the problems. It is true that we need new leadership but we need to be reasonable.
The question is…”Are you better off today than four years ago?” obama will get credit if the voter answer is yes, and will take the hit if the voter answer is no. Blame or credit is almost always credited to the leader. There is no nuance in the voting booth.
I suppose you are right.
I doubt if any Republicans will vote for obama. I believe than some Democrats may vote Republican. The election depends once again on Independents. How will they answer the question?
Former congressman Artur Davis of Alabama, who seconded obama’s nomination at the 2008 Democrat convention said…
“America is a land of second chances, and I gather you have room for the estimated 6 million of us who know we got it wrong in 2008 and who want to fix it.”
According to Davis, the election will hinge on the question of obama’s “promise” or “performance”.
Royal Flush, you have every right to be concerned about what is taking place between Israel and Iran. I have been a preacher for over 30 years. I have taught Bible prophecy in Seminaries, churches, and prophecy conferences. What we are seeing is a fulfillment of Ezekiel chapters 38 and 39. There is nothing that can be done to stop what is going to take place. This battle will usher in a terrible time on the earth and the United States plays little to no part in these events.
No self-respecting Christian believes in prophecy because a foreordained & foreseeable future means there is no free will; it means we’re all just players in a scripted play with a known outcome. It’s pure determinism based upon supersticion, and it encourages passivity in the face of adversity.
I cannot imagine a more un-American trait.
But enought about religion…
Recently, David Shuster reported that Obama was up by more than nine points in OH, according to an internal polling. The Romney camp has just confirmed huge lead to Politico.
Perhaps that answers the question about how Independents will vote.
The GOP convention provided no bounce to Romney. One poll showed one point, the other polls flat-lined. (The average bounce is four points). Meanwhile, it appears the Democratic convention is creating a bounce for Obama. Not only did it draw five million more viewers than the GOP convention, but most observers gave high marks to some speeches by Democrats, while Republican speeches were met with indifference. Well, except for that empty chair. The chair did pretty good, don’t you think?
A gallup poll tracking consumer confidence just took a huge jump. Outlier or harbinger?
The DJIA just set another high for the Obama administration.
Big jump in the ADP employment numbers. The unemployment numbers and the ADP ones generally follow the same trend. Which number should we believe?
And I am repeating myself, but Democrats love discussing the question, ‘are you better off now than four years ago?’ It’s a gold embroidered invitation to engage in a not-so-fond reminiscence of the financial meltdown at the end of Bush administration. Why Republican would want to go there is simply beyond me.
Sometimes, unexpected developments take the spotlight. Bombing Iran would certainly qualify. But it really wouldn’t make sense for the Israelis to attack Iran right now. Most people believe they would be better off not attacking at all, and even the right wing-i-est Israelis would have to make the calculation that it is better to wait until after the US election in order to garner maximum US backing.
The convention got an Obama bounce; too bad the economy never got an Obama bounce. It kind of shows the way things work for liberals. The story told is much better than the story lived.
I like the stock market rise, but I am a little surprised that liberals would be so much in favor of something that mostly helps “the rich”.
Democrats did have a good convention. Maybe you guys should just treat the election as in the bag. Don’t worry; be happy.
Re the economy - it is only now coming back to its more natural level. The Obama policies slowed the adjustment, but it is starting to come anyway.
The question for Obama is how the next four years is going to be different from the last four years? What will he change to do a better job?
C&J: “Re the economy - it is only now coming back to its more natural level. The Obama policies slowed the adjustment, but it is starting to come anyway.”
Do you base this on your own opinions or the opinions of economists? You’ve said this enough times but I still wonder where you get the idea. Multiple economists or groups have come forward to suggest the stimulus prevented a depression. You suggest Obama’s policies simply made things slightly better at the expense of years ahead. Where would we be now had we fallen further in GDP or lost 3 or 4 million more jobs? Where would we be had the auto industry not rebounded? If you think we’d be further along in recovery despite falling further down then what do you base that on?
The stimulus may have prevented a steeper downturn, but all the parts that worked were (TARP, Fed Action etc) where in place and working by early 2009. You can see in the charts that things bottomed out in Jan-Feb 2009, before the Obama stimulus.
The Obama stimulus was largely misspent. He bought jobs in 2009 at the expense of jobs today and also at very high cost. IMO, he figured that he would be able to buy jobs in the short term, but the economy would kick in by now.
You can find studies all over the map on this.
You can buy some jobs at the expense of others. A good explanation is here
So at best we spent lots of money we didn’t have to move some jobs from 2012 to 2009.
What Obama should have done is make government more efficient and work to address the entitlements crisis, but that would have been less fun.
Your own links indicate that around 80% of the economists who studied the effects of stimulus agree that it worked.
Please provide such glowing reports about the Bush Tax cuts helping to create jobs, or rock solid data showing how tax cuts in the past have provided incentives to create jobs.
The stimulus was pocket change to the real reasons for the current national debt, which is largely the result of two wars which were not only unfunded but took place during a huge tax cut aimed largely at the very wealthy. Worse, the free-wheeling, ‘making it rain’ cash spending spree during the wars focused the spending on private war contractors, corrupt government officials in the countries under attack, and the military suppliers while stiffing the veterans and the soldiers deployed who gave up jobs and family time along with their limbs and lives.
Had that happened during a Democratic administration, we would have seen administration officials on trial on television… and you know it, but won’t admit it. I’m not sure Obama should have gone after the corruption in the administration for the lost monies during the wars, but many liberals and progressives did want to (in addition to the torture policies.) Another party difference. The GOP has no problem trying to cripple and destroy the opposition. Perhaps the Democrats have some growing up to do.
“The question for Obama is how the next four years is going to be different from the last four years? What will he change to do a better job?”
Read the transcript of Obama’s DNC acceptance speech. It’s available at numerous sites online. Some critics thought the speech was too wonky, too policy driven. I don’t think it was specific enough. But if you’re wondering about Obama’s plans and goals for the next four years, the speech gives a good overview.
I’m not sure why talking about the stock market means liberals are “in favor” of it. Not only does the stock market have a huge impact on me personally, it’s a good forward indicator of future prospects.
And it gives some perspective on just how bad the economic crash was 2007 - 2009, and just how well Obama’s policies have performed. The DJIA peaked in October 2007 at a little over 14,100. The crash reached its low of @ 6,500 in early March, 2009.
It gives some perspective to just how bad that crash was under Bush, to consider this: the ensuing Obama bull market is one of the biggest bull runs in American history, and it STILL has not reached the highs of 2007.
The real estate market gives an even grimmer picture.
The jost market, the huge contraction in GDP, the loss of manufacturing and hi tech jobs through offshoring… It was simply horrible.
We’ve seen a massive asset deflation, followed by deleveraging- paying down private debt- and most of us have never lived through this kind of an economic downturn. Only the Great Depression resembles what we’ve experienced, and obviously that was a long time ago.
The Obama administration had to address this deflation and deleveraging without the benefit of a road map. There was very little to guide us out of the downturn, the worst kind of downturn. Decisions of huge consequence and financial impact had to be made quickly and without the benefit of hindsight.
The Obama administration saved GM, and created a situation where we’ve now experienced 30 consecutive months of positive job growth, and 8 consecutive months of DGP growth.
That’s better than a Great Depression. That’s better than the economic crash conservative policies caused in the
My link shows that most economist think that it did short term good. I agree. It also shows that fewer than half really think it was worth the money in the long term.
In any case, we have a lot of disagreement among the experts. It is not clear cut. This is part of the general question of stimulus. Conservatives tend to think tax cuts work and liberal think giving away money does. But the system is the same and economists cannot agree on the multiplier.
You talk about the “massive debt”. I agree it is a problem, although recall that 2/3 of the budget is spent on transfer payment, so you cannot blame that much on military and we had record revenues in 2006, so the tax cuts are also not the big cause. But let’s take your point. What was the massive spending in Bush time? It was a massive stimulus. Did it work?
We never know what might have happened. This cannot be solved by taking a vote among experts. These same experts who “predict” the past are unable to predict future events with any accuracy. The test of any theory is its predictive value.
The question we are discussing is whether the poor performance under Obama could have been worse. It could have been. But it could also have been better.
Obama promised infrastructure but found there were not shovel read projects. Even laymen like me knew that and wrote about it. Why doesn’t the president know as much as moderately informed citizens?
The housing market got overheated. This was not primarily a Bush thing. It was pushed by liberals such as Dodd and Frank, enabled by government based organizations like Fannie and Freddie, abetted by the Fed and generally pushed to people who should not have been granted mortgages by an ideology that wanted to “help the less fortunate.”
Prices went too high. They had to come down, which they more or less have done. It is not magic and no thanks to Obama. We expect economies to recover.
Re stocks - if you invest you know that it is an invalid measure to take the market at a low and compare it to a high and pretend that it is a true measure.
Again, I would ask you to look at the bigger picture http://stockcharts.com/freecharts/historical/djia1900.html
You notice that the market peaked and started to go down the year before Bush took office. It went down with the economic downturn and is now returning more or less to a long term average performance.
I am glad that under Obama we almost recovered. I think we can do better, however.
“Another priority for a new term is to build an ownership society, because ownership brings security and dignity and independence.
Thanks to our policies, home ownership in America is at an all- time high.”
George Bush, 2004 Acceptance Speech
Perhaps you forgot. Bush campaigned on home ownership in 2004. At that time, he took credit again and again. Would you like more quotes? There are lots of them.
If you want to criticize Obama, it can’t really be for quantifiable performances like the stock market or corporate profits or growing DNP. If anything, it should be for the way big corporations were bailed out, while homeowners were allowed to fall into foreclosure far, far too often. And it would be for the failure to pass the jobs bill, and more aggressively address unemployment early in the administration. This played a major role in the discontent that sparked the 99% movement.
But what makes Obama’s performance even more remarkable and praiseworthy is that he accomplished what he did while faced with the obstructionism of the opposition. The GOP stopped the jobs bill. The Tea Party took a whack at tanking the economy during the debt ceiling crisis, and did manage to frighten one ratings agency enough for them to downgrade US debt.
Could the recovery have been better? Perhaps. But even with hindsight, it’s hard to say how.
Bush was taken up by this dream too. But his ownership society meant to reform entitlements too. He got no traction with Democrats and didn’t have the kind of absolute power Obama did in his first two years so could not pass it over the objections of the people like Obamacare.
Obama had absolute control. He chose to use it the way he did. It is not heroic to hold all the cards and even then play the game poorly.
BTW - read above about Obama’s role in bringing us to the fiscal cliff. Congressional Republicans and Democrats had a deal that Obama would not accept for his own political reasons.
Entitlements? You meaned EARNED BENEFITS, like Social Security? Bush tried to kill it with privatization and failed. Thank goodness.
FYI, Obama held 60 votes for a period of roughly 13 months. He tried to work with the GOP. That was a mistake.
I mean both earned benefit and those that people just get such as welfare and medicaid. Whether or not we think people deserve to get them, they take up a majority of the budget. Fifty years ago, the Federal government invested twice as much as we spent on these benefits. Today we spend twice as much as we invest. We people like us retire, this ratio will get more and more out of whack until there is nothing the Federal government does but take from workers and give to non-workers.
We have spoken of this before. I prefer to take less than I am “entitled to” in order that the younger generation can keep more of what they earn. You take the other side. You prefer to tax the crap out of the younger generation in some kind of revenge fantasy of getting back at Bush. It is kind of perverse, if you ask me, to punish people not even born or too young to have been in the labor force, for the fact that you and I paid lower taxes over much of our working lives and governments gave us more in benefits than we paid for.
Conservatives tend to think tax cuts work and liberal think giving away money does. But the system is the same and economists cannot agree on the multiplier.
Let’s assume one is not ethically better than the other just for the sake of argument economically speaking. What you conveniently fail to mention is that monies paid to the poor, the unemployed, the retired, the sick, the handicapped, is money that is spent immediately… pouring that money directly back into the hands of middle class businesses and then we see that multiplier effect throughout the economy. Monies paid (OK … retained) by lowering taxes to the wealthy can and often are (as demonstrated during the Bush years) salted away in cash, real estate, off shore investments, savings, gold, jewelry, and financial stocks, many which multiply less and some not at all for the US economy.
I don’t think you can make a lucid argument that monies paid to the poor and low income citizens is poured down a rathole, … wasted money… the middle class grocers, gas station owners, landlords, clothiers, etc. would find out soon enough how a 10 or 15% cut in available monies in their communities would affect their business.
Money paid to the poor might be immediately spent and indeed if you goal is to use more stuff, it works faster. Tax cuts are more likely to go into investments and debt reduction. That indeed has a less immediate effect.
I would prefer government do what it used to do well. It should invest in infrastructure and in things that allow people to built wealth. Giving people money is like the old saying of giving a man a fish and feeding him for the day. It may be necessary but it creates dependency.
There is also a difference between letting people keep more of their own money and giving people the money of others, but we will leave out the ethics as you request.
“You [phx8] take the other side. You prefer to tax the crap out of the younger generation in some kind of revenge fantasy of getting back at Bush.”
Speaking for myself, I object to your characterization.
If making good on treasury bonds invested by the SS Trusts on behalf of baby boomers who paid excess F.I.C.A. taxes for the past thirty years to fund their SS benefits is a burden on the younger generation, then, quite frankly, so be it.
It is time to speak frankly about this issue. Perhaps, we will finally understand the consequences of the enormous Bush tax cuts, the unfunded wars in Iraq and Afghanistan, etc. Perhaps, we will actually understand that we are facing choices. Perhaps, we will finally understand that the fantasy world of conservative fiscal policy has no legs. You can’t have tax cuts, increase the world’s largest military budget, conduct wars and at the same time “save” SS and Medicare. It simply doesn’t make sense.
The conservative solution to this conundrum is to disguise cuts in social benefits that people have paid for(entitlements)in rhetoric of “saving” those benefits. It is an outrageous sham. People have an absolute need for SS retirement income and health care. It is not an optional policy choice.
“their SS benefits is a burden on the younger generation, then, quite frankly, so be it.” You have the legal right, but not the moral right and perhaps not the political power. Let’s see how this works out.
You and I have both paid into entitlements. I have paid the maximum SS tax since 1992 and so I will get the maximum SS benefit. I don’t know how much I will need the money. But I know that many young people who will be paying those higher taxes to support me may well need it more. Perhaps people like me, and maybe like you, can do with a little less from our government; maybe we can work a bit longer.
John F told us to ask not what our country can do for us but what we can do for our country. I believed him and still do. Liberals may have changed but some still hold on to those values.
Oh, please! What are you talking about? The baby boomer population taxed itself in order to pay for its retirement SS. It is not just a technical legal obligation, it is equally a moral obligation. Unless, of course, you think that reneging on the investment backed expectations of a generation is the moral high ground.
The money we paid went to support our parents. There used to be five of us carrying each one of them. This year there are about three and in a short time it will be only two. If the Obama policy of discouraging workers continues, it may get worse.
We paid our part. That is true. But our part divided by five is much less than we are asking young people to pay divided by two.
We have the legal right and maybe the electoral power to compel the young people to pay all we are “entitled to”.
Some people, however, have tried to plan ahead to take better care of themselves. Others will be willing to take a little less so that young people can have a little more. You are right that we don’t “have to” be generous. But it might be better if we do.
Liberals are always generous with other people’s money. I think it is very instructive to see that we conservatives are more willing to give up some of what we might get for the common good. On this blog at least, the liberals are the ones that want to squeeze every cent they can from the government and hence from the younger generations. It shows where the true greed lies.
I advocate means testing - which means I get less; I advocate extending retirement age, which means I work more. I know liberal have trouble understanding why conservative vote against their economic interests. Maybe we know there are things more important than money.
I tell my kids that when they make a deal, they should always leave something on the table. Don’t take everything you can. I am distressed to learn that my old-fashioned conservative ways are so despised by liberals.
I have no idea why you would think that a generation that prudently managed its SS retirement funds by increasing its contributions to provide a surplus and extending the age for receiving full benefits should now sacrifice the fruits of its labor.
The SS “entitlement” is not a cause of our current or intermediate future deficits. If you want to “fix” the long term, post baby boomer, problem then adjust the regressive earnings cap in accordance with the assumptions of the Greenspan Commission, consider extending the full benefits age and incorporating means testing. In other words, engage in the type of planning that the baby boomer generation did in 1983 to preserve their “entitlement.”
It depends on which point of view you take. From the point of view of us old people, we paid money and we want to get it back plus a return. From the young person point of view, they would prefer not to pay higher taxes than we did because our generation produced relatively fewer children than our parents did.
Not getting what you paid for is not fair. Paying for what you won’t get is also not fair.
“consider extending the full benefits age and incorporating means testing” These are the two big things I think we need to do, as I wrote above.
SS was never supposed to be support in old age. It was supposed the be “insurance” to supplement, not replace savings and other forms of support.
If you reach 65 and SS is the ONLY thing you have, you have failed. It may not be your fault; it could be the result of bad luck, but you are among life’s losers. We should help those people, but they cannot expect to enjoy the same benefits as those who did better. On the other hand, those of us who did succeed, like you and I, could do with a little less from the government. This is not “fair”. We are being ripped off to some extent by those who did not or could not save. But it is better that we who can afford it get a little less rather than demand everything at the expense of others.
There’s so much BS in this post, I don’t know where to begin. Can we start with the notion that the economic crisis in America was over by early 2009?
The recession didn’t even end until the middle of the year. First quarter GDP went down 6.7%. Even second quarter GDP still went down .7% Meanwhile, in those two quarters, 73% of all job losses occured, and much of that is what we’re paying for right now.
Capital’s basically recovered. Whatever you claim is supposed to hurting their cashflow or profitability isn’t. They’ve got more of it on hand than ever. The thing to be clear on here is, if our problem was a cashflow problem for businesses, on account of regulation or whatever, that problem’s solved, despite everything you claim would stop it.
Your fundamental miscalculation seems to be this: you expect the so-called job creators to be chomping at the bit to take on new workers. You’ve missed the memo: workers are considered liabilities, by folks who seem to believe that businesses perform by shear dint of their brilliance and leadership. Truth of the matter is, you are expecting the economy and the fiscal situation to recover on the backs of the very people who do not need to be burdeded in order for this recovery to work. You’re trying to build the wall higher by taking the bricks from the bottom.
And the AEI expected what, that long term labor participation would be better if Obama had let the situation become even more hopeless? There are a few things you have to take into account. One is that a significant number of Baby Boomers were near retirement age anyways. Two is that Republicans have repeatedly worked against extension of unemployment benefits, which is what keeps people in the workforce, rather than off it. Three is that numbers would likely have been considerably worse with more unemployed.
The people represent the vast majority of the economy. It’s not enough to return the big companies and those who run them back to doing well. But Republicans are prepared to do nothing else than that. Republicans simply do not have the will at this point to do what America needs to be done.