Correlation is Not Causation: Bush, Spending, Tax Cuts, and Deficits

Recently, there has been criticism of President Bush from within the GOP for being a big spender. For example:

President Bush: Two-Thirds of a Real Conservative: ...Fred Barnes of The Weekly Standard magazine. ... has produced a book about George W. Bush, "Rebel-in-Chief," ... Barnes admits that he is "no libertarian or small government conservative," ... Bush "pays lip service" to limiting government, Barnes says. "More often than not," Barnes goes on to say, "he relies on a bigger federal government and billions of taxpayer dollars" to achieve his goals. ...

Or, another of many examples:

Hey, Big Spender, Peggy Noonan, Commentary, Opinion Journal: ...When George W. Bush first came on the scene in 2000, did you understand him to be a liberal in terms of spending? ... Mr. Bush ... "spends like a drunken sailor except the sailor spends his own money." ... If I'd thought he was a big-spending Rockefeller Republican--that is, if I'd thought he was a man who could not imagine and had never absorbed the damage big spending does--I wouldn't have voted for him...

The reasoning is that because deficits have increased since Bush took office, his spending habits must be the cause. But the evidence shows that this inference is spurious. While the two variables are correlated - deficits have increased under Bush - it is not because of his out of control spending habits:

[C]onservatives ... criticize Mr. Bush for presiding over runaway growth in domestic spending, because that implies that he betrayed his conservative supporters. There's only one problem ... it's not true. ...

I'm hoping to do more examples of "correlation does not imply causation," so if you come across examples of spurious correlation, please send them to me by email.

Of course, the first  place to turn on on such issues is The Simpsons. Here causality is inferred from the lack of a response to an action:

Homer: Not a bear in sight. The "Bear Patrol" is working like a charm!
Lisa: That's specious reasoning, Dad.
Homer: [uncomprehendingly] Thanks, honey.
Lisa: By your logic, I could claim that this rock keeps tigers away.
Homer: Hmm. How does it work?
Lisa: It doesn't work; it's just a stupid rock!
Homer: Uh-huh.
Lisa: But I don't see any tigers around, do you?
Homer: (pause) Lisa, I want to buy your rock.

Usually though, it is two variables moving spuriously together that results in the incorrect inference. For example, having lots of churches and lots of gambling in Nevada does not necessarily imply one causes the other. This is a case where causality does not exit between the two variables, instead a third variable, liberal regulations regarding gambling and marriage, cause a proliferation in both casinos and marriage chapels.

I think an editorial in today's Washington Times may provide an example of this. Recently, a paper by Bill Niskanen, chairman of the Cato Institute reemerged (the paper is discussed here). The paper, to the distress of conservatives, claims that cutting taxes does not reduce the size of government. The commentary in the Washington Times attempts to reestablish that tax cuts "starve the beast" by looking at cross-country evidence:

Tax cuts as government curb, by Richard W. Rahn, Commentary, Washington Times: ...Nothing new here -- but back across the Atlantic in America, a little storm was raised when one of President Reagan's economic advisers said he thought the Reagan and Bush tax cuts had led to more, rather than less, government spending. One argument by advocates of President Reagan's tax cuts is that "they would starve the beast," meaning lower tax rates would force less spending. The fellow causing the storm was Bill Niskanen, chairman of the Cato Institute ... [He claims] "starving the beast" did not work and may have been counterproductive. ...

Bill Niskanen actually showed even the best economist can occasionally be wrong. Let's hop back to Europe where I am at the moment. Italy, France and Germany began several decades ago to adopt a high-tax and spend government model, while the U.S. was moving toward a lower tax rate model. ... Mr. Niskanen's mistake was to ... fail to look at what has happened in the rest of the world. Major low-tax economies, such as Japan, Switzerland and the U.S., have much smaller government sectors than the major high-tax-rate countries. ...

But couldn't it be that as in the Nevada example a third variable, the preferences of people who live in each country, explains both taxes and the size of government? Countries that want larger government choose higher taxes, and countries that want smaller government make the opposite choice. Trying to force causality where none exists - cutting taxes and hoping the size of government falls when the majority of people do not want such cuts in government - will not work. It may be that the preferences in the U.S. are inconsistent and, for now at least, people demand both large government and low taxes, or it may be that current policy is out of step with what people want. But it is preferences that determine the size of government, not the amount of revenue collected.

Comments

[anne]

Though conservatives may make so many perverse claims, they are not necessarily fools, they are rather conservatives and have long had a wish to turn aside any and every social benefit program. The legacy of Franklin Roosevelt or even Teddy Roosevelt must be set aside completely. So, simply leaving Social Security or Medicare alone would draw continual criticism from conservatives. There is of course an exception to conservative criticism, the exception is the spending for the military and presently for the tragic from the beginning-tragic to the present war in and occupation of Iraq.

[anne]

The reason for the deficit, even with needless military spending, is the series of tax cuts which have insured a deficit that will grow indefinitely faster than the economy can grow. Conservatives cry for slashing social benefit spending, as a mask of the damage done by cutting taxes so profoundly for the wealthiest. There is however a continually saddening trade that is occuring between spending for the needless tragedy in Iraq and what could be done were the spending directed to needs in America and even selectively internationally.

[Idaho_Spud]

Don't forget the other conservative perennial favorites: Ag subsidies and Corporate welfare. Interestingly, while individuals are considered unworthy of government largesse, non-competitive or poorly run businesses face no such ideological hurdles!

"Free-market conservative" may be the greatest oxymoron yet.

[anne]

There is an interesting matter; Michael Pollan of Berkeley has been studying the effects of American corn subsidies in particular and effects of the subsidies prove startling when we realize how much we have become corn people and have much more so we are likely to become. There is a reason we have a steep tariff against the import of Brazilian sugar cane, even beyond the fine advantage sugar cane has over corn for ethanol production.

[anne]

http://pollan.blogs.nytimes.com/

May 24, 2006

The Great Yellow Hope
By Michael Pollan

I've been traveling in the American Corn Belt this past week, and wherever I go, people are talking about the promise of ethanol. Corn-distillation plants are popping up across the country like dandelions, and local ethanol boosters in Minnesota, Illinois, Iowa and even Washington State (where Bill Gates is jumping into the business) are giddy at the prospect of supplanting OPEC with a homegrown, America-first corn cartel. But as much as I'd like to have a greener fuel to power my car, I'm afraid corn-based ethanol is not that fuel.

In principle, making fuel from plants makes good sense. Instead of spewing fossilized carbon into the atmosphere, you're burning the same carbon that a plant removed from the air only a few months earlier — so, theoretically, you've added no additional carbon. Sounds pretty green — and would be, if the plant you proposed to make the ethanol from were grown in a green way. But corn is not.

The way we grow corn in this country consumes tremendous quantities of fossil fuel. Corn receives more synthetic fertilizer than any other crop, and that fertilizer is made from fossil fuels — mostly natural gas. Corn also receives more pesticide than any other crop, and most of that pesticide is made from petroleum. To plow or disc the cornfields, plant the seed, spray the corn and harvest it takes large amounts of diesel fuel, and to dry the corn after harvest requires natural gas. So by the time your "green" raw material arrives at the ethanol plant, it is already drenched in fossil fuel. Every bushel of corn grown in America has consumed the equivalent of between a third and a half gallon of gasoline.

And that's before you distill the corn into ethanol, an energy-intensive process that requires still more fossil fuel. Estimates vary, but they range from two-thirds to nine-tenths of a gallon of oil to produce a single gallon of ethanol. (The more generous number does not count all the energy costs of growing the corn.) Some estimates are still more dismal, suggesting it may actually take more than a gallon of fossil fuel to produce a gallon of our putative alternative to fossil fuel.

Making ethanol from corn makes no more sense from an economic point of view. The federal government offers a tax break of 54 cents for every gallon of ethanol produced, and this incentive is what has generated the enthusiasm for ethanol refining: the spigot of public money is open and the pigs are rushing to the trough. (At the same time, the government protects domestic ethanol producers by imposing a tariff of 54 cents a gallon on imported ethanol.) According to the Wall Street Journal, it will cost U.S. taxpayers $120 for every barrel of oil saved by making ethanol. Some "savings." ...

[anne]

Conservative research, which is a curious phrase considering the research from government spending to global warming, conveniently pays no attention to such small government findings as an absence of enough military spending in Japan to save or otherwise use the world :) Japan, by the way, could hardly have a government more privately intrusive.

[calmo]

Thanks for that Pollan article anne and your thoughts on what 'conservative' amounts to when it comes to military spending to maintain this so called 'small government'.

But I'm uncomfortable (what could be worse than that?) with that Bear Patrol note from Mark who seems to be lining us up against (maybe even comparing us with) Homer.
Or maybe it's just a coincidence. (Was that specious or special?) [Just like the rock, not so stupid afterall...]
You figure there is something called "The Bear Patrol"? (I know for a fact that there is bear sign but no Bear Crossing signs. Just a small point you think, but wait till you get chased up a tree for ignoring the not so telltale signs because you were waiting for the Bear Crossing sign...) [I treat those quotes around The Bear Patrol with all due respect, you?]
Can I bring myself to buy a copy of Barnes' Rebel to get another perspective on w that may redress a view that might be somewhat imbalanced? It could be that all that bear sign was deliberately placed on the path by those ahead who did not want a parade following them up the hill. The pristine wilderness (with all its pristine mosquitoes, black flies, noseeums, wasps...) is never shown as if it were the local campground on Memorial Day weekend, people. Some people will do anything to have the hill all to themselves. And that view may not be all that it is cracked up to be, no? There are so many other hills to climb with less artifacts and less artifices.
So Barnes offer declined but boy do I need some remedial Simpsons!

[anne]

Actually the passage from the "Simpsons" is wonderfully funny, and I will think of it often when worrying unnecessarily about tigers :)

[Andrew]

The view that federal tax and spending policies map to individual preferences -- not just lawmakers' preferences, or the preferences of rent-seeking pressure groups that influence them -- is a truly exotic view of government decision making.

There are myriad reasons why tax and spending policies may diverge sharply from the individual preferences of taxpayers or spending recipients. Tax exporting may lead to inefficient over-provision of government spending and taxation. Preferential tax handouts -- such as property tax abatements aimed at attracting new investment away from neighboring jurisdictions -- and other begger thy neighbor tax policies clearly are in the strategic interest of lawmakers, but it's hard to see how they map to the "preferences of the people who live in each country."

Public opinion polls consistently show deep ignorance of taxing and spending policies by wide majorities of Americans. And a large number of taxes are largely concealed from view, thus masking the "tax price" of public goods from individuals, making it impossible for them to choose the optimal amount of spending -- any more than consumers in a grocery store with no prices on the items would spend the optimal amount on food. In addition, see the many other reason state action may diverge from individual preferences in the broad public choice literature.

The public interest theory of government that argues that the state simply aggregates individual preferences and sets policy impartially, is hard to square with the observed behavior of states. It assumes away the whole problem of rent-seeking and stratic action by lawmakers, which is arguably the hardest policy issue we face.

[Bruce Webb]

While not taking anything away from Pollan, his arguments seem well placed, there is something to be said for jump starting ethanol production even if it is initially based on a pork ridden, tariff laden gift to corporate corn farmers. Much like Anne's argument in favor of the similarly corporate profit oriented Medicare drug benefit, getting the camel's nose under the tent is an imporatant first step. Then let the economics drive the policy.

Once the economy of scale is set in place the market fundamentals will begin to enter into play. Unless corn farmers lock in vertical integration (unlikely) ethanol producers will look to secure the cheapest source of supply, and if this means sugar beets from Montana or sugar cane from Haiti then that is what will go into the hopper.

Moroever if and when ethanol really takes off corn farmers can reexamine the way they grow corn. I spent some high school years in corn country (like over my back fence) and it would seem that the methods and materials that are necessary for seed corn or corn for harvest for human consumption are largely unnecessary if you are just going to send that corn to the distiller. Who cares if you don't have a perfect cob because insects got to a row or two? So what if it is a little off color? In the end all the ethanol producer cares about is sugar content. Corn is a weed, given the right conditions of heat and humidity you plant it and jump back before it hits you in the eye. I can easily see the precise corn-rows of my Indiana days give way to a jungle. Plant your corn densely enough and you won't need weed killer, remove need for access to the corn during the growing season (detassling and harvesting) and that fifty percent of the dirt reserved for the corn rows is liberated for planting.

Agronomists please pile in here. Is there are reason you could not grow corn solely for ethanol without laying out the fields in precise rows? Why you couldn't go the down and dirty route of planting as densely as possible to achieve the highest yield per acre if you didn't have to care a whit about the physical quality of the corn cob itself? And were going to mechanically harvest?

Right now the corn-ethanol market is designed to be a pressure outlet for farmers, a welcome place to send excess production. But once the market matures there will be incentives for growing corn in ethanol friendly ways and corn country may start looking way different when viewed from the air.

[Michael Cain]

When I look at this graph from Angry Bear showing federal revenues and spending, as a fraction of GDP, excluding Social Security
http://angrybear.blogspot.com/2005/12/budget-deficit-in-context.html

I am struck that since 1981 revenues and spending have tended to move in opposite directions. I attribute this simply to the fact that particularly under Reagan and George W. Bush, the people in charge truly believed that "deficits don't matter" so they cut tax rates and spent freely. During the Clinton years, a combination of somewhat more grown-up fiscal policy and some good luck with the economy caused revenues and spending to move the other way. My candidate for Mark's "third variable" in this case is obvious.

[Winslow R.]

But it is preferences that determine the size of government, not the amount of revenue collected.

Government spending (determined by 'the people') transfers nonfinancial resources from the private to public sector. Government spending determines the amount of resources in the public sector.

Government spending is limited (by inflation) by:
1) the ability to tax.
2) the ability to encourage 'savings' of deficits or future tax liabilities (tsy secs,cash).

I would like to better understand the desire to 'save' future tax liabilities.

Who are these 'savers' and what are their motivations? Why does Mr. Buffet have 40 billion in cash? Why does Ford have 20 billion? Why not 'invest' or spend instead? The opportunities for 'rent seeking' in the private sector fall below the rate of return on tsy secs?

Why does PBoC have 320 billion? To manipulate exchange rates? Will the U.S. ever 'tax' these foreign entities that hold almost half of all future tax liabilities?

http://www.ustreas.gov/tic/mfh.txt

I enjoyed Mr. Webb's take on future corn production.

[RW]

Pollan seems pretty close to the mark to me. I suppose it could be argued that ethanol from corn might represent a transition strategy if we possessed a reasonable and comprehensive energy strategy that took science and policymaking seriously - ah well, maybe some day.

But frankly it is not clear to me that the US should seek an ethanol/gasoline solution at all since, beyond engine changes (and do we really want the internal combustion engine to be part of a long term solution?), the ethanol production and distribution system represents a new and presumably rather significant infrastructure cost regardless of ethanol source. On top of that, removing arable land from food production for the purpose of producing vehicle fuel just makes the whole idea seem topsy-turvy.

Whatever happened to the idea of focusing on an electric car and then just finding different ways to feed it juice?

In any case, the analysis provided by Tad W. Patzek (2004) titled "Thermodynamics of the Corn-Ethanol Biofuel Cycle" supports Pollan's viewpoint and casts serious doubt upon the notion that corn ethanol can even be part of an intermediate-term solution much less a longer-term one, at least from a thermodynamic and carbon load viewpoint. The paper can be found at http://tinyurl.com/6yoec (it's a fairly large file); here's the abstract:

------------(snip)----------------

In this paper I define sustainability, sustainable cyclic processes, and quantify the degree of non-renewability of a major biofuel: ethanol produced from industrially-grown corn.

First, I demonstrate that more fossil energy is used to produce ethanol from corn than the ethanol’s calorific value. Analysis of the carbon cycle shows that all leftovers from ethanol production must be returned back to the fields to limit the irreversible mining of soil humus. Thus, production of ethanol from whole plants is unsustainable. In 2004, ethanol production from corn will generate 11 million tonnes of incremental CO2, over and above the amount of CO2 generated by burning gasoline with 115% of the calorific value of this ethanol.

Second, I calculate the cumulative exergy (available free energy) consumed in corn farming and ethanol production, and estimate the minimum amount of work necessary to restore the key non-renewable resources consumed by the industrial corn-ethanol cycle. This amount of work is compared with the maximum useful work obtained from the industrial corn-ethanol cycle. It appears that if the corn ethanol exergy is used to power a car engine, the minimum restoration work is about 7 times the maximum useful work from the cycle. This ratio drops down to 2.4, if an ideal (but nonexistent) fuel cell is used to process the ethanol.

Third, I estimate the U.S. taxpayer subsidies of the industrial corn-ethanol cycle at $3.3 billion in 2004. The parallel subsidies by the environment are estimated at $1.9 billion in 2004. The latter estimate will increase manifold when the restoration costs of aquifers, streams and rivers, and the Gulf of Mexico are also included.

Finally, I estimate that (per year and unit area) the inefficient solar cells produce 100 times more electricity than corn ethanol. We need to rely more on sunlight, the only source of renewable energy on the earth.

[anne]

Well argued, and though there have to be false directions to alternate energy I too would be careful that experiments continually be argued through and fostered.

[Mark Thoma]

I think I posted the wrong article. I wonder it it's worth posting Pollan on the main page?

[calmo]

And just when I was just warming up to Homer...

[RW]

Mark, perhaps I'm simply being too broad but it all seems part of a larger theme. The notion of confounding variables vis a vis taxation and size of government needs to include indirect taxation such as subsidies and protective tariffs; welfare for the rich if you will. The point has doubtless been made elsewhere and better but Republicans LOVE big government to the degree it makes liabilities public and privatizes profits. It's just another aspect of the tragedy of the commons.

[algernon]

Indeed, tragedy of the commons is an element in gov't spending. The bottom half of earners only pay 5% of Federal income tax. And even the many in that group who are net tax recipients can vote. Why shouldn't they vote for spendthrift politicians?

As an institution that effectively transfers money from the people who earn it to the people who are politically well-connect, gov't is essentially corrupt. It's going to grow by hook or crook...Republican or Democrat.