Archive for the ‘Economy’ Category

Confusing correlation with causation is a common mistake for people to make. Often, this mistake is the result of sloppy thinking, such as the case with this article here.

Today, President Bush gave an eight-minute speech on the economy, which was meant to reassure the markets. “This is an anxious time,” said Bush. “But the American people can be confident in our economic future.” However, ABC News notes that during those eight minutes, the Dow Jones dropped another 107 points. The Dow was down 78.70 at the beginning of Bush’s address, but at 185.66 by the end.

Correlation occurs between two variables when there is a strong relationship between A and B, such that when A changes, B also changes. The tendency for most people is to assume that since there is a correlation between A and B, A must cause B. However, as anybody with high school statistics could tell you, it is a mistake to assume a causal relationship because of a correlation. It might be the case that A causes B, but it could also be the case that B causes A, or even the third possibility that there is some variable, C, that is causing the change in both A and B. Because of the number of possibilities, we cannot draw a conclusion about probable causation with the observation of a single correlative study.

In this case, we have good reason to assume that the causal relationship is incorrect. By the time Bush had made his address, the stock markets had already been losing value at a steady rate for weeks. Furthermore, he made his address specifically to address the financial crisis. In this case, it would seem that the most reasonable assumption to make would be that there is a third variable (or group of variables) that caused both the stock market to fall, and Bush’s speech.

This post’s author may or may not have been serious about the argument, but I have seen similar arguments made regularly enough to know that many people do not understand the difference between correlation and causation. I hope that the next time you hear somebody make an argument like this, you will recognize that it is incorrect, and demand more proof before accepting a causal relationship.

Piracy and DVD sales are putting the theaters out of business… or so we’ve been told. I managed to take this picture while driving around downtown¹ a few days ago²:

It turns out that a new movie theater is going into a plaza around Sheppard and Don Mills. This isn’t your average run-of-the mill theater either; this is one of Cineplex’s giant “Silver City” theater complexes. This isn’t an isolated incident either; theaters are still being constructed amidst giant box store malls all over Ontario. While this isn’t necessarily proof that the theater companies aren’t in trouble, it makes me wonder if they’re doing as bad as most people seem to think.

With global warming all the rage in government, the media, and the scientific community; and the recent introduction of the new Liberal carbon tax plan, a lot of talk has focused on the issue of who should be footing the bill for our increasing energy use. Whereas proponents of the bill think that Canadians have to start paying attention to our levels of carbon emissions, opponents of the bill point to the fact that Canadians are already burdened with high energy costs and require relief, as opposed to increased taxes, at this time.

First: a few facts. We know that there are a number of externalities from carbon emissions. Global warming has more or less been universally accepted at this point in time, and we know that the effects will range from moderate to severe harm to our environment. Even if you don’t believe in global warming, you probably still acknowledge that combustion processes, that are the source of most carbon emissions, are significant contributors to smog and other pollutants. These things are both bad for our health and for our environment. We also know that, currently, these costs are not factored into the price of using fossil fuels and other carbon-emitting power generating processes. As a result, we grossly underestimate the cost of using these energy sources, and neglect to factor in the environmental and personal harm that we inflict when using them¹.

As previously discussed, while proponents of the carbon tax generally recognize that it is our responsibility to mitigate the above mentioned harms, critics don’t believe that the average Canadian citizen should be punished via increased energy costs. Some people don’t believe we should be paying these costs at all, but this is clearly not a [long-term or sustainable] solution. So if the Canadian citizen isn’t footing the bill for these costs, who should be the one to do it? Big corporations? Distributors? Producers?

Taxation tends to be misunderstood. If you levy a tax against a big corporation, nobody seems to care, but levy the same tax against your citizens and there is a big outcry. The truth of the matter is that no matter who is taxed, the consumer is always the one who will end up paying for it². Why is this the case?

The economic principles behind this phenomenon are rather simple. In an ideal (closed) free market economy, businesses are driven by two distinct mechanisms:

1. Profit Maximization: Businesses will always try to maximize their profits through minimizing expenses and maximizing the price of its products.
2. Competition: Consumers will choose to purchase the cheaper of two (or more goods), assuming comparable function and quality, businesses will compete to try and achieve a larger portion of the consumer market, and thus competition will drive businesses’ prices down.

These two factors work together to develop a market equilibrium where a company’s revenue will equal its expenses. By taxing the business, all you are doing is adding an extra expense that the business must factor in to their prices. Just like every other expense, this helps decide the price of the product that is sold to consumers: Raise the costs of production, and you will also raise the final price of the product. This will result in a new state of equilibrium, where consumers are paying more for the same product. The same process happens regardless of what stage of production you add the tax; it is factored in as an extra cost, which is then passed on to the consumer. People don’t care as much when the tax is added on earlier in the process. Just because you don’t directly observe the price increases from a business being taxed (unlike seeing the sales tax being added on when it comes time to pay for something), it does not mean that you aren’t paying a higher price because of that tax.

Obviously we don’t live in an ideal free market economy, but the principles are more or less the same. The result is that there is virtually no difference between taxing a business and taxing the consumer. Of course, in a more complicated system, where you have to compete to retain business and jobs on an international scale, whom you tax becomes more important. However, the fact remains that taxing will ultimately affect the consumer. So remember: the next time the government decides to tax a big, greedy corporation, and give the money to honest, hard-working citizens, that corporation is just going to turn around and pass that expense onto the consumer³.

No, this isn’t going to be a political rant about the war in Iraq, or our dependence on (foreign) oil. I want to look at the price of gas, and tackle the assertion that gas prices are too high, and that high gas prices are a bad thing.

We often complain that we (Canadians, but also Americans) are paying too much for gasoline. The reality is, what we pay is a small amount compared to what the rest of the world pays for the same thing. Because we extract and refine a lot of our oil right here in Canada (as well as placing relatively small taxes on gasoline), we can afford to keep our gas prices relatively low, even with our burgeoning consumption. However, the price of gas at present doesn’t really tell us what the price should be.

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Gas Strikes: Do they work? No.

There’s a new fad sweeping the internet: gas strikes. These aren’t really strikes; more like boycotts. The idea behind them is that if you choose to boycott gas stations in your area, the collective power of consumers will force gas companies to lower their prices. It sounds like a good theory, in principle (as long as you don’t know what the principle is), but it does have some major flaws.

1. This Doesn’t Change Consumption

To start, you’re just shifting consumption. If everybody goes and fills up with gas so they don’t have to fill up for the next five days, you aren’t reducing your consumption. All you’re doing is shifting your consumption by “stocking up” at the beginning of the boycott. The gas stations sell just as much gas, and ultimately do not see a drop in sales. The only way to truly change the price of gas would be to change your overall gas consumption to lessen demand for the product, but this would only be effective if everybody did it. There is no way that you and a few thousand friends (or even all of the people in Ontario) could radically alter the price of gas by changing their purchasing habits, or refusing to purchase it.

2. Changing Consumption Won’t Change Gas Prices

Why won’t you be able to change the price of gas? First, the price of gas is not arbitrary; it is determined by a combination of crude prices, refining and transportation costs, as well as government taxes. Even if you were able to cause a significant reduction in the demand for gas at your local gas station, there is likely nothing that the station owner could do to lessen the price of their product. This is because if you don’t buy it, there are other people all over the world who are more than happy to take it off your hands. If you don’t buy gas from your local gas station, the franchise will eventually go out of business and then Shell/Petro-Canada/Esso will just sell their gas elsewhere.

3. This Doesn’t Hurt Oil Companies

The last point is that even if you were successful in your boycott, you wouldn’t be affecting the people you intend to target. The demand for oil and gasoline is constantly on the rise. By refusing to do business with your local gas station, the only result will be driving that gas station out of business. That gas station is a franchise, which means that though they have to buy their product from the big bad oil companies, it is owned and operated by one of your neighbors. When the franchise goes out of business, you aren’t harming the oil companies (who will just sell their product elsewhere); you are harming local business owners.

I will not be participating in this, or any other “Gas Strike”, and neither should you.