Cause and/or Effect

During the current economic stimulus debates, much has been made of the cause versus effects of monetary and fiscal policy. When assessing the results of tax increases during the 1990s, for example, some have reasoned that the economy grew despite or even because of them. The argument continues by claiming that recent tax cuts have resulted in unemployment rates surging to levels unseen in the past quarter century. These claims, oversimplify a complicated and dynamic set of variables, none of which we are capable of isolating.

You must keep in mind that tax cuts do not happen in a box. We do not have the ability to singularly isolate all variables in the real world. We cannot accurately say whether it was monetary policy that caused a particular gain or fiscal policy or even foreign policy. Perhaps one of the infinite other variables caused a gain or loss. Or consider that a certain period of time might have been made worse from action as opposed to having introduced nothing at all. For example, it has been cited that recent tax cuts have resulted in surging unemployment rates. One must consider, relative to what? Had we increased taxes at that time, what would have been the result? The answer is that we do not know precisely. We are forced to use some amount of logic and common sense. We cannot rely on historic measurement if we cannot isolate the variables.

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