Correlation and Causation

In comments late last night, Stone Glasgow pointed out that correlation is not causation, which is, of course, a fact.  It falls into the category of true, but irrelevant

The way I look at it, there are meaningful correlations and non-meaningful correlations.

In the meaningful case, there might be common cause, or there might actually be cause and effect.  If there is common cause, at least one phenomenon serves as a barometer for the other.  Help me out here, if I'm missing any other possibilities.

In the non-meaningful case, an apparent correlation may simply be a data artifact, or there can be pure coincidence, or what I call "coincident correlation" where two unrelated phenomena happen to follow a similar course for a while, before veering off on their own trajectories.

To sort out if a correlation is  meaningful, you have to put together a coherent narrative.  In the case of this graph, I've done that.  Here is some elaboration.  The indicator value of finance sector peaks in identifying recessions since WW II is ten for ten - 100%.  On the contrary, there is one false positive in 1986.  This gives us 10 for 11, overall, or 90.9%.  Few indicators achieve that kind of reliability.

As additional confirmation, consider the times when the percentage of finance sector capture is below trend for several years in a row.  These times are specifically the longest recession-free periods in the time frame.  Politically, these are the Kennedy-Johnson and Clinton administrations.

To call this correlation non-meaningful is asking an awful lot of coincidence.  Occum's razor firmly in hand, I prefer to think that policy matters.  Recessions are a characteristic of Republican administrations.   This relates to tax enforcement policy, deregulation that enables capital misallocation, fiscal and monetary policies, and the wealth disparity that has grown continuously since about 1980.

My coherent narrative lends credence to the meaningful correlation between high finance sector profits and poor economic performance.

High finance sector profits contribute to a concentration of wealth at the top of society.  This is ultimately destabilizing.  It happened in the 30's and it's happening again now.


.