Is it correlation, or, causality? I forget which…
In today’s WSJ, Todd Zywicki paraphrases Elizabeth Warren confusing correlation for causality:
She says that such a commission is necessary because consumers cannot buy a toaster that has a one-in-five chance of exploding, but they can get a subprime mortgage that has a one-in-five chance of ending in foreclosure.
The same Elizabeth Warren, Lady Overseer of TARP? No way she gets that wrong. Wait for it… A Google search brings me her article from the May-June 2008 issue of Harvard Magazine:
It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance your home with a mortgage that has the same one-in-five chance of putting your family out on the street—and the mortgage won’t even carry a disclosure of that fact.
She really thinks people don’t understand what their getting themselves into. Buying a house is risky. The modal way of life for Americans is living paycheck to paycheck. Mandating the use of vanilla mortgages is not going to remove the risks of buying a house. “Creative” mortgages were indeed a disaster, but there is an underlying issue to that problem, and it has nothing to do with the terms of debt obligations.
Mr. Zywicki goes on to explain why mortages and toasters are not good for comparison:
And unlike toasters, borrowers have substantial say over whether their loan “explodes.”
This reminds me of a discussion of seatbelts, airbags, and other devices that make cars safer, but increases the riskiness of driving. If you follow the last link, you’ll be treated with an introduction to “Tullock Airbags.” I get excited when I get to share that one with people.
When you lower the percieved costs of risky behavior, driving or buying a house, people substitute towards consuming more of said risky behavior. Like driving faster, or buying bigger houses. Effectively what Elizabeth Warren wants, is for consumers to outsource their due diligence to a safety commission.
Even cartoonists know the difference:
Tags: econtalk, correlation, causality, Elizabeth Warren, seatbelts, Todd Zywicki, WSJ, Xkcd, Tullock Airbags
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