Wednesday, January 03, 2007

Correlation is not Causality

In their article "Economic Development and Reconstruction on the Gulf After Katrina", Waugh and Smith argue that:

The duration of closure is also negatively related to long-term recovery. The longer the business remains closed, the less likely it is to recover in the long term. This result suggests that businesses need to open as soon as possible after the disaster to have a better chance of recovery.
This conclusion may or may not be true, but it doesn't seem warranted. Couldn't there be a third factor that affects both the time to reopen and the long term success of a business? It seems likely that healthy businesses are able to rebound quicker. To implement a policy of encouraging all businesses to "open as soon as possible" will do little more than force weak businesses into the marketplace before they are ready. Correlation is not Causality.

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