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August 16, 2005

In one of my courses I try to teach the students how to avoid constructing misleading graphs. Barry Ritholtz properly criticizes a poor Wall Street Journal graph and provides me with a nice example for my course.


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A bad example, if you ask me. The chart correctly indicates that (1) the employment recovery was significantly faster than the preceding decline; and (2) the recovery began a few months after the tax cut. Of course one should not be foolish enough to think that the tax cut was the only reason for the recovery, but the chart suggests (rightly, I think) that it was an important part of the reason. Short-term interest rates follow a pattern rather similar (with a time lag) to the employment pattern shown in the chart, so apparently the FOMC found that employment pattern compelling, and they are hardly a bunch of ignoramuses that would be easily misled.

The usual criticism of the chart argues that it fails to put the recovery in the perspective of previous recoveries. Granted, there is a valid point to be made that the recovery is relatively weak by historical standards (partly for demographic reasons), but it is not reasonable to label the chart misleading simply because it fails to make that point. One chart can only accomplish so much. And Barry Ritholtz’ counterpoint chart – the Cleveland fed chart comparing employment relative to business cycle peaks – is even more misleading in this context. In that chart, the current recovery appears much slower than it really is, because the decline was so slow, and the eye is fooled into seeing the decline as part of the recovery.

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