Regression Toward the Mean

Regression Toward the Mean

Extremes are by definition out of the ordinary. In life, in the economy, in history, in theology, in marriages, in parenting, etc., there is, as it were, a pendulum that swings. If you've ever watched a grandfather clock you'll see that the pendulum swings back and forth until it reaches its apex and then descends back toward the gravitational pull and then swings to the opposite extreme. If you assigned a numerical value for each point on the arch of the pendulum from one extreme to the other you would find that if you took the average point total it would be in the middle. The tendency is for life to move toward the mean, the average, the norm.

We often hear rainfall totals or rainfall deficits compared to the average rainfall total. What is the average rainfall total? It is the average of the extremes. The tendency in life is a regression from the extremes to the mean.

In the economy there are constant fluctuations between market expansion and market contraction. There are fluctuations between times of wealth building and recession. However, if the fundamentals of the American economy are sound, then in time the economy will regress toward the mean. It will correct, it will tend toward the norm.

In the current situation we can be sure that unless something is done by the government to prevent it from doing so, the economy will move toward the norm and it will appear that there is a significant improvement. What often happens is that when markets go through their cyclical fluctuations is that the president in office when the market trends lower gets the blame, and the president who holds the office when it trends better takes the credit. People acting out of emotion or blind loyalty often fail to appreciate the normal fluctuations and want to assign the label of goat or hero to the leader, regardless of what real impact he or she had. In truth, President Bush was not a goat and President Clinton was no hero. They just happened to be sitting in oval office as the pendulum swung from one extreme to the other.

Time will only tell where the pendulum will be at the end of President Obama's presidency in four or eight years. But regardless of where the pendulum is, President Obama should not be seen either as a savior or as a goat. However, we should never use the extremes of pendulum as an excuse to institute a social agenda that may have negative long-term effects. A true leader understands these fluctuations and makes provision to insure that there is a social net for those affected by market downturns and that others are not in a position to unfairly take advantage when the market is in an upswing. It will always regress toward the mean unless we impede the progress.