I know I'm learning real fast here

Like most of the chain e-mails making the rounds, this one is inaccurate. Some claims are outright false while others are grossly out of context. Overall, the e-mail commits the logical fallacy known as post hoc ergo propter hoc (or after the fact, therefore because of the fact).

Here's what we found:

Consumer confidence has fallen since October 2006, but it was not at a 2 1/2 year high prior to the elections. In fact, consumer confidence varies less with elections than it does with general economic conditions, many of which have little to do with the actions of politicians.

Gas prices were not at $2.19 per gallon before the election, but did reach that point nearly a year before the election and again (briefly) two months afterward.

The e-mail actually understates the equity drop by $500 billion. In fact, the stock market lost $2.8 trillion in equity from its most recent high point. But the e-mail fails to make clear that the high point happened nearly a full year after the election. It also neglects to mention that the market is higher now than it was in November 2006.

There's no clear figure on how much home equity has been lost since 2006 (the two most widely used measures give vastly different sums). But home equity loss and higher foreclosures have more to do with some unsavory lending practices and some bad decisions by homebuyers than they do with congressional activities.

The e-mail commits a whole series of post-hoc fallacies. That is, it assumes, without offering any evidence, that because one thing preceded another, the first must have caused the second.

We did find one accurate assertion, though. The unemployment rate really did increase from 4.5 to 5 percent.

The Two-and-a-Half-Year High That Wasn't

Because the e-mail has been around for a while and is undated, we can't say exactly when "a little over one year ago" is supposed to begin. We�ll assume that it means sometime shortly before the 2006 elections. Adding to the confusion is that there are two different surveys of consumer confidence. But we are certain that neither index shows consumer confidence at a two-and-a-half-year high prior to the 2006 mid-term elections. Here are the results from the Conference Board Consumer Confidence Index:

As you can see, in the months leading up to the November 2006 election, consumer confidence actually declined. It was not at a two-and-a-half-year high. In fact, it had dropped 4.7 points between April 2006 and October 2006. And April 2006 actually represented a nearly four-year high. Consumer confidence last topped the April 2006 number in May 2002. Consumer confidence then climbed after the 2006 election, peaking in July 2007 before it began to fall off.

The University of Michigan's Index of Consumer Sentiment shows similar results:

Here, too, we see that October 2006 does not represent a two-and-a-half-year high point in consumer confidence; January, February, June and July 2005 all saw higher totals.

Leaving aside the incorrect numbers, the e-mail is misleading to suggest that the November 2006 congressional elections caused a decline in consumer confidence. By that sort of logic, one could also suggest that George W. Bush's election caused the 10 percent decline in consumer confidence recorded by the Conference Board between December 2000 and January 2001, or the 12 percent decline in consumer sentiment that the University of Michigan measured between November 2000 and January 2001. But in fact, those drops had a much greater connection to the bursting of the dot-com bubble than they did to an election. The same is true of the decline in the last half of 2007, which owes far more to generally worsening economic conditions � or at least to the public perception that economic conditions are generally worsening � than it does to an election.

Did You Know That Congress Sets Gas Prices?

Despite what this e-mail implies, Congress little or nothing to do with setting the price of gasoline. Gas prices rise and fall with fluctuations in supply and demand. Prices go up when the supply decreases or the demand increases. Prices fall when supply goes up or demand goes down. There are those who believe that oil companies are manipulating supply, but if so that's the doing of oil-company executives, not Democratic senators or House members, some of whom in fact are calling for yet another investigation of oil-company practices.

U.S. policy can have some effect on global oil markets � wars in major oil-producing nations tend to reduce the oil supply, at least in the short-run � but foreign policy is primarily the province of the executive, not the legislative, branch.

What's more, the e-mail includes some carefully cherry-picked figures, as this chart from the Department of Energy shows.

The e-mail implies that gas prices were at $2.19 per gallon just prior to the 2006 election. Gas prices did in fact dip as low as $2.19 per gallon, but they did so in January 2007, after the congressional elections. Gas prices also dipped below $2.19 per gallon in November 2005, a full year before the election. The e-mail also fails to mention that prices climbed to more than $3.00 per gallon in August 2006, when Republicans controlled both branches of Congress and the White House.

That Pesky Stock Market

The claim that Americans have lost $2.3 trillion in stock and mutual fund equity is not quite right. Economists use the Dow Jones Wilshire 5000 Total Market Index, an index that tracks nearly every U.S. stock, as the best measure of the entire U.S. stock market. On Nov. 7, 2006, (the day before the congressional elections), the Wilshire 5000 closed at 13,871.50. On April 30, 2008, the Index closed at 13,991.10. That represents a gain of about $119.6 billion in equity since the 2006 election.

But that's not to say that it's been a steady gain. On October 11, 2007, the Wilshire 5000 peaked at 15,819, then plunged to 13,037.3 on March 19, 2008, a loss of $2.8 trillion in equity, or $500 billion more than the e-mail claims. Market gains since March have reduced the number to $1.8 trillion since that low point, which is somewhat lower than the e-mail indicates. There are lots of ways to look at numbers: between the 2006 election and October of 2007, the stock market gained over $1.9 trillion in equity, then lost $2.8 trillion before gaining $954 billion back again. But the fact is that anyone who invested in a reasonably broad-based array of stocks in early November 2006 and held all those stocks until today has seen a modest increase in their value.

Moreover, it is inaccurate to say that all these losses have been experienced �by American households.� It�s true that the percentage of U.S. households owning stock continues to increase. A 2005 joint report from two organizations representing investment companies and security firms estimated that about half of all U.S. households now own stock (mainly through mutual funds). But institutional investors � retirement funds, college and university endowments, investment companies like J.P. Morgan Chase and insurance companies � control a large portion of stocks. At Microsoft, for example, around 63 percent of the stock � or just under 6 billion shares � is owned by just 2,300 different institutional investors. These institutional investors bear some of the brunt of equity losses, so it�s just wrong to imply, as the e-mail does, that "households" account for all the lost stock market equity.

My Kingdom for a House!

The e-mail is right about the bare facts of the housing crisis. It's true that about 1 percent of American homes were in some stage of foreclosure in 2007, and for the first time since 1945, home equity value fell below 50 percent (that is, Americans' mortgages are more than half the value of their homes).

Whether Americans have actually lost $1.2 trillion in home equity depends on what measure one uses. There are two different indexes used to track home value. Standard & Poor's Case-Schiller Home Price Index measures residential housing prices in 20 metropolitan regions and then constructs a composite index for the entire United States. Freddie Mac's Conventional Mortgage Home Price Index (or CMHPI) measures the value of single family homes that qualify for Freddie Mac or Fannie Mae underwritten mortgages, which, in practical terms, means that the CMHPI excludes any house valued at more than $417,000.

Measured by the Case-Schiller index, the crisis is actually worse than the e-mail says, at least for homes in those 20 regions. Case-Schiller shows a 12 percent decline in home value since November 2006. Standard & Poor's estimated the 2006 value of residential real estate held by individuals and nonprofits to be around $22.4 trillion. A 12 percent decline works out to about $2.7 trillion in lost home equity.

The CMHPI paints a very different picture. Its U.S. index, which is given in quarterly rather than monthly figures, shows a fourth quarter 2006 composite of 294.5 and a fourth quarter 2007 (the last quarter available) of 295.3, or about three-tenths of a percent increase.

The truth lies somewhere in between. As this map of foreclosure rates shows, many of the areas hardest hit by falling home prices are large, high-growth areas � in other words, major metropolitan areas where a lot of homes are priced at more than $417,000:

Source: The Atlantic

Because the Case-Schiller index focuses on some of the metropolitan areas hardest hit, it likely overstates the amount of equity lost. By excluding homes valued at more than $417,000, the CMHPI understates the problem.

In any event, the e-mail is wrong to imply that the crunch is related to congressional elections. Indeed, blame really rests with two entirely different groups: lenders who (in some cases) fudged loan applications for buyers who weren't really qualified for loans, and home buyers who signed mortgages that they couldn't afford. Operating on the assumption that houses would always increase in value, some Americans essentially gambled on their home purchases. They were aided, in many cases, by subprime loans which generally have very low interest rates for a few years, but which later jump higher � sometimes much higher � than rates for conventional mortgages. Many people used subprime loans to buy houses that they could afford (barely) for the first few years with the thought that they could always sell the house for a handsome profit just before the higher interest rates (and hence higher payments) kicked in.

Unfortunately, house prices didn't continue to rise. In fact, the frenzy to purchase houses resulted in unrealistically high prices � much like the stock market bubble in the late 1990s. And so, like that stock market bubble, when investors stepped back for a moment, they realized that they were overpaying. Since houses (like everything else) are worth only what someone is willing to pay for them, when new home buyers paused, housing prices leveled out and then began to decline, falling 8.9 percent in 2007. Many homeowners thus found themselves with the double whammy of a house that was worth less money than they owed and an increased payment that they could not afford.

Latin Alert

The e-mail is a classic example of the logical fallacy post hoc ergo propter hoc. Post hoc fallacies assert that A caused B because B happened after A without offering any evidence that A and B are causally related. It's one of the most common fallacies, and not just in the political arena, either. They're very easy to construct: Just pick two things you don't like and attribute the second one to the first. It's that sort of thinking that might lead a sports fan to believe that his team wins only when he wears his "lucky" cap turned backward.

A simple rule of thumb is to treat any sort of "we did this and some really bad thing happened" argument with extreme skepticism. Causal arguments work only if there is an actual connection between the two events. A good argument can't just assume a connection; it has to show that one really exists. In case you want to delve further into this subject, we'd suggest you visit our sister site for educators and students, FactCheckED.org, and take a look at the lesson plan "Monty Python and the Quest for the Perfect Fallacy."

When you see this sort of claim presented without any evidence at all, you probably ought to just assume it's false. And if that claim happens to arrive in the form of a chain e-mail? Then we hope you'll take our advice and give your delete key some exercise.

- Joe Miller

I know I'm learning real fast here

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