In social science research (especially economics), what kinds of tools or methods are used to distinguish between correlation and causation?

sonac36 · 2012-05-24T21:40:49.703155+00:00

All good points. The strongest papers usually approach causality in several ways. I don;t think I've ever been to a paper presentation where an audience member didn't spend 10 minutes interrogating the poor presenter about precisely why his IV was exogenous.

sonac36 · 2012-05-24T21:38:38.649135+00:00

Good clarifications!

davidreiss666 · 2012-05-24T16:27:35.314911+00:00

The most commonly cited statistic in happiness economics is the rule that somewhere between $40,000 and $110,000, a higher salary doesn't buy much more joy or satisfaction. Many people draw the bright white line at $70,000. This provides a strong utilitarian impulse to raise taxes on the rich, who apparently can't buy much happiness with their extra millions, and to funnel the money to the poor to bring them closer to $70,000.

This findings has actually been retracted by Kahneman. He showed it to Angus Deaton (a Princeton economist) who immediately pointed out that you'd expect happiness to scale logarithmically with income, not linearly. Sure enough, wnen you plot happiness using logs, you the relationship continues to be robust at high income levels.

sonac36 · 2012-05-24T15:22:02.921251+00:00

Econometrics has a very powerful toolset for determining causality. A good overview of current working is in Taking the Con Out of Econometrics, more details are in the book: Mostly Harmless Econometrics.

The standard econometric toolbox includes:

Natural experiments : Cases where the natural world or policy environment provided some exogenous variation. For example, rainfall (at least over short time periods) is provides more-or-less random shocks to the agricultural sector.

Instrumental variables: Already covered by pikacool. I wanted to add that one of the cool uses of IVs is as an add-on to other randomized trials, such as Intent to Treat analysis. For example, prenatal supplements can increase infant's cognitive development. 20 years later, you can run an IV to see how cogntive endowment effect labor rates.

Regression Discontinuities: A really neat mechanism if you're got a discrete outcome arising from a continuous variable. For example, academic scholarships might be based on a specific GPA or SAT. Since the difference between people with a 3.0 GPA and 2.99999... GPA are minor, differences in outcomes at that point should be due to the scholarship itself.

Expeiments: The gold standard. Take some names, put them in a hat (or more likely, in a cluster controlled excel spreadsheet).

Edit: I forget The mystery of the vanishing benefits: An introduction to impact evaluation, a really fun paper that gives another overview. Not technical, too!

habaker91 · 2012-05-24T13:42:59.004922+00:00

And if we take Romer's numbers from the table above, and plug in a decline of 455 for the most recent recession (which Krugman himself says will be an understatement), we get that the average "output loss" (measured in the units Romer defines in the chart) during recessions from the pre-Fed era was 158.1, while in the post-Fed era it was 356.4.

Does everyone see the significance of this?

Amusing phrasing, because, of course, the result isn't significant. The standard deviation of the distribution is 609, so we're talking about a difference of less than a third of a deviation.

Not to mention that it looks like the distribution is exponential. If you take the logs of the number you find that pre-Fed recessions had a reduction of 4.9, while post-Fed had one of 5.1.

Even more amusing is the excerpt from the conclusion. Murphy took some data, threw out the data that didn't fit his thesis, and what remained fit his thesis? You don't say!

TheGhostOfNoLibs · 1 day

Relevent xkcd.

dronezero · 1 day

Unemployment in blue collar and white collar positions have actually increased by roughly the same percentage in the recession.

TheGhostOfNoLibs · 1 day

What exactly would complexity theory add to this?

TheGhostOfNoLibs · 1 day

No, you actually wouldn't. Gains from trade from other trading partners would increase growth rates. In any case, as I pointed out, exports made a very small part of the US economy post WWII.

TheGhostOfNoLibs · 1 day

No, we actually ran a surplus in the last few years of the Clinton administration.

TheGhostOfNoLibs · 1 day

Why should it be? Honestly, complexity economics and agent based modeling have been active fields of research for 20 years, but they haven't had any breakthrough insights. They've always been the next big thing in economics, but they haven't actually produced anything that requires radical remaking of the field. I read Paul Omderod's Butterfly Economics when it came out, and didn't see anything that was really exciting in it. The Santa Fe institure has a lot of cool papers, but nothing yet that indicates a need to remake the field.

TheGhostOfNoLibs · 1 day

From the chaos theory link:

Chaos theory is a field of study in mathematics, with applications in several disciplines including physics, engineering, economics, biology, and philosophy. Chaos theory studies the behavior of dynamical systems that are highly sensitive to initial conditions, an effect which is popularly referred to as the butterfly effect.

Chaos theory is very much being used in graduate level macroeconomics courses.

TheGhostOfNoLibs · 1 day

Actually, most economists do use dynamic stochastic models. You just don't see them discussed in newspaper pieces.

TheGhostOfNoLibs · 1 day

This is not true. Exports were only 5% of GDP in the post war spending. Comparative advantage means that you'd expect growth to be lower in the absence of trading partners.

TheGhostOfNoLibs · 1 day

No, I'm using it's meaning in econometrics. The secular variation of a time series is its long-term non-periodic variation.

TheGhostOfNoLibs · 1 day

Looking at (government expenditures)/(gdp) on FRED it does look like the government does a fairly decent job of spending counter cyclically, but there's a secular trend towards larger government.

aMindWellArmed · 2 days

You're right, I conflated the two. Thanks!

Physiocrat · 2 days

Could you please provide sources?

aMindWellArmed · 2 days

You don't have to pay for it. Each servicer is required to give you your credit score annually. You can request your score at https://www.annualcreditreport.com (note: freecreditreport.com is a scam.

Physiocrat · 2 days

I think this is a really good question, actually. It's a case where the majority of academics disagree with the conventional wisdom.

Physiocrat · 2 days

Fanne Mae wasn't an important driver of the crisis. The housing bubble was driven by price increases between 2002- and 2005, the same period GSE-origninating loans was at a local minimum (alternate graph) and private loans surged (alternate graph).

I can certainly imagine a housing bubble that was driven by government backed mortgages, with limited oversight and moral hazard. I don't see any evidence that the 2008 crisis was one.

MyStepdadHitsMe · 3 days

Thanks for the reports!

NarwhalBaconCat · 3 days

Question on #2: Couldn't the discrepancy between high school and college earners be more attributed to the declining worth of a high school degree, rather than college grads have become 80% 'better' than high school grads?

Interesting question! It's certainly possibly. However, I'm not aware of any evidence of HS standards dropping to that extent. The book I recommended, "The Race Between Education and Technology" does a really convincing job of showing the the difference is due to what economists call "Skill Biased Technological Change". You can get a synopis of it here.

Also, does #2 take into account the increasing cost of a degree, not just the better wages it enables? It's hard to believe based on my own anecdotal evidence that college kids are that much richer than in the past.

No, but the difference between salaries is large enough that it absorbs most of the increasing tuition cost. At the same time, education isn't a free lunch. If its value increases, prices will rise to match it.

NarwhalBaconCat · 3 days

That's interesting - I think there's an argument that the internet will make traditional credentials more important. If you don't have any expertise in a subject its actually can be pretty challenging to distinguish between someone who knows what they're talking about someone who is simply cribbing off of wikipedia and google.

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