Mostly Harmless Econometrics: An Empiricist’s Companion

Making Regression Make Sense

’Let us think the unthinkable, let us do the undoable.

Let us prepare to grapple with the ineffable itself,

and see if we may not eff it after all.’

Douglas Adams, Dirk Gently S Holistic Detective Agency (1990)

Angrist recounts:

I ran my first regression in the summer of 1979 between my freshman and sophomore years as a student at Oberlin College. I was working as a research assistant for Allan Meltzer and Scott Richard, faculty members at Carnegie-Mellon University, near my house in Pittsburgh. I was still mostly interested in a career in special education, and had planned to go back to work as an orderly in a state mental hospital, my previous summer job. But Econ 101 had got me thinking, and I could also see that at the same wage rate, a research assistant’s hours and working conditions were better than those of a hospital orderly. My research assistant duties included data collection and regression analysis, though I did not understand regression or even statistics at the time.

The paper I was working on that summer (Meltzer and Richard, 1983), is an attempt to link the size of governments in democracies, measured as government expenditure over GDP, to income inequality. Most income distributions have a long right tail, which means that average income tends to be way above the median. When inequality grows, more voters find themselves with below-average incomes. Annoyed by this, those with incomes between the median and the average may join those with incomes below the median in voting for fiscal policies which - following Robin Hood - take from the rich and give to the poor. The size of government consequently increases.

I absorbed the basic theory behind the Meltzer and Richards project, though I didn’t find it

all that plausible, since voter turnout is low for the poor. I also remember arguing with Alan Meltzer over whether government expenditure on education should be classified as a public good (something that benefits everyone in society as well as those directly affected) or a private good publicly supplied, and therefore a form of redistribution like welfare. You might say this project marked the beginning of my interest in the social returns to education, a topic I went back to with more enthusiasm and understanding in Acemoglu and Angrist (2000).

Today, I understand the Meltzer and Richard (1983) study as an attempt to use regression to uncover and quantify an interesting causal relation. At the time, however, I was purely a regression mechanic. Sometimes I found the RA work depressing. Days would go by where I didn’t talk to anybody but my bosses and the occasional Carnegie-Mellon Ph. D. student, most of whom spoke little English anyway. The best part of the job was lunch with Alan Meltzer, a distinguished scholar and a patient and good-natured supervisor, who was happy to chat while we ate the contents of our brown-bags (this did not take long as Allan ate little and I ate fast).

I remember asking Allan whether he found it satisfying to spend his days perusing regression output, which then came on reams of double-wide green-bar paper. Meltzer laughed and said there was nothing he would rather be doing.

Now, we too spend our days (at least, the good ones) happily perusing regression output, in the manner of our teachers and advisors in college and graduate school. This chapter explains why.

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Mostly Harmless Econometrics: An Empiricist’s Companion

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