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politicians still seem fixated by exports, this time geared towards fast-expanding but lower-margin regions such as China rather than America. There is also talk of re-regulating wages by restricting the hiring of non-regular workers in manufacturing. None of the election rhetoric sounds enough to jump-start the juggernaut that Japan, still the world’s second-largest economy, could be. Nor does it offer Japanese people much cause for optimism that the daily grind of hard work and modest pay will get any better. Despite the traffic jams, spending a few of their seven days’ annual holiday venerating the past is more fun than contemplating the future. Video: See Japan’s structural imbalances at Economist.com/videographics Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved. -117-
Economics focus Cause and defect Aug 13th 2009 From The Economist print edition Instrumental variables help to isolate causal relationships. But they can be taken too far Illustration by Jac Depczyk “LIKE elaborately plumed birds…we preen and strut and display our t-values.” That was Edward Leamer’s uncharitable description of his profession in 1983. Mr Leamer, an economist at the University of California in Los Angeles, was frustrated by empirical economists’ emphasis on measures of correlation over underlying questions of cause and effect, such as whether people who spend more years in school go on to earn more in later life. Hardly anyone, he wrote gloomily, “takes anyone else’s data analyses seriously”. To make his point, Mr Leamer showed how different (but apparently reasonable) choices about which variables to include in an analysis of the effect of capital punishment on murder rates could lead to the conclusion that the death penalty led to more murders, fewer murders, or had no effect at all. In the years since, economists have focused much more explicitly on improving the analysis of cause and effect, giving rise to what Guido Imbens of Harvard University calls “the causal literature”. The techniques at the heart of this literature—in particular, the use of so-called “instrumental variables”—have yielded insights into everything from the link between abortion and crime to the economic return from education. But these methods are themselves now coming under attack. Instrumental variables have become popular in part because they allow economists to deal with one of the main obstacles to the accurate estimation of causal effects—the impossibility of controlling for every last influence. Mr Leamer’s work on capital punishment demonstrated that the choice of controls matters hugely. Putting too many variables into a model ends up degrading the results. Worst of all, some relevant variables may simply not be observable. For example, the time someone stays in school is probably influenced by his innate scholastic ability, but this is very hard to measure. Leaving such variables out can easily lead econometricians astray. What is more, the direction of causation is not always clear. Working out whether deploying more policemen reduces crime, for example, is confused by the fact that more policemen are allocated to areas with higher crime rates. Instrumental variables are helpful in all these situations. Often derived from a quirk in the environment or in public policy, they affect the outcome (a person’s earnings, say, to return to the original example) only through their influence on the input variable (in this case, the number of years of schooling) while at the same time being uncorrelated with what is left out (scholastic ability). The job of instrumental variables is to ensure that the omission of factors from an analysis—in this example, the impact of scholastic ability on the amount of schooling—does not end up producing inaccurate results. -118-
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egistered voters are frauds. Yet Mr
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