Garrett M. Petersen

Significance Tests as Leading Questions

Under the common law, lawyers are not allowed to ask witnesses “leading questions,” as witnesses can be influenced by the way questions are asked. A leading question is one that suggests a particular answer, for instance, “Were you at the country club on Saturday night?” is a leading question, while, “Where were you on Saturday night?” is not.

Econometricians should be as careful as lawyers when questioning the most unreliable of all witnesses: economic data. Most statistical software will automatically spit out t-tests for whether the coefficients in regression models equal zero. This is equivalent to asking the data, “Data, given these modelling assumptions, can you deny with 95% certainty that this coefficient equals zero?” That’s a leading question, and the econometrician shouldn’t ask it unless he has special reason to suspect that the coefficient is zero.

For example, suppose an economist was attempting to test the effect on employment of an increase in the minimum wage (I choose this example only because I am familiar with it). If he observes many people working below the new minimum immediately before it goes into effect, he can believe with high certainty that the new minimum will be binding. Furthermore, if he observes many businesses employing low-skilled workers, as well as a stream of new businesses entering the market for low-skilled labour, he can believe with high certainty that the market for low-skilled labour is competitive rather than monopsonistic. Putting on his economist hat, he can infer from these two observations that the reduction in employment caused by the minimum wage will correspond to the elasticity of the demand curve for low-skilled labour.

Given this situation, would it be appropriate for this economist to ask the data, “Data, given these modelling assumptions, can you deny with 95% certainty that the minimum wage has zero effect on employment?” I hope the reader can see the problem with such a question. The economist has no special reason to believe that the demand curve for low-skilled labour is perfectly inelastic, any more than he has a special reason to believe that this demand curve has an elasticity of exactly 0.73. The question he should be asking is, in the case of this particular historical event, how much did the increase in the minimum wage increase unemployment? “Not at all” is a valid answer, but with no special reason to believe it is the correct answer, he should not bias his conclusion by phrasing the question in such a way that he leads his “witness” to favour zero.

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Louis XIV Lives On

When calico printed cloth was introduced to Europe, the French government banned it. They employed gestapo-style tactics to stamp out the new innovation. Here’s Murray Rothbard’s summary of the fiasco, from his excellent An Austrian Perspective on the History of Economic Thought (vol. 1, p. 219):

The new cloth, printed calicoes, began to be imported from India in the 1660s, and became highly popular, useful for an inexpensive mass market, as well as for high fashion. As a result, calico printing was launched in France. By the 1680s, the indignant woollen, cloth, silk and linen industries all complained to the state of ‘unfair competition’ by the highly popular upstart. The printed colours were readily outcompeting the older cloths. And so the French state responded in 1686 by total prohibition of printed calicoes: their import or their domestic production. In 1700, the French government went all the way: an absolute ban on every aspect of calicoes including their use in consumption. Government spies had a hysterical field day: ‘peering into coaches and private houses and reporting that the governess of the Marquis de Cormoy had been seen at her window clothed in calico of a white background with big red flowers, almost new, or that the wife of a lemonade-seller had been seen in her shop in a casquin of calico’. Literally thousands of Frenchmen died in the calico struggles, either being executed for wearing calicoes or in armed raids against calico-users.

The recent government crackdowns on Lyft, Uber, and other unlicensed taxi services show just how far we’ve come since the days of Louis XIV. For one thing, the US government is not outright murdering the people who hire better, cheaper transportation services. It’s still preventing them from doing so, but it’s not murdering them.

Also, the enforcement is now directed exclusively at sellers and almost never at buyers (drugs are an exception). This allows government authorities to tightly control people’s lives while maintaining the illusion that they are free. Imagine a law that said that people who have too much sodium in their diets can be fined or thrown in jail. Now imagine a law prohibiting businesses from putting more than a certain amount of sodium into their products. The effects of these laws would be nearly identical, but the latter would be far more acceptable to the general public, since it could be justified as protecting innocent consumers from unscrupulous, mustache-twirling businessmen. Transactions require both buyers and sellers, and most of the things we do require transactions, so most aspects of life can be controlled by regulating sellers.

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