Monday, February 27, 2012

The Phil Gramm Effect

I recently re-read Andrew Abbott's brilliant article on the problems with classical linear regression. One of the most persuasive criticisms is that statistical models are extremely difficult to use for examining small changes with big effects (but big changes with small effects can be modeled). I like to call this the "Phil Gramm Effect" because arguably one of the most important causes of the 2008 financial crisis (an undoubtedly big effect) was Phil Gramm (a small change), since he was the driving force for gutting the Glass-Steagall Act and shifting government regulations in favor of private companies (often called "deregulation," but more accurately termed "re-regulation").