What’s Their Counterfactual?

February 8th, 2012 at 8:52 am

As others have noted, conservatives who’d like to bash the President on the economy are having an awfully hard time right now, as the recovery proceeds apace.  Too slowly apace, for sure, but no objective observer can miss that the trend is our friend and that even the job market, while still far too weak and with conspicuous downsides (intractable long-term unemployment), is improving.

So, they’re stuck with “yeah, things are getting better, but if we were in charge, they’d be even better!”

This, of course, is the flipside of a rap with which I’m intimately familiar: “sure, things are bad—but without our actions, they’d be even worse!”

Neither are convincing to most people, because most people don’t engage in the economist’s counterfactual: the path the economy would have taken absent your interventions.  It’s the “compared-to-what” in the above statements.

Thing is, I know and believe, within confidence intervals, my counterfactual.  It comes from tried and true modeling based on the historical relationships of how advanced economies respond to stimulus.

Or, if you don’t like that sort of thing, you can derive a counterfactual from simply projecting the course the economy was on before you did your policy thing, and compare that to the actual path of growth and jobs (you can see that approach here—see discussion around Table 3).  [Note: the fresh-water economists, who continue to willfully ignore critical lessons of our past, deeply disdain the Keynesian multiplier models—but I haven’t heard their objections to this other, much less theoretical approach, as in Table 3 in the above doc.]

What I don’t get is their counterfactual.  Other than unconvincingly waving hands, muttering how things should be better, how the EPA and OSHA rules are killing businesses, yada, yada—let’s see some analysis.

Gov Romney’s got real economists on his team.  If he wants to make the case that things would be better if we followed his plan—which actually looks pretty Hoover’esque to me—explicitly anti-stimulus re jobs and liquidate the housing market—let’s see the model.   True, most people won’t believe it anyway, but those of us familiar with counterfactual analysis would like to see if there’s anything there, or if this is just disgruntled smoke-blowing.

I’m not saying we–when I was with the admin–or the Federal Reserve got everything right by a long shot.  But what I don’t see is anything approaching a coherent argument about how things would be better otherwise.

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13 comments in reply to "What’s Their Counterfactual?"

  1. Geoff says:

    We are far from out of the woods and into recovery.

    One thing that gets me because I don’t think its talked about enough is the terrible state of the banks balance sheets due to the fact that they have so much real estate that is overvalued.

    Mark to market accounting practicies were suspended some time ago. The result is that many banks are in reality very undercapitalized, and if they had to write down this stuff many would still be in trouble based on undercapitalization.

    Its another reason why banks really don’t want modification workouts. One real problem is that these workouts essentially make all the (equity) second mortgages worthless, and this would stress many banks.

    There is a comming crisis looming in commercial real estate, because an very large number of these loans were taken out during the real estate boon and they are normally seven year loans. Most of the loans in this environment are ballon type loans and the values of the property are down 40%. Refinancing these properties will be difficult without large infusions of cash. Many of these loans are in CMBS trunks as well and are off book.

    There simply is not enough money in traditional sources to refinance the 1.8 Trillion that is comming due in the next five years.

    The problem should really surface towards the end of 2012 or the beginning of 2013.

    Below is a link an article quoting Elizabeth Warren’s warning about this in her watchdog capacity from some time ago.


    It points out how many small and regional banks will be in trouble when this happens.

    I’m afraid we are in for another rough patch at the end of 2012 or the beginning of 2013. Too many zombie banks.

    • rokkitman says:

      Geoff: One real problem is that these workouts essentially make all the (equity) second mortgages worthless, and this would stress many banks.

      @Geoff: First mortgages, too. This is the key. The Government has to force a write-down of what’s on the books, and force a re-write of mortgage principal amounts, for mortgages people can’t afford. This will stop the walk-aways, rationalize the banks’ books, and provide a realistic basis for the loan and housing markets. In exchange for this write-down and re-write, the Government must guarantee the difference, over time, to allow the thus-undercapitalized banks to rebuild their balance sheets with genuine collateral. Probably need to include recapture of future benefits clauses, too. Easier said than done, but I see no other way to bridge the chasm between the present, distorted market and a healthy one.

      • Geoff says:

        I agree. It’s a real mess. Any further stimulus done must address this in order to be really effective.

  2. Fred Donaldson says:

    While the GOP focus may be on reducing labor costs, slashing taxes for the wealthy and privatizing the universe, they do have a point with excess regulation.

    Many of these government-ordained rules are originated by big businesses, who use such regulation as gatekeepers and obstacles to small firms entering their market.

    Both parties participate in creating laws that strangle innovation. Democrats would have us believe that these rules are always to protect the public, and the GOP suggests that all rules are evil.

    True conservatives of either party are needed to police the rulebook and introduce regulations only when needed, but absolutely where required for the public interest.

  3. Will says:

    They would have eliminated corporate income tax, which would have gone entirely to the workers (or shareholders, which are “ordinary americans,” not the already wealthy. Anyone who disagrees is engaging in class warfare!)

    They would have ended job killing regulations in favor of people killing pollution. This has the doubly positive effect of raising our GDP and decreasing our population, so our GDP per capita would soar!

    And, in truth, they probably would have passed a very similar health care plan amidst Democratic grumbling and complaints (we should really be going for universal!)

  4. perplexed says:

    Its way past time to drive a stake through the heart of the Bush tax cuts! They have already caused so much damage & inequality that any attempt to retain or salvage any part of them should be met with suspicion. There’s nothing they do on the stimulus front that can’t be better accomplished by other methods. Its time they took their place in the history books where very serious people can ignore them they like they do the rest of history’s lessons that don’t serve their objectives.

  5. marcel says:

    Have you seen this?


    It’s an alternative explanation of the stimulating effect of deficit spending that does not rely on multipliers. Doesn’t contradict that possibility, but sort of orthogonal to that argument entirely. I cannot tell how important it is, but it sounds plausible, and it’s one that deLong has, essentially, been hammering on for a couple of years.

  6. Tom Cammarata says:

    “What I don’t get is their counterfactual.”

    To quote what Mad Magazine posited in its send-up some 50 years ago of Perry Mason countering an objection from the D.A:

    “It’s irrelevant, immaterial and mainly, if I answered that, it would ruin my case.”

    Pretty much sums up conservative Republican tactics in general these days. Why else would intelligent men like Kevin Drum and Bruce Bartlett question them with increasing — and damning — regularity?

  7. the buckaroo says:

    …pet peeve #1: unsubstantiated bloviating. Facts, Ma’am, just the facts as Frank Gannon would request. You are spot on…simple hand waving does not conjure the facts, more akin to yelling ‘Squirrel’.

    Innuendo, non sequiturs, ad hominems & just bad manners pose as serious debate…sure!

    PP #2: road kill…which Obama would be imitating had he not pushed for super PAC moolah.

  8. Bumpa says:

    I really must thank you and Paul K. for outstandingly informational blogs today.
    Generally I can manage to understand the gist of what you are saying, but todays blogs (your’s and Paul’s) are an education.

  9. InfiniteThoughts says:

    See, this is what the Right hates about you, Jared. You frame the question to your advantage!

    Instead of What’s Their Counterfactual?, if you asked “What’s their Counterfact or Countermyth – statements that they think is true or feel is true but don’t have to back by facts” – the right wing would have come to the debate table …

  10. Michael says:

    The issue is that because conservatives are not arguing in good faith — they want the American labor market to have weak demand, because they hate the idea of the middle class — counterfactuals are not in evidence.