Why Counterfactual Thinking Is Important
One of the analytical errors I seem to constantly come across is what I call the non-result result. It goes something like this: If you do X, and there is no measurable change, X is therefore ineffective.
The problem with this analysis is the lack of a control group, If you
are testing a new medication to reduce tumors, you want to see what
happened to the group that did not get the tested therapy. Perhaps their
tumors grew and metastasized. Hence, no increase in tumor mass or spreading is considered a very positive outcome.This seems to get loss in the debate over QE. The debate — either
ignorantly or disingenuously — makes claims such as “Look how few jobs
have been created, and look how high unemployment is.”
Understanding this logic, and lacking a control group, we must employ
a counter-factual. The question one should be asking is “How many less
jobs would have been created?; How much higher would unemployment be?”
This idea is nicely summarized by the QE counterfactual produced by Poltiical Calculations. It shows what would have happened to nominal GDP had there been no QE3. It is not a pretty sight:
the repo interest rate conditional on (1) the Fed not increasing its share of
marketable treasuries starting in late 2010 and (2) the Eurozone crisis, China
slowdown, and fiscal policy shocks still occurring as they did. The implications for the economy were the same as in the figure above.
Source: http://macromarketmusings.blogspot.com/2013/10/why-counterfactual-thinking-is-important.html
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