Skip to Content

Support MinnPost

MinnPost logo 7th Anniversary

MinnPost’s online auction is now live!
Register and start bidding today

The problem with asking: Are you better off than four years ago?

Flat Rock Assembly Plant in Flat Rock, Mich.
REUTERS/Rebecca Cook
One economic alternative involves the government’s policy toward the auto industry. Ford Motor President of the Americas Mark Fields, Rep. John Dingell and others pose with workers outside a revamped plant in Flat Rock, Mich., on Monday.

Are you better off than you were four years ago?

It seems like a simple question with a simple answer: Democrats say “yes” and Republicans say “no.”

I was thinking about this when I saw this tweet from Daniel Altman, adjunct associate professor at the Stern School of Business at New York University: “The problem when people ask ‘are you better off than four years ago’ is that they totally ignore counterfactuals.” 

Exactly. So, what’s a counterfactual and why should you care?

Counterfactuals and railroads

A counterfactual is a plausible, but not factual, alternative to an actual event.  Thus, when we ask the question, “What if X happens?” we can answer by analyzing what the world would look like if X doesn’t happen.

Robert Fogel, who shared the 1993 Nobel Prize in Economics, built the most famous counterfactual in economic history. He began by asking, “Did the interregional distribution of agricultural products [in post-Civil War America] depend on the existence of the long-haul railroad?”

To answer this question, he had to ask another: What would the U.S. economy have looked like without the railroad system constructed between the end of the Civil War and the beginning of World War I?

Fogel argued that a system of canals, river improvements and roads would have been built instead of the rail system. He then showed that about three-quarters of all agricultural output produced in 1890 was within 40 miles of navigable or potentially improved waterways.  The result: in 1890, GDP was probably 5 percent higher due to the railroad. (Go here for maps Fogel created for the project.)

Fogel and his work set off a furor in both economics and history, but did so in part because he was so clear about his counterfactual world. Critics and supporters could examine the system of canals, argue whether or not it was plausible, and tear the work down to its smallest details.

Better off compared to what?

The two critical elements of counterfactual analysis are on display in Fogel’s work:

  • A set of clear alternatives to actual events (canals);
  • A framework in which to analyze those alternatives (economic theory).

This is what’s needed in today’s discussions.

First, what are the alternatives to the policies pursued over the past four years?  A few come to mind:

  • Bank bailouts: We could have let the banks fail or we could have nationalized them as Sweden did with their banks in 1992. The Troubled Asset Relief Program (TARP) was a compromise between the two.
  • Auto bailouts: We could have let GM and Chrysler fail or we could have pursued a Conrail strategy. The PennCentral was the result of a failed merger between the New York Central Railroad and the Pennsylvania Railroad; when the company went bankrupt, the federal government took over the company, renamed it Conrail (Consolidated Railroad), invested in it and eventually sold it to Norfolk Southern and CSX.
  • Stimulus: We could have enacted a smaller stimulus in early 2009 or a larger program.
  • Health care: We could have ignored health care reform, passed a narrower set of reforms or went whole-hog for single-payer insurance.

That’s a lot of alternatives to consider. 

Second, what are the proper economic tools to analyze the different counterfactual strategies? If we had a single, unified model of the economy we could feed the counterfactuals into it and find the answer. Unfortunately, we don’t have such a model.

For example, Alan Blinder and Mark Zandi used the Moody’s Analytics model of the U.S. economy to examine a variety of counterfactuals involving the TARP and the 2009 stimulus. They found that “the effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4 percent, holding the unemployment rate about 1½ percentage points lower and adding almost 2.7 million jobs to U.S. payrolls.” 

Blinder and Zandi were immediately challenged by other economists who protested that the Moody’s model was wrong, that there were better models and so on. Again, the dispute was possible because Blinder and Zandi were crystal clear about the properties of the model in which they analyzed the alternative policies.

Show me your model

I don’t really care whether President Obama or Mitt Romney thinks we are or are not better off than we were four years ago. I’m much more interested in them telling me how they think the economy works so that I can evaluate their counterfactuals.

I want them to show me their models.

Get MinnPost's top stories in your inbox

Related Tags:

About the Author:

Comments (20)

All Cuts Balanced Budget

The counterfactual I'm interested in is, "What if we had pursued the Republican meme of all cuts, no taxes approach to balancing the budget and paying off the debt?" Would we see the European model, where the economy slows to a standstill and shrinks?

No

Ask yourself if it's possible for you to pay off your personal debt without getting a pay increase. Of course it is.

In many cases that would

In many cases that would require eliminating essential spending. Even in a household budget.

And that doesn't even address the depressive tendencies of massive governmental austerity on the broader economy.

What part of "you" is better?

My 401K is better - a lot better. My business is not, but that has more to do with changes in technology than the economy. My wife's business is hiring again. My daughter, a recent college graduate, got a job right out of college, but it's not in this country. The world is not at the threshold of never-ending Middle Eastern war - something I think makes my life better. Things like paying for college are MUCH better than when President Bush was in office and the banks essentially re-wrote the student loan laws so they could make a killing. We are at least looking at energy for the first time in 30 years, even though I doubt the president should get any credit for more wind farms or more hybrid cars.

Republicans ask that question like there is a simple answer for it. And I blame the Republicans for stopping President Obama's efforts to improve the economy. They stood in the way of every stimulus package he proposed.

Shouldn't stating that your number one priority is to make the country worse, rather than better, which the Republicans have all but said, be treasonous?

When Ronald Reagan asked the famous question,

"Are you better off than you were four years ago," he clarified it by saying "Is it easier for you to go and buy things at the store?' "Is there more or less unemployment in the country than there was four years ago?"

http://www.youtube.com/watch?v=8EvFQLhqWPQ

Counterfactuals? Give me a break.

If you answer Ronald Reagan's questions today, you have to consider that:
1. Gasoline was $1.89 when Obama took office. Today it's $3.89.
2. Unemployment averaged 5.3% under Bush. It's never been below 8% under Obama.
3. Median family income has fallen 7.3 percent (about $4,000) since Obama took office.

But most importantly, the average price of a house in 2009 was $342,000 today it's $142,000 with over 20% of all homes under water. Forty-eight percent of borrowers under the age of 40 are underwater.

Home value is the most important figure in determining whether "you're better off" or not, because a person's wealth and their perception of their wealth and well-being is tied to the value of their home.

When you think about what Ronald Reagan was asking the American people then, and what Mitt Romney is asking them now, counterfactuals are meaningless.

Gas was at $1.89 when Obama

Gas was at $1.89 when Obama took office because the economy had just taken a dive off the cliff. As the economy has improved, demand has increased, as have gas prices.

Econ 101.

Almost all of the economic trends are positive in the US. When Reagan asked the question, trends were negative.

Agree entirely. The question is nonsensical.

We're not better off than we would have been if the focus had been more on recirculating wealth through the middle and working classes than on ensuring that Wall Street's multi-million dollar bonuses were not disrupted, but we're certainly better off than we would be if the trajectory from Bush to Romney had continued undeflected. The most trenchant counterfactual, however, remains: "Would we be better off now if Glass-Steagall had not been repealed?"

better off than 4 yr ago

Sir,

I really do not care about "counterfaucual" what ever you are writing about.

This is what I know. I have not had a pay raise in 7 years. I took a job where I make less money than I did in 2003. I get no benefits. I am just grateful to have a job so I can pay my bills. And I am PISSED off about school teachers in Chicago going on strike .... I make less than 35,000 a year with no benefits, and I work all year long! when are public workers going to have to suck it up like all of us have had to for years!!!?

Catch The News Much?

Governments across the country have been laying off people for years now. Remaining employees have had their pay cut through unpaid furloughs. They have had to increase payments for pensions and health care.

Anyone who says that government employees have not had to sacrifice hasn't been paying attention.

Whether they have suffered enough relative to private sector employees is a reasonable debate. To say they have escape the recession that began in December of 2007 shows ignorance.

I have never understood this attitude

If you are working hard and making less money and not getting benefits, you should be angry. But I don't know why your anger is directed at public employees. Instead of wanting other middle class workers to have their pay and benefits cut like yours have been, doesn't it make more sense to work to see that everyone who works hard - public or private - gets the pay and beneifts they deserve? Public employees didn't take your pay and benefits - they are getting squeezed like everyone else now. But corporate profits and income inequality are at record levels. Figure out where the money went before you direct your anger.

Great article

Now this is really stepping up to the plate and asking the key question, "show me."

As an economist I like using the tools of economics to analyze problems particularly economic problems. That is also why when politicians say they can do something about the economy particularly in a demand deficient economy there is very little they can do except purchase goods and services and provide stability in markets.

So show me the with and without policy outcomes don't just give me fairy tales and slogans.

Show me how giving tax breaks to the job creators have created jobs here in the US.

Nonsense

Drill baby, drill. The price of gas was $3.99 at my neighborhood station today. On average, that's over $100 less per month of disposable income that a family could have spent elsewhere in the economy that they had four years ago.

If the president made it clear that we will be energy self-sufficient despite the protestations of the environmentalist wackos, by drilling for oil and gas everywhere on this continent, we not only would drive down domestic energy costs, but we would create tens of thousands of new jobs and save hundreds of billions of dollars by not having to deploy the military in the Middle east to protect our national interests.

Then there's the thousands of small businesses that are waiting until after the election when they can be assured that Obamacare is going away, before they resume hiring again.

Purchasing goods and services with government money doesn't solve anything. The government has to first take the money out of the private economy so they can spend it. If they left the money in the taxpayers' pockets, the economy would be driven by 300 million people, not a handful of bureaucrats deciding what to spend it on.

Four years ago almost to the

Four years ago almost to the day, gasoline prices were almost exactly where they are now. That $100 difference vanishes completely in light of the facts.

There always businesses that put off hiring in the end of a national election year, waiting to see what changes if any are going to happen after the election, Affordable Care Act or not. As the Romney campaign continues to implode, it is becoming increasingly obvious that the Affordable Care Act isn't going away anyhow.

Best you look for economic reasons. The bottom line for business is whether or not it has customers anyway. If people are willing to buy, someone will be selling. Those are the business concerns that merit the trickle up profits that should be the real concern of any healthy private enterprise economic system. Those are the job creators, the ones who have earned their accumulations in the actual marketplace.

I used to work at a place where there was a motto plastered all over the employee areas:
"In our business the customer is king, customers make paydays possible." That company was forced out of business by larger competitors that forced it to cut its margins too thin. It was difference in business size that determined that failure not customer response which was solid. That shows a real fault in business to business competition if the playing field is not carefully leveled so all the competitors are playing out of the same balanced rule book. Then profit is earned rather than stolen.

An example, of skewing the skewing

9/12-2005 Gas ~ $1.80
7/24-2008 Gas ~$3.90
11/12-2008 Gas ~ $1.56
9/12-2012 Gas ~ $3.80

Gas is a global commodity. subject to the global free market, Nothing makes the case better for selective thinking than someone to espouse Regan in one breadth and then accuse a president of poor economic policy in the next breadth based on the price of gas. Oh yes, just a week or so after a hurricane raises hell with the refineries!

Presuppositions

The question presupposes several things:

The President is more responsible for my situation than myself.

If I am better off, the credit goes to the President and not me.

I should primarily consider myself and not the greater community. We are not in this together.

The only proper answer is...

If you're not better off, it's your own damn fault. I mean, government doesn't solve problems, it IS the problem. And we are all individually responsible for our own well-being.

At least...that's what we hear from Republicans ad nauseum.

What about gas *exports*?

None of the posters about gas PRICES mentions the fact the US is TODAY a major gasoline exporter.

That puts conservatives between a rock and a hard place--because if the US is *exporting* gasoline, that MUST mean there is insufficient demand in the US to absorb all that is produced. So, to drive down gasoline prices, wouldn't that mean the US must prohibit the export of gasoline (so the domestic price DROPS to encourage demand/growth/use of gasoline)?

The oil from Canada must ALSO be kept and used in the US--NOT EXPORTED (because that would also drive up the US cost of oil--especially for farmers and other large users in the Midwest US). We are trying to prevent price increases for food--so that is a rational action. TransCanada is the source of this information--which was an official source of info about WHY they wanted to build the Keystone XL pipeline (to export their oil) Estimated total permanent jobs in the US was maybe 20 (yes, TWENTY).

If conservatives disagree with the above, then they need to document how they will get domestic US gasoline prices below the $2/gallon mark *before* election day.

the average voter

The average voter doesn't have the data to weigh counterfactuals and economic models. They do have data, however, on what is happening in their own lives. They know what prices are in the stores, prices of gasoline, how much their salaries are, how much their house payments are, how much they have in the bank, etc. When they are asked whether they are better off, that is what they are thinking about. Personally, I'm not better off, and I will vote accordingly.

Misleading question

It is a misleading question and on purpose. It changes the outlook of the voter from the national picture (the presidential level) to the personal. It is too bad this question gets so much air time because it does nothing to help answer the question of presidential performance and it certainly does nothing to evaluate a prospective president. So I suggest to tune out anyone who promotes a candidate on claims of a personal four year outcome.

This is why economics is such a disaster.

Counterfactual? Sounds impressive but what is it really? An imaginary history that has no predictive power whatsoever. This is so typical, you make up jargon that sounds impressive and has the word "fact" in it and pretend your saying something new and insightful. All you end up doing is balancing what you don't know against what you don't know and pretending you're making an informed position as if no one ever considered the consequences of anything until economists came along. You give a Nobel prize to a guy who imagines a transcontinental canal?

I don't know why we spend so much building cars because without them we'd all be driving hovercrafts!