I recently made the case that many observers are not thinking properly about the Fed's Quantitative Easing (QE) programs. Using the analogy of George Bailey's life in the film It's a Wonderful Life, I argued that the critics who question the efficacy of the QE programs are doing the wrong counterfactual. Today, Barry Ritholtz makes the same point:
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?”
I too ran a QE counterfactual in my George Bailey post. There I considered what would have happened to employment, the stock market, PCE core inflation, and 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.