You won't hear any politicians talking about "counterfactuals" when they campaign this fall. Yet the biggest factor in the midterm elections will be what didn't happen over the last two years.
A counterfactual, according to Webster's, is something "contrary to the facts." In economic and political terms, it refers to a hypothetical outcome that might have occurred if certain decisions hadn't been made or had been made differently. And evidence is mounting that the Great Recession of 2008 and 2009 might have been dreadfully worse if Washington hadn't bailed out the banks, stimulated spending, pumped cash into the system, and generally leapt into action like a panicky parent trying to rescue a child from an oncoming train.
A new analysis by economists Alan Blinder of Princeton and Mark Zandi of Moody's Economy.com finds that all that government aid "probably averted what could have been called Great Depression 2.0." Had the government done nothing, according to Blinder and Zandi, GDP would have declined by 7.4 percent in 2009 and another 3.7 percent in 2010, compared with an actual drop of just 2.4 percent in 2009 and a projected increase of 2.9 percent this year. The unemployment rate would have hit 15.2 percent this year, 16.3 percent next year, and 15 percent in 2012, instead of maxing out at about 10 percent and then drifting down. Life without bailouts and stimulus plans, in other words, would have been more terrible than anything most living Americans have experienced.
Americans obviously disagree. In a recent Pew poll, 74 percent of respondents felt that government policies have helped big banks, 70 percent felt they've helped big companies, and 57 percent felt they've helped the wealthy. But only 27 percent said that government policies have helped the middle class. If Blinder and Zandi are correct, it's self-evident that the government helped the middle class, because the difference between actual unemployment and their projections without government aid amounts to about 8.5 million more people who would have lost their jobs—plus many more whose hours and pay would have been cut. Almost by definition, people who get to keep their jobs instead of losing them either constitute the middle class or aspire to it.
[See when tax hikes are coming.]
In fact, even without the Blinder-Zandi analysis, it should be obvious that government action has helped the middle class. More than $1 trillion in stimulus spending has kept teachers, cops, firefighters, and construction workers employed, while giving the unemployed extra help to buy food and pay the rent. Machinations by the Federal Reserve have strengthened companies, boosted stocks, and helped drive interest rates to historic lows, which benefits anybody who buys a house or car. Even those ignominious bailouts for AIG, Citigroup, General Motors, and dozens of other firms helped the middle class, because most of the people who work at those companies are middle-earners who had nothing to do with the chicanery or foolishness of incompetent management.
Yet Democrats running for reelection in the fall are poised to get walloped, with Republicans likely to make strong gains in both the House and the Senate. It's possible that Republicans could gain control of one chamber or both. Obama's own approval ratings are at record lows. And Americans are nearly as gloomy as they were during the recession. What-ifs about the state of America without government stimulus are providing no lift at all to the Dems who provided much of it.
The Blinder-Zandi analysis is hardly the last word on the recession. Some economists feel their findings overstate the effects of government action, a debate that will go on for years. (Economists still argue over what caused the Great Depression.) It's also valid to challenge the idea that conventional Keynesian fiscal policy is the best way to spend north of $1 trillion in taxpayer money. Still, there's a huge disconnect between what the government has accomplished and what Americans give it credit for.
Part of it involves the Obama administration's breezy assumptions about the recession. Obama and his economic advisors famously underestimated the jobless problem (like most economists) and made it sound like the 2009 stimulus act, passed less than two months after the president took office, would take care of everything. The economy turned out to be much worse than expected even then, leaving Democrats the unwinnable job of explaining why the economy seemed to get worse, not better, after their historic spending binge.
Obama also created the impression that he was more interested in complex reform initiatives on healthcare, energy, immigration, and financial regulation than in matters that hit much closer to home—namely, jobs. The fact that Congress is still talking about various "jobs bills" 30 months after the recession began indicates how far behind the Democrats got on messaging and action.
But the biggest problem may be the reference points that Americans use to measure their well-being. Few people ask themselves if they're better off than they would have been under a fictitious scenario in which the government does nothing while the economy craters. Instead, they tend to compare their current standard of living with whatever they consider to have been the glory days. If they're not getting ahead compared with that, then it's time to blame somebody.
In fact, despite the rise of the small-government Tea Party activists, Americans of virtually every stripe expect their elected officials to spring into action when trouble hits. Philosophically, the Bush administration was about as laissez-faire as an American government can get. Yet they saw no choice but to hold their noses and initiate the now-loathed TARP bailouts rather than watch the financial system collapse, bringing down a swath of corporate America with it.
Considering everything the government did, Americans expect better results than a weak recovery with prolonged unemployment, topped by a staggering national debt. They also expect their living standards to resume the upward rise we've come to take for granted over the last 50 years—despite many forces that are now pushing them the other way. So Obama tries to play up an unconvincing recovery, wanly telling Americans that it could have been worse.
He's right, but he's not telling voters what they want to hear. So come November, voters will create their own counterfactual. Instead of measuring their well-being against a depression that didn't happen, they'll measure it against the attainment of prosperity and security that they feel should have happened but didn't. And they'll express profound disappointment at the polls—an exercise they may end up repeating over many election cycles to come.