Thursday, August 23, 2012

Top Ten Economic Myths

When it comes right down to it, we Americans don't know jack about economics, even though our very future depends upon understanding it and then voting for the guy with the right economic plan. Part of this has to do with the fact that even expert economists often don't know what they're talking about, being too blinded by partisan politics to do an objective analysis about what works.

Am I unbiased? No, because nobody is. But I daresay I'm as objective as any slightly-left-of-center person can get. So, for the benefit of all, I'm listing here the top ten economic myths which plague our understanding of how to build jobs and move an economy forward. Here they are:

10.) Lower taxes means economic growth. Not necessarily. Lower taxes on the middle class (the poor often pay no tax, so that can't be lowered), means more money for consumers to spend, and this stimulates an economy every time. But what about the rich? As I pointed out in a previous blog post, lower taxes on the rich will work, but only if the rich are being over-taxed to begin with. Cut taxes on the wealthy when they are over-taxed, and they will feel free to spend more on goods and jobs. (This is the "trickle down" hypothesis.) But if the rich are being under-taxed, then a tax cut means that they can keep more, but don't feel a pressing need to spend more. This leaves less money for everything and everyone else. As we saw under Clinton, taxes upon the rich were higher, and economic growth was also higher. That should tell us all we need to know. We need a balance between over-taxing and under-taxing the rich.  Right now, with the rich being under-taxed while our nation simultaneously faces a large deficit and looming debt, holding the line on taxes on the upper 2% of income-earners, or worse, lowering those taxes, would mean certain disaster.

9.) Higher taxes on the upper 2% will hurt small businesses. I also dealt with this one in a previous blog post. The problem here is the definition of "small business." A small business is defined as less than 500 employees, but almost no businesses have between 100 and 5000 employees in them. There are many "small businesses" with fewer than 100 employees who make six figures or more each. So the definition of a "small business" should be defined by dollars earned, not employees retained.
Still, there are some "small businesses," where the proprietor earns more than $250,000 per year with only a handful of employees, which would be hurt slightly.

8.) Obama promised to cut the deficit in half. But our national debt is higher than ever! This common mistake is based on people not knowing the difference between a deficit and a debt. It's amazing to me just how many people are ignorant of this! Every fifth-grader should know this one! But sadly, many high-school graduates can't even find Iraq on a map, much less can name these definitions. So, here's what you need to know:
Let's say you start with $0 dollars. If you make $1000 this year, but spend $2000, you have a $1000 deficit. You also have a $1000 debt. At this point, the deficit and debt are the same. But let's say the following year, you also make $1000 and spend $2000 again. Now, your deficit is still $1000, but your debt is $2000. Do the same thing the next year and your deficit will be $1000, and your debt $3000. The year following, and your deficit will be $1000 and your debt $4000, and so forth.
Of course, your debt will incur interest, and that adds to your debt, but that's beside the point I'm trying to make, which is this: If you cut your deficit in half, your debt will still grow!
Okay, so how is Obama doing? Did he lower the deficit by half? Well, he inherited a deficit of $1413 billion per year in January 2009. By January 2013, the deficit will be down to $901 billion, according to federal budget office projections. Not quite reduced by half, but definitely reduced. But let's remember that Obama wanted to remove the Bush tax cuts on the upper 2% back in 2010, but Republicans blocked him. Had Republicans not done this, the budget deficit would have been reduced much more than half. There may even  have been a surplus drawn by 2013 or 2014!

7.) Government spending doesn't help an economy. Private industry creates jobs, not government. This claim is empirically false. Every time government spending has increased, the economy has grown, whether it be during a war, or during a federal program like FDR's New Deal. There has not been a single instance where federal spending has increased where the economy has not improved. As for private industry creating  jobs, it's true that private industry creates most jobs, but not all. Ask a policeman. Ask a fireman. Ask a teacher or a soldier. There are countless jobs, from park rangers to NASA scientists, who earn a respectable living from a government paycheck. The tricky part for government spending comes in how to pay for government jobs in a way which avoids the job being dependent upon the government's continued support. Government can do this by building a business with new technology and then privatizing it after it has become sustainable.

6.) The welfare state weakens the economy. Also empirically false. An economy thrives only when it has workers which are trained for the jobs of both today and tomorrow. But when there is global competition for employment, some jobs may go overseas if workers are under-trained. A solid welfare state is necessary to sustain workers long enough to allow them to make the transition from yesterday's job skills into tomorrow's job skills. Take this welfare system away, and the economy is guaranteed to go nowhere but down! Workers will be trained only for yesterday's jobs, and will remain unemployed!

5.) Strict environmental legislation hurts business and the economy. Yes, businesses may have to pay more when an environmental protection is required of them, but look how that plays out: These businesses must hire more workers to make the upgrades necessary to comply with the new regulations. They must also retain more employees to maintain compliance. Businesses may complain and grumble about it, but environmental legislation creates jobs, and this helps, not hurts, an economy.

4.) Protectionist tariffs don't work. Not necessarily true. The claim we have often heard in school is that the Smoot-Hawley Tariff Act led to the Great Depression because it stifled free trade in the marketplace. This is both true and misleading. Smoot-Hawley ignited a tariff war among all industrialized nations, and it was that tariff war which brought global economies down. Prior to that, protectionism worked for all concerned, and worked fairly well. But too much of anything is always bad. Make other countries feel slighted with your tariffs, and you will hurt trade.
Look at South Korea. It benefited from tariffs for decades before privatizing its government owned company, Samsung, which once did little else but trade in rice and beef cattle. Now, Samsung is one of the best privately-owned electronics manufacturers, and you probably have one of their products in your home right now! Look at India. It benefited from protectionism as well. And, of course, there's China, which refuses to play fair-trade with us while we insist on free-market rules with them -- and they're kicking our ass because of it!
China, India and South Korea had economic ministers who were untrained in economics. In the case of South Korea, its chief government economist was trained as a mathematician. These people engaged in non-lasses-faire economics because they were not trained in the accepted dogma. And it worked!
Maybe, instead of playing fair with a Chinese government which refuses to play fair with us, why don't we enact a few protections of our own? Maybe we could ignore their copyright laws for a change? Certainly, government projects should at least be barred to Chinese interests who are trying to under-bid American contractors with government-subsidized labor!

3.) Inflation is bad for an economy. Not necessarily! Inflation hurts savings accounts and makes retaining money difficult, but it also reduces debt rapidly. Since debt, especially housing and credit card debt, is a huge ball and chain on our economy right now, a little inflation would solve a lot of problems! That having been said, inflation is only likely when unemployment is low. With unemployment at barely over 8%, you are likelier to see an alien landing in your back yard than inflation within the next few years.

2.) Obama's economic stimulus in 2009 failed. No. The economic stimulus stopped a sinking economy cold, and GDP has been steadily growing ever since (albeit too slowly). On the other hand, it didn't significantly reduce unemployment, either, as that figure still remains too high. On balance, it's safe to say that the stimulus stopped the downfall, but wasn't enough to induce an outright recovery. In other words, it didn't fail, but it wasn't a 100% success, either. It should have been bigger -- but a bigger stimulus bill wouldn't have passed, even with a super-majority in the House and Senate.

1.) Deregulation helps grow an economy. This is flatly wrong. Certain areas of the economy, especially banking, need strict regulations for a stable economy.
They tried deregulation of "soft" banking in the 80's under Reagan, freeing up Savings & Loan establishments to invest their money as they saw fit, while keeping FSLIC insurance guarantees. The result was that S&L's took on risky investments on purpose, because if their investments bottomed out, the FSLIC would guarantee them. It was a "heads we win, tails taxpayers lose" arrangement. The Savings & Loan scandals that resulted taught us all a lesson to never deregulate banks too much.
Or so we thought! Under Bush II, deregulation was tried again. Several times Alan Greenspan had to pool the largest banks together to "voluntarily" bail out one of their other banks, while stubbornly maintaining that the market can "police itself." Eventually, it didn't work. When Godman Sachs and Bank of America both met dire straits, it was too late. Even Alan Greenspan himself admitted that he was wrong.
Regulation also has benefits in areas where an economy depends upon the environment. Take fishing or logging, for example. Without strict regulations curtailing the amount harvested, the resulting scarcity will drive the price of the commodity up. Rather than correcting itself, the free market will make the problem even worse as deregulated businesses strive with each other to fight over the remaining precious commodity left! When it's all gone, the market completely collapses, and everyone loses. No, better to have laws which limit the amount taken in, thus preserving the most possible output for everyone!

Well, that's all for now. Hopefully, some of you out there will know a little bit more now.

Neither Obama nor Romney promise to use the perfect approach based on the above, but Obama comes much, much closer. And Romney? Well, that would be a disaster and a half. Don't say I didn't warn you.

Eric

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