Sunday, December 11, 2011

What Are Some Common Myths About the Economy


 Six Myths About the U.S. Economy


For the first four years of his presidency, Franklin Roosevelt tackled the Great Depression with inflation, easy monetary policy, and government spending. But in 1937, FDR's advisers persuaded him to reverse gears. After all, interest rates had been close to zero for years, commodity prices were climbing, and fear of inflation was on the rise.
Bust or Boost?

What happened next is now called the "Mistake of 1937" (PDF). Federal spending was cut and monetary policy was tightened up, with disastrous results: GDP immediately began to plummet, and industrial production fell by a third. Within a year everyone had had enough. In 1938 the austerity program was abandoned, and the economy started to grow again.

The truth is that stimulus worked in 1933 and it worked in 2009. So why is our economy still in such bad shape? For one, partly due to political considerations and partly because it wasrushed through Congress, the 2009 stimulus wasn't as well designed as it could have been. It was also sold badly. If the bill passed, administration economists predicted, unemployment would peak at 8 percent and then start declining (PDF). But the recession was far worse than the White House originally thought. Unemployment peaked in the double digits, and that's made the stimulus a fat target for Republican critics ever since.


If your credit card company offered you $30,000 interest-free to buy a car, would you take the deal? Sure you would. It's a three-way win: You replace your clunker, the auto industry keeps its assembly lines humming, and the credit card company is happy to have made a safe loan, even at no interest. Apparently, they think you're a pretty good credit risk.

The Bush Effect

This is pretty much the situation the US government is in now. If our national debt were really at dire and unsustainable levels, as conservative economists and Republican leaders have taken to arguing, nervous investors would be driving up interest rates on federal borrowing. But just the opposite has happened: As I'm writing this, 10-year real treasury yields are at 0.00 percent. The seven-year rate is actually negative. Apparently, the financial markets think we're a pretty good credit risk.


There's no greater orthodoxy in the Republican Party than unconditional fealty to tax cuts. In a recent GOP debate, when the candidates were asked whether they'd walk away from a deficit deal that included just $1 in tax increases for every $10 in spending cuts, every single hand shot up.

Taxes have been the third rail of American politics ever since the California tax revolt of 1978. Even Democrats are nervous about touching them: President Obama has famously called for letting some of the Bush tax cuts expire, but he's always careful to make it clear that he wouldn't change rates for anyone earning less than $250,000 per year. In other words, he'd repeal less than a quarter of the Bush tax cuts.

This fear is easy to understand. No one likes paying higher taxes. But do lower taxes actually spur economic growth? Bruce Bartlett, an economist in the Reagan administration, has compared tax rates in various rich countries in 1979 to each country's growth rate since then. His conclusion? There's virtually no correlation.

Recent US history backs this up too. Bill Clinton raised tax rates in 1993, and Republicans insisted it would cripple the economy. Instead, the economy boomed. In 2001 and 2003, George W. Bush lowered taxes and Republicans insisted the economy would flourish. Instead, we got the weakest expansion of the past century.


Are American businesses paralyzed by fear of a tidal wave of new regulations? WhenMcClatchy reporter Kevin Hall went out and asked small-business owners about this, he got a clear answer. "Absolutely, positively not," said one. "Government regulations are not choking our business," said another. In its most recent quarterly survey (PDF) of small-business trends, the National Federation of Independent Business reports that sales—i.e., lack of demand—is the No. 1 concern, beating out taxes, regulations, inflation, and everything else.

The Bottom Line Is the Bottom Line

In any case, regardless of what the Wall Street Journal editorial page says, the Obama administration has hardly been a whirlwind of regulatory activity. Its health care reform will have very little effect on either small businesses (which are exempt) or large businesses (which mostly offer health plans already) and only a modest effect on medium-size businesses (PDF). Its financial reform bill affects only the financial sector. Its proposed new air-quality regulations will mostly affect old coal-fired electrical plants that would have shut down anyway (PDF).

Dumb and outdated regulations are no friends to the economy—and the Obama administration has undertaken a regulatory review that's projected to save an estimated $10 billion during the next five years. 

 The full article with the links to the studies(pdf files) are at the link along with the last two myths. Remember that best selling book that everything they teach you, especially about history, in public schools is wrong ( everything is whitewashed so no one is offended) that is what these myth busters do to what bone headed conservatives and libertarians tell America about the economy. The conservative and libertarian models never have worked, at least not before they cause a big crash