Myths and Lies in Economic Policy (Part 3 of 3, the AmEcon Series)

Policy fights taking place over debt reduction, deficit reduction, and job growth focus on taxes and inflation. Leaders are repeating the mantra that tax cuts will increase jobs. That the debt and deficit are killing jobs. They are warning that and higher prices are a danger that can further stall the economy.

Yet, those who make these agruments for policy offer no reasoned examples or credible evidence to support their claims. Will facts and evidence matter in national debates? Or will they be disregarded, condemned as assaults on common sense?

Rick Perry calls social security a “Ponzi scheme.” But the fact is the program is self-sustaining, costs the government nothing (it pays for its nominal overhead), has never missed a individual payment in its 76 year history, and has a surplus of 3.2 billion dollars. It provides not only retirement income but survivor’s benefits to spouses and children, disability supplements to disabled workers. All while people with incomes over 102,689 paying no pay roll taxes on their income above that limit.

Here's the Offical Asset Chart for the Social Security Trust Fund Rick Perry Calls a "Ponzi Scheme."

Michele Bachmann, in a New Hampshire speech at a April “We the People” forum, appeared with other Republican candidates to say: “a generation of Americans just entering the work force now could eventually see 75 percent of their earnings sucked up by income taxes, Social Security and Medicare.” She offers no evidence or examples to support her assertion.
But many people agree with her view. Many dismiss the facts as tainted, as the delusions of experts, or as offered by people with suspect goals.

US Tax Rates are at 60 Year Lows.

Many of these same elected officials approve of taxing workers: they oppose extending the payroll tax cuts Obama requested in 2010.

II.

    Discussing economic policy has two key parts: a) first, you must understand how proper national policy is often at odds and goes against the logic of the family check book; b) and you must understand why statements without any support from evidence, facts, or examples pass for effective positions.

Here’s a short list of myths about national economic policy:

The dollar is falling. Daily, C-SPAN callers, commentators, comment writers, columnists point to a falling dollar as evidence of America’s decline. But put your fears aside. A lower dollar is good for America.

A cheaper dollar makes American goods cheaper and increases exports. If a Euro is worth 70 cents, Europe zone residents and businesses buy more US products and services than they will if the Euro raises to 80 cents.

Lowering the currency rate puts the dollar on sale. It lowers the costs for American products. That expands trade. The increase will help American growth. The falling exchange rate is good news!

China understands this. For years, the Chinese have deliberately kept their currency exchange rate low and resisted efforts for its rise on world exchanges. Why do the Chinese keep the yuan low? It allows their businesses to flood the world with China products and keep exports high. A lower dollar will increase the costs of imports but will also encourage more domestic consumption. Don’t buy into the myth that a lower dollar hurts America. Its one of our best tools to grow jobs and sustain a strong recovery. Those people who becry the falling dollar shout without thinking through or understanding the math of economic relationships on the world markets. They will never be convinced that lowering the dollar sells more goods. It does.

Greece, just look at Greece: that what happens when you borrow too much—and that’s how the US will end up any day. But we’re not Greece. Greece’s currency and economy is now governed by an authority outside of Greece, the Euro community of which Greece is a member. The Euro community acts to put measures into place which are good for the whole community, especially its strongest members. Greece is no longer economically independent. 1) It does not have an independent currency. 2) It is forced to abide and follow the decisions of the Euro bankers. Greece is no longer an economic sovereign.

Ireland is the better warning example for the US economy. Ireland turned to austerity and cut back on government spending as its banking crisis spread, and its economy imploded and collapsed. Ireland should be the focus of our warning: it has lessons not yet learned. Greece is the trick answer; pass it up.

In hard times, the US needs to cut back. This common sense idea runs smack into a hidden economic paradox: how can you grow by cutting back? If we all buy less food, will the grocery stores hire more clerks? The paradox is that what makes sense for one doesn’t make sense for the group. That’s the difference between mico-economics (the economics of individual and consumer trends) and macroeconomics (the economics of nations and states). In recessions, the group has to make up for the individual, or the economy implodes, falling into a black hole from which it becomes harder and harder to pull out.

Think: if nobody buys insurance, how will costs be lowered? If nobody travels, how will the hotel room be rented? In recessions, the burden falls on the government to push spending, not shrink it. (The paradox!) As private demand returns and the economy grows, the government must be disciplined enough to shrink to maintain reserves for the next downturn. But the middle of a downturn is not the time for the government to shrink. Less will not produce “more.” Government austerity will not bring prosperity.

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Debt Has Its Advantages (Part 2 of 3, the AmEcon Series)

Actually, government borrowing has advantages which are rarely discussed.

Global investment in America’s financial system takes place through the purchase of US bonds. US public debt is the largest single source of global capitol resources that are transferred into dollars and made available for lending to American businesses and families. The capital received from the debt is put to use to grow the economy. It increases aggregate purchasing power. It funds research. It helps business expand into new areas.

    US borrowing makes available a stable, low risk source of capital, independent of economic conditions. It helps dampen the effects of recessions.

The Long and Short of Inflation: Higher Rates Indicate Rising Inflation or Market Risk. Note the Historic Lows. Is this an Economy Global and Domestic Investors Think is Saddled With Debt?

      Borrowing helps keeps taxes low. It is economically more cost efficient to borrow at current rates near zero than to increase taxes. Borrowing enables US families and businesses not to have to reduce savings or to constrict the purchasing power that drives demand and job growth.

    At the national level, debt is not all bad. It supplies the capital resources that expand the American economic engine. Debt helps create wealth and income for all economic sectors. Without debt, how would banks borrow and lend funds to finance growth? How would millions of pensioners receive fixed income allotments without having to wait on cash flows? How would a small business persons finance expansion? How would public and private capital improvements take place?

All Graphs from the St. Louis Federal Reserve.

    In the mahogany suites of national policy, the benefits of debt are well known.

    Over a decade ago, the conservative independent think tank, American Enterprise Institute featured a report,  with this main point:

“Contrary to widespread claims, there is no theoretical or empirical support for the enduring notion that either lower budget deficits or surpluses that lead to government debt reduction are beneficial to the economy.”

     The report went on to say:

Alexander Hamilton took the view that consolidating the debt and servicing it in a reliable and timely manner would enhance America’s standing as a worthy creditor, turning debt from a liability into an asset. Hamilton also, no doubt, recognized at the time the value of a benchmark asset, .  .  . 

In terms of historical and cross-country comparisons, a debt-to-GDP ratio that has moved from 26 percent to close to 50 percent and back down to around 35 percent is hardly a major fiscal or economic event for the United States economy, notwithstanding comments of politicians to the contrary. [Writer’s note: 2010 debt/GDP ratio was 92 percent, under World War II and depression highs.]

    The AEI report also observed that today’s Republicans arguably put the cart before the horse. The report warns against debt reduction to promote economic growth and is clear and reasoned in pointing out the dangers:

“Paying off the national debt would leave global financial markets with no benchmark risk-free asset in the form of U.S. government securities. High-quality liabilities of the U.S. government confer benefits on both the private sector and the government, enabling the government to borrow when necessary at low cost. If the U.S. government were to absent itself from the credit markets, it would hamper its ability to smoothly resume borrowing, should the need arise.”

    And the Reagan years? The conservative report, which called debt reduction at the time, “a preposterous idea,” asserted “The truth is that, in the 1980s, stimulative fiscal policy, especially lower tax rates coupled with monetary policy acting to reduce and stabilize inflation, pushed up growth.”

    Yet because of the family checkbook model, reducing the debt and its corresponding deficit is seen as the single, all purpose solution for national growth and the creation of private sector jobs. Yet because of feedback characteristics found within the whole system, reducing the deficit can have the opposite effect.

Non-Borrowed Reserves are Increasing. US Debt is not “Crowding Out” Other Borrowers or Shrinking Reserves.

Also see “Common Sense Doesn’t Add Up to Effective National Economic Policy (Part 1 of 3, the AmEcon Series).” and Myths and Lies in Economic Policy (Part 3 of 3, the AmEcon Series)

Common Sense Doesn’t Add Up to Effective National Economic Policy (Part 1 of 3, the AmEcon Series)

What appears to be common sense in economics doesn’t make sound economic policy.

     Because the plus and minus accounting of family income and expenses does not reflect the way a national economy works. Each family manages its money, juggles income and expenses, and worries over credit. But that family’s wealth only increases if the national economy grows. That family’s market investments, usually in houses and stocks, will only increase in value if the nation’s domestic and international economic output increases. Their children will only have greater opportunity if the national economy expands.

    That uneven translation between balancing the check book on the family dinner table and balancing the components of national policy in the mahogany suites remains a sticking point that politicians and policy makers both exploit.

    The important difference between the family budget and the national economy is a concept called feedback. In the national economy, an act of government has consequences in very different ways than the private acts of a family.

    For example, if a family saves, it can cut its debt. It can accumulate savings. It can pay its bills. At the national level, if all families save, it will diminish buying and cut demand. When demand falls, workers are laid off, jobs are lost, and unemployment raises.

     So if one family saves, it can balance its budget. But if all families save, it will increase unemployment. Increasing family wealth by saving can cause the economy to lose jobs. (This is known as the thrift paradox.) That doesn’t seem to make sense, but it highlights the difference between the family ledger and the feedback effects within a national economy. It tells us why national policy can not be based on the decisions of the family checkbook.

Key Policy Questions

    The recession of 2009, originally linked to a housing bubble of inflated mortgages and unsecured mortgage derivatives has been more recently blamed on government spending and debt. This shift in focus has been the result of political goals. By messaging, the Republicans have shifted responsibility away from the banks, financial institutions that the government bailed out and blamed the government itself for the massive private sector failure, which lead to the collapse, sale, or bail out of major investment firms and banks such as Merrill Lynch, Lehman Brothers, Bank of America, the re-insurer AIG and Goldman, Sachs. Hundreds of small banks failed. Yet national policy discussions ignore both the private sector collapse and the giant consumer and private debt that hung over the economy and is silently growing larger.

    The question for national economy policy is how to review and weigh each of these elements of debt: private, household, non-financial, financial, public, in order to increase the nation’s total purchases and economic output.

For example, private household debt equals almost 100% of the US GDP (the US gross domestic product).  In comparison, the federal budget deficit last year (2010) equaled 9.9% of GDP.

 According to CIA statistical profile, the US ranks 38th out of 128 countries in its share of GDP to public debt. Total Federal debt is $9-10 trillion while US corporate debt is at least $29 trillion. (Failing to increase the debt ceiling would have actually moved money into US Treasuries, and have a negative effect on corporate debt, both interest rates and availabity.)

 Overall US debt, public and private, for all levels of government, households, and corporations, stands at $50+ trillion, with federal debt accounting for only $9.9 trillion.

 Yet the question dominating the public discussion is paying down the national debt and cutting annual government spending.

Why?