Facts and myths about the state of the US Economy

A list of popular myths and facts concerning the US economy and the implications associated with the debt, the deficit and the role of the government.

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July 27, 2011 10:50
Obama and Boehner meet to discuss US debt crisis

Obama Boehner 311. (photo credit: REUTERS)

 
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As the deadline for lifting the debt limit is approaching, the political rhetoric in Washington keeps gaining steam. Distortions of reality, dipped in sacred ideology, false economic theories, defiance of historical truths—all jam the air, the print media, the talk show discussions and the small talk around the water cooler.

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Lies and  distortions spread by those who oppose the lifting of the debt ceiling must be addressed and exposed for what they are—dirty politics wrapped in a baseless ideology. The following is an incomplete list of myths and facts concerning the US economy and the implications associated with the debt, the deficit and the role of the government.



Myth
The Debt Ceiling (I call it the Death Ceiling) is conditioned upon a bi-partisan agreement on lowering or balancing the US Government budget.

Fact

There is no dependence between the lifting of the debt ceiling and the budget deficit. In fact, it is my strong opinion that there should be no debt ceiling at all. The American government must honor its obligations regardless of the budget deficit’s size. The debt ceiling should be raised or completely eliminated, since each and every time we approach it, we realize that we have no choice but to raise it yet again. Government spending must be conducted responsibly with an eye on the size of the deficit regardless of the existence or the absence of a debt ceiling. If the ceiling is not lifted or eliminated altogether, the US will bring about a self-inflicted long-term disaster on its economy and on its economic dominance in the world while drowning the rest of the world in the process.

Myth

In recent days the rhetoric made use of the term “job creators” when referring to the rich. Is it the proper term or is it misleading?

Fact

The real job-creators are the consumers. The boss will hire more workers if present business capacity is unable to fully satisfy consumers’ demand for goods and services. The boss will lay off employees if business capacity exceeds consumers’ demand. Taxes have little to do with hiring or firing of employees. The bosses do not create jobs. In their attempts to maximize their profit they act to satisfy demand in response to the real job creators—the customers.

What we need right now is a “Demand-Side” economic policy rather than a “Supply-Side” one.

Myth

The US needs a Balanced Budget amendment to the constitution.

Fact

Under a balanced budget amendment Government may be paralyzed at times of emergencies when it’s most needed. It will not be able to act quickly and decisively during unforeseen events like natural disasters such as Katrina, man-made disasters such as wars, or economic calamities such as the collapse of the auto industry, the breakdown of the financial sector or both. History has demonstrated that attempts to balance the budget during an economic depression caused more harm than good, and the damage was not confined to the short term. There is no need for a balanced budget amendment, especially now, when the economy is sluggish and unemployment is high. Shocking the economy at this point by forcing massive budgetary cuts in the short term is insane, unless policy makers are nostalgic about the great depression and feel like living through a greater one.

Myth

Taxes are too high in the US

Fact

Taxes are the lowest they have ever been. Income tax payments this year will be nearly 13% lower than in 2008—the last full year of the Bush presidency. The poor economy is largely to blame for the low tax rate, but the tax code is not an innocent bystander either. It grows each year with new deductions, credits and exemptions. Both rich and poor pay significantly less than they did in the past.

Myth

Supply Side Economics is what America needs.

Fact

Supply-side economics has never worked. The idea was that lower tax rates would provide strong incentives to earn more income, and as a consequence tax revenues would go up. Even supporters admit that the big supply-side tax cuts of the 1980s and the 2000s did not work as advertised, but those who want to believe in this false theory, despite the historic evidence to the contrary, hold on to their religious conviction in the Supply Side theory. They choose to ignore the fact that the promised boon in tax revenues has never materialized.

Myth

Government does not create jobs.

Fact

There are two main roles the government plays in the economy. It is the largest employer of the American workforce in addition to being the private sector’s most significant customer. As of March, 2009 total federal government employees amounted to over 2.8 million people with monthly payroll exceeding $15 billion, not including the armed forces. The number of state and local employees was equal to over 5.3 million with payroll for that month equal to a figure exceeding $19.3 billion.

Government purchases of goods and services including healthcare, education and defense in 2010 amounted to $2.764 trillion. The figure does not include expenditures for pensions, welfare and interest payments.

Government expenditures are directly responsible for spawning millions of jobs in the private sector. Government expenditures for pensions, welfare and interest provide an indirect stimulus, offsetting some of the counter-stimulus tax burden.

Myth

The US Economy is like the Greek Economy

Fact

One of conservatives' favorite talking points these days is that the US is going to end up like Greece if we don’t do something drastic. This statement ignores some basic realities.

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Greece’s economy is small and relatively insignificant compared to the US economy. Unlike the US, Greece’s debt is not in its own currency. In fact, Greece doesn’t even have its own currency. Unlike the US, Greece’s fiscal and monetary policies are not coordinated because Greece has no control over its monetary policy.

The US can prevent defaulting on its own debt unless it chooses otherwise. All real economists are in the opinion that a country can always pay its debt when the debt is in its own currency. It can simply print more money and devalue its currency and its debt in the process.

In spite of the Great Recession the US has a vibrant economy. Its production capacity, innovative atmosphere and capital levels, are unmatched in the world. Not a single person can say that about Greece.

Myth

The Obama/Bernanke bailouts have been erroneous and/or ineffective.

Fact

TARP— the Troubled Assets Relief Program, created in October 2008 at the height of the financial crisis has been one of the most prominent success stories of the great recession. Not only most of the $410 billion (out of the authorized $700 billion) is being paid back, but it did hit the brakes on the down spiral of the economy following the Lehman Brothers’ collapse.

Real economists agree that without TARP and the massive quantitative easing (QE) by the Federal Reserve unemployment could have risen to levels matching or even exceeding the levels of the Great Depression. It is a fact that proper government economic policies have been directly responsible for 8.5% unemployment. This figure is high compared to an ideal level, but it is very low in comparison to what it could have been had TARP failed to materialize.

Without TARP the American auto industry would have disappeared forever, taking with it all supporting industries and a great deal of the American manufacturing base. Without TARP banks would have failed, AIG would have failed, taking with them numerous industries, shrinking the money supply to a bottom that prevents any economic recovery while sinking the rest of the US to levels equivalent or lower than levels experienced during the Great Depression.

Claiming that TARP has weakened the economy is like claiming that the CIA (rather than al Qaeda) flew airplanes into the World Trade Center. Go figure…

Myth

The Obama administration created the largest budget deficit ever

Fact

This statement is actually true, but it fails to deliver an authentic picture. The Obama administration had no choice but to save a troubled economy and to support the troops in two wars it inherited. The administration shouldn’t be blamed for trying to get the economy out of the ditch; it had no choice. And given the circumstances, it was the right thing to do.

Myth

The next generation will have to pay for the present government spending spree.

Fact

The statement above is a distorted version of the truth, since it attempts to place blame on the wrong party. The next generation would have paid much more if unemployment and underemployment reached levels of the Great Depression since parents would not have been able to invest in their children’s future. Government spending is not the only reason for the largest US budget deficit ever. The Bush tax cut is clearly a contributing factor. Still, tax cuts and greater levels of government spending were preferred to balancing the budget during the Great Recession. Running a budget deficit has been a better choice than sliding down the cliff the US was staring at, following the collapse of Lehman Brothers.

Myth

Balancing the budget can only be accomplished by reducing spending since there is a need to transfer more resources to the private sector away from the government.

Fact

As I have argued earlier, there is no evidence favoring Supply-Side Economics. Accordingly, there is no proof that the private sector can, on its own, lift the economy out of the ditch. The private sector is frozen due to lack of demand. The only force that could jump start the economy at this point is an economic force not motivated by profit. Businesses will not invest and will not hire unless they see evidence of renewed economic activity justifying new spending. If we depend on the private sector to jump start the economy we must provide it with a compelling reason. In the absence of one, the recession will only get worse since leaving it unchecked will only cause it to feed upon itself, spiral down the cliff to levels of a Great Depression. Ubiquitous absence of demand generates more of the same, more layoffs, more depression.

The statement above is true only when the economy is healthy, when it fires on all cylinders at full force, when it benefits from full employment. In times of high unemployment when so many resources are unutilized, pulling resources out of an idle pool does not deprive the private sector. On the contrary, it spawns new job-creators—more working consumers who are willing and eager to spend their earned income on goods and services produced by the private sector.

Myth

Raising the debt ceiling is a democrat’s socialist idea

Fact

When George Bush was president and Barack Obama a senator, the latter objected to raising the debt ceiling. When former president Ronald Reagan faced the same issue he argued that “Unfortunately, Congress consistently brings the Government to the edge of default before facing its responsibility. This brinkmanship threatens the holders of government bonds and those who rely on Social Security and veterans benefits. Interest rates would skyrocket, instability would occur in financial markets, and the Federal deficit would soar. The United States has a special responsibility to itself and the world to meet its obligations. It means we have a well-earned reputation for reliability and credibility—two things that set us apart from much of the world.”

Would you still argue that it’s a democrat’s idea consistent with a tax and spend policy?

Myth

Keynesian economics advocated a tax-and-spend government policy

Fact
Keynes advocated an active fiscal policy by the government to balance and repair the economic conditions. In fact, he believed in increasing taxes and reducing spending in times of inflationary pressures while reducing taxes and increasing spending in times of high unemployment. This is the opposite of a straight tax and spends policy.

The writer is currently a talk show host at Paltalk News Network (PNN). He served as an intelligence expert for the Israeli government and was a professor at Northwestern University. He is the author of Fundamentals of Voice Quality Engineering in Wireless Networks, and more recently, 72 Virgins. Both books can be purchased at www.aviperry.org.

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