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Mon, Oct. 21

Let's dispel these tired old economic myths

WASHINGTON – Something must be in the water here, because people repeat the same old economic myths every year as the gospel truth.

Politicians love to spread these fictions because they offer convenient, easily accepted answers to difficult problems. The national media are frequently all too eager to promote these myths – when it fits their liberal agenda.

Over the years, I have tried to dispel some of these myths in my column. Here are some of the worst, and my reasons why they are patently untrue:

– Myth: Budget deficits cause interest rates to rise.

There is no connection between them. Interest rates skyrocketed in the 1970s when the deficit was relatively low, and fell in the 1980s as the deficit rose to record levels. Interest rates dropped again in the 1990s, when we had budget surpluses, and fell further in recent years as the deficits shot up again.

– Myth: The deficits and federal debt will impose huge long-term burdens on future generations of taxpayers.

The national debt is an instrument of fiscal policy. People, banks and other institutions lend the government needed money and get a return on their investment.

But in an $11 trillion economy, and in a government that rakes in more than $2 trillion a year, some debt is not necessarily bad. To the feds, it can be a short-term liability the government will pay in due course, often at low interest rates. To the lender, it is a financial asset that is as good as gold.

In good times, when the economy is growing rapidly (as we saw in the go-go '90s), budget surpluses can pay down the debt relatively quickly. Indeed, budget officials forecast in the late '90s, before the bubble burst, that the public debt owed to outside lenders would be paid off in 15 years – the length of a common home mortgage.

– Myth: Trade deficits are bad for America.

On the contrary, they are a sign of our growing affluence. We buy much or most of what we produce, but as a result of our wealth as a nation, we have enough left over to buy a lot of imported stuff, too.

We sell roughly $1 trillion in goods and services abroad each year, which helps keep a lot of Americans employed. But we spend more on imported goods, creating a trade deficit. The opposite is not necessarily a good thing. We had trade surpluses during the Great Depression. Japan ran surpluses, but it has been in a recession for two decades.

– Myth: Free-trade agreements destroy American jobs.

You tend to hear this more when our economy is in a periodic slump, but it is a phony charge.

Jobs were plentiful in the 1990s, although we were just as aggressively engaged in global trade, particularly under the successful North American Free Trade Agreement. The U.S. unemployment rate dropped to below 4 percent at the end of the '90s, when the biggest problem facing businesses was finding enough labor for jobs that went unfilled.

Unemployment is now a little more than 6 percent, though that has a lot to do with weak trading partners who need to cut their tax burdens, reduce or eliminate their trade tariffs, deregulate their economies and open their markets to foreign investment.

Copyright 2003, United Feature Syndicate, Inc.

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