Say whatever you want. The voters will never know you're fooling them.
That seems to be the attitude of several presidential candidates who either don't feel like boning up on basic economics, or know they're spreading fairy dust but don't particularly care. The economy, of course, is issue Nos. 1, 2, and 3 in the minds of voters, as the stock market tanks, jobs remain scarce and news headlines warn of another recession. There's a good chance the unemployment rate will be close to 10 percent when voters go to the polls in November 2012, with economists warning that stagnation could settle over America for years. Abysmal poll numbers make it clear that the weak economy has left President Obama as vulnerable to defeat in 2012 as any first-termer in modern times.
With millions of American families falling behind, you might think the candidates would be cramming on basic economics, to better understand the forces that generate—or undermine—prosperity. Alas, you'd be wrong.
Instead of an improved understanding of vital matters like monetary and fiscal policy, Americans are now witnessing an intellectual race to the bottom among candidates who seem to revel in their disregard for conventional economics. And uninformed voters willing to believe nonsense make it possible. Part of the problem is that economics is a squishy science that's still evolving, with a lot of gray areas where cause-and-effect relationships aren't completely clear. Americans hate ambiguity and prefer simple black-and-white explanations, so if something doesn't work 100 percent—such as the big 2009 stimulus package or the Federal Reserve's "quantitative easing"—they tend to deem it a total failure instead of a partial success.
It's also quite possible that the U.S. economy is undergoing something unprecedented that we don't fully understand yet, and therefore don't know how to fix. Plus, many Americans fail to grasp the severity of the economic problems of the last five years, and therefore have unrealistic expectations about easy solutions. Whatever the cause, there's an alarming degree of economic illiteracy among the candidates vying to become the next leader of the world's leading free-market democracy. Here are five bogus themes that crop up repeatedly in political rhetoric:
America is broke. Completely false. The U.S. government spends more than it takes in and therefore has an uncomfortably large amount of debt. But it is far from broke, which typically means out of money. The government, in fact, earns about $2.6 trillion per year, mostly through tax revenue, and it could earn more if it raised taxes. When it needs additional money, it borrows at the lowest interest rates on the planet, which is not something a bankrupt is typically able to do.
The distinction matters because saying that America is "broke" implies that the money's all gone and spending cuts are the only solution. That's not true. The issue, rather, is a legitimate disagreement over what level of taxation should support what level of government services. Despite its problems, America remains a rich country able to fund high levels of government spending. That's not what voters seem to want in general, but if there were a national emergency that required a doubling of tax rates to assure the nation's survival, it would become quickly apparent that America is anything but broke.
Paying down the debt is more important than stimulating economic growth. Economists tear their hair out over this one. The fixation on reducing the national debt is obviously a Tea Party rallying cry that has been adopted by Congressional Republicans and practically every GOP presidential candidate. That's important, but they've got the priorities backward. Economic growth should come first, because more jobs, higher incomes and better business profits will provide more tax revenue that will help pay down the debt. Reducing the debt without putting economic growth first, meanwhile, is self-defeating, because cutting government spending or raising taxes cuts into growth in the short term and helps create a "negative feedback loop" that perpetuates an economic slowdown. Yet that's precisely what happened over the summer, when President Obama and Congressional Republicans nearly shut down the government over disagreements on how to tackle the national debt. Had they devoted that much effort to creating jobs, it might have done more to reduce the debt than the half-baked debt deal that left practically everybody dissatisfied.
This still matters because there are more big battles looming over the debt, starting with the Congressional "super committee" that must come up with another $1.5 trillion worth of debt reduction by the end of the year. Economists and business leaders worry that more foolishness in Washington could be one of the things that triggers a new recession. Most feel the right way to approach the problem is this: Jobs first. Debt reduction later. But the hypercharged political environment may generate the opposite, with the presidential candidates stoking this seminal economic misunderstanding.
The Federal Reserve is evil. The Fed has done a number of controversial things to prop up the economy: granting emergency loans to big Wall Street banks, bailing out AIG, slashing short-term interest rates to record lows, and launching two big rounds of quantitative easing meant to boost stock values. Texas Rep. Ron Paul wants to eliminate the Fed. Minnesota Rep. Michele Bachmann and Texas Gov. Rick Perry (plus gadfly noncandidate Sarah Palin, the former Alaska governor) have all taken shots at the Fed, suggesting it should mind its own business and stop interfering with the economy. Above all, they insist, the Fed should stop "printing money."
But the whole reason the Fed exists is to interfere with the economy—which was considered a good thing when the Fed was created, in the aftermath of the Panic of 1907, because the economy routinely endured mayhem much worse than what we went through in 2008 and 2009. It took awhile for the early Fed to get its footing, but there's compelling evidence that the economy is more stable with a strong central bank than it used to be without one. Between 1854 and 1907, for example, there was a new recession every 4.1 years or so, according to the National Bureau of Economic Research. The average downturn lasted 22 months. Since 1945, which is generally considered the modern economic era, there has been one downturn every 5.5 years, with an average duration of just 11 months. Before the latest recession hit, that postwar period was known as the "Great Moderation." The Fed has certainly erred at times--by keeping interest rates too low in the early 2000s, for instance, which contributed to the housing boom and bust--yet most economists still consider the modern economy to be far preferable to the bank runs, financial panics and ruinous depressions of life before the Fed.
Paul, Bachmann, Perry, and Palin feel the Fed has corrupted capitalism, but financial historians frequently point out that capitalism was more corrupt—and more ruthless, too—when it was less regulated. Today, most economists feel the Fed has prevented a deep recession from being a lot worse. If the Fed had sat on its hands, we might now have 15 percent unemployment instead of a 9.1 percent jobless rate, plus a paralyzed financial system and an enduring credit freeze. Yet the Fed's very boldness now makes it a convenient target for politicians looking for a bogeyman, as if doing nothing in the face of a crisis would have been more patriotic that doing something risky to make things better.
Inflation is disastrous. This is the basic premise when candidates like Bachmann or Perry criticize the Fed for "printing money," because more money in the economy usually means inflation will go up. The Fed has in fact injected money into the system, but that hasn't caused inflation yet because that money is mostly sitting on bank balance sheets, not yet sloshing around in the "real economy." If banks suddenly ramped up lending and the Fed were unable to withdraw that liquidity in time, then we might get the kind of runaway inflation Fed bashers keep warning about. But inflation is only about 3 percent right now, and forecasting firms such as IHS Global Insight predict that the weak economy will force inflation down, not up, over the next few years.
Besides, inflation in itself isn't bad. What matters more is whether incomes are rising by more or less than inflation, which determines whether families are getting ahead or falling behind. One reason so many people feel like they're falling behind these days isn't inflation—it's falling household incomes, which can make even modest inflation feel punishing.
Higher inflation may even be desirable in the near future, because a rise in the value of today's money would deflate the value of yesterday's debts for everybody, including consumers and the federal government. Harvard economist Kenneth Rogoff argues that a deliberate policy to boost the inflation rate to somewhere between 4 and 6 percent might even be the fastest way to work through the long period of "deleveraging" that will be necessary before the economy can get back to normal. But "good inflation" may be a concept too complex for candidates on the hustings to grapple with, or explain to voters.
More domestic oil drilling will force gas prices down. If you believe this claim by Michele Bachmann, maybe you should just buy a car that runs on hot air. Bachmann says that more drilling in the territorial United States would push gas prices down to $2 per gallon, a fantastical claim that has been thoroughly debunked. But the economic fallacy behind such flawed logic is important to deconstruct because it touches on many important issues involving trade, globalization, and the worldwide economy.
Bachmann presumes that any additional oil produced in the United States would somehow stay here, greatly expanding domestic supply and driving prices down. But that's not how free markets work. In the market for a global commodity like oil, any additional supply or demand affects worldwide prices, which in turn affects the amount of oil that other suppliers produce and other buyers buy. We can't control the amount of oil that others choose to buy or sell, which has a much bigger impact on prices than any marginal new supply from the United States would ever have. This is basic supply-and-demand theory, which underpins our entire economic system.
Any measure that would artificially force up the domestic supply of gasoline by the huge amount required to get the 40 percent price drop Bachmann wants would be more akin to the nationalized oil policies of Venezuela or Saudi Arabia than to American-style capitalism. But that's a trifling detail, so never mind. Just cheer for the candidate and stop asking a lot of pesky questions.