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Economic Myths Debunked Debunked II

I introduce this series in the first post here. Basically, I’m tackling a Mother Jones post that I believe exemplifies the differences in philosophy between liberals and conservatives when it comes to the economy.

Myth 2: The Deficit is our Biggest Problem right now.

It’s true that we need to address our long-term deficit problem—a problem almost entirely due to Medicare and other health care expenditures. But that’s in the long term. Right now, our problem is a sluggish economy and too many people out of work. And let’s not forget that the Bush tax cuts, not stimulus spending, will also fuel deficits for the foreseeable future.

The real answer to future deficits is to spend money now to get the economy growing again. Yields on federal bonds are at record lows. That means, as University of California-Berkeley economist J. Bradford DeLong has calculated, that the government could inject a big stimulus into the economy at an unbeatably low price: Spend $1 trillion but (because of low interest rates and the tax revenue from a faster-growing economy) borrow only $400 billion. Act now!

Act Now! or not.

There are a few problems here. Firstly, who are they quoting? Who is suggesting this? I know conservatives are concerned with the deficit and growing national debt. But watch the Republican debates, do they talk more about deficits, or the economy? Obviously the big problem is the anemic growth of the economy. Conservatives believe the job market will improve with the economy, and both liberals and conservatives believe the deficit issue will be easier to tackle in a vibrant economy. Liberals may wish the conservatives were obsessed only with the deficit, but this is not the case.

Secondly, who is going to invest in a country that has a government in debt and getting deeper into debt everyday? Especially when there are better places to put that money? We can’t keep looking at America in vacuo. There are other countries with growing economies, more available labor, friendlier tax environments and more rational energy policies. It’s going to be hard enough to attract capital to America under these circumstances without having a government on the verge of bankruptcy. Here was see the very real possibility that running a high government deficit retards economic growth. Investors know money borrowed today must be repayed eventually, and sending money to places where there is not a lot of debt results in a smaller chance of losing future gains to inflation or taxation.

Thirdly, there’s no reason why the current government can’t set about making longterm changes to our entitlement programs and other deficit drivers and do other things as well. Liberals are trying to give a false choice, care about the economy or care about the deficit. It’s quite possible to do both. And that means creating an America good for business.

The current liberal attitude towards the economy has nothing to do with creating a competitive regulatory and tax environment, nor is it concerned with how wealth is created. Their underlying assumption is the best way to create wealth is for the government to use the nation’s credit card, get money circulating so businesses and people are fooled into thinking things are okay. But fooling people is getting difficult.

As I explained in the first post in this series, we can’t simply plug government spending into economic models and expect the multiplier effect to appear. The assumptions behind those models are wrong.

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