Sunday, January 29, 2012

Economic Myths from the Political Campaign

              I avoid about 99.5% of the blather that comes out of Fox and MSNBC, and I managed to miss about 95% of the Republican presidential debates. But even tuning in for a few minutes here and there, I've heard my share of political punditry, social commentary and economic posturing -- not to mention the opinionated reports one gets from newspapers and magazines. (By the way, I recommend The Week magazine. It's succinct, reasonably thorough, and not larded with too much political bias.)

           People promulgate their points of view and often try to present them as facts. Even when someone says, "But the fact of the matter is ..." usually what follows is just an opinion or unexamined assumption. Here are some of the things I've heard recently, repeated over and over -- things that are just not true, or (at least in my opinion) mostly not true.

Rich people create jobs. This is a favorite canard of certain politicians, but it’s not really true – unless you count the hiring of a few English butlers and undocumented gardeners. The people who really create jobs are middle-class consumers.

          Investors and entrepreneurs do create small companies. But most small companies are funded by family funds, not rich people's money. Think of Apple or Microsoft. They were started by college dropouts, not wealthy hedge funds. Or think of a local store or restaurant, or even a franchise. The capital to start these businesses typically comes from the person's family, supplemented by a bank loan or a credit-card loan, not a wealthy benefactor.

But aside from how a new company is funded, what a new company needs more than anything is customers to buy its products. The largest portion of customers, by far, is the middle class, which spends most of what it earns, as opposed to the superrich who save a lot of their money and store it in banks and non-productive assets like art or real estate. A lot of poor people create successful businesses if they have the customers. A rich person with no customers -- that's the DeLorean. 

Social Security is dead. Social Security has started paying out more than it takes in from the payroll tax -- especially now that the employee portion of the tax has been lowered from 6.2 percent to 4.2 percent. But according to latest reports, Social Security will be able to pay all of its obligations for the next 26 years. After 2037, it will still be able to pay 78 percent of promised benefits – and that’s assuming no change to the system. Congress has more than two decades to make adjustments that will keep the system whole, such as raising the retirement age, increasing the salary cap on the payroll tax, or changing inflation adjustments.

But let's not get complacent. Some people shout and scream that Social Security should never be touched because it does not add to the budget deficit. Actually, Social Security never did add to the federal deficit ... until recently. Now it does pay out more than it takes in from the payroll tax, so it's cashing out some of the surplus that it's been paying over to the federal budget for the past 75 years. But the real problem lies in the future, when beneficiaries overwhelm workers and, if things don't change, Social Security, along with Medicare, will add mightily to the federal deficit.

Another rallying cry you hear: "You can't cut my benefits, because I paid for them!" I sympathize with this point of view, but it's not entirely accurate. Sure, we all paid in for many years. But our payments went to our parents, not to any "lockbox." Now we're relying on our younger siblings and children to pay our benefits -- and there aren't as many of them. We are also living longer, and on average receiving more payments than our parents and grandparents ever did. Most beneficiaries get more out of Social Security than they ever put in, and the way to maximize your benefits is not to argue for a bigger check -- that's a hard sell in this economic environment -- but to take care of yourself and live a long time.

College is too expensive. Tuition has climbed over $50,000 a year at many private universities, leaving students deeply in debt. But, on average, college still pays off. Just consider the current unemployment rates as tallied by the Bureau of Labor Statistics:  Less than high-school education: 14.9%; high school education: 10.3%; college degree: 5.4%; professional degree: 2.4%.

Plus, on average people who pay top-dollar at the most-expensive universities also earn more money. One survey of Ivy League students graduating in the 1970s and ‘80s found that people from these high-priced schools earned 15 to 40 percent more than their counterparts from less competitive, and less expensive, schools.

But it's important to remember that not all graduates of prestigious colleges earn more than students from state universities or community colleges. A lot of a person’s earning power depends not on the size of his or her college tuition, but on the choice of major. Students majoring in engineering, business and management are the top earners. Those majoring in education, religious studies and fine arts earn a lot less. College is only “too expensive” if you go to an exclusive private school and major in a subject with little economic value.

Saving the environment costs jobs. Research says that environmental regulations make production more expensive, thus reducing demand and costing jobs. This is true, as far as it goes. However, studies have also shown that environmental technology creates even more jobs, ranging from blue-collar construction jobs to high-paying scientific research jobs.

          One 2009 study concluded that solutions to climate change – investing in renewable energy sources, building out high-speed rail, creating a smart-grid infrastructure – could generate over 1 million new jobs in this country. Another study calculated that a $100 billion decrease in oil imports would create 900,000 new jobs. 

The U.S. economy is in permanent decline. Despite recent financial problems, the U. S. still boasts the largest economy in the world, accounting for a quarter of the globe’s economic activity. The U. S. is the largest trading nation, provides the most reliable reserve currency, and is home to more major international corporations than any other country. Even with relatively high unemployment, America attracts the most foreign investment, and its net migration is among the highest in the world. The U. S. also ranks near the top in the global competitiveness index produced by the World Economic Forum.

           For a quick review of the challenges facing the U. S. economy, and how we can thrive in the midst of global competition, check out Thomas Friedman's piece in today's New York Times.

Experts project that China’s economy will catch up to the U. S. by 2020. But not because the U. S. economy isn’t growing. It’s because China is growing faster. With more than four times the population of the U. S., it only makes sense that China will eventually have a bigger economy. But even then, the average American will be a lot richer than the average Chinese.


Mary Lee said...

"The fact of the matter is..." OMG, I just watched the morning talk shows and heard it over and over.

Interesting that the same political party that criticizes the President's desire to fix our infrastructure and update our power grid cheers for a guy wanting to put a colony on the moon.

Talk about bassackwards!

schmidleysscribblins, said...

After I comment here I am going to check out Tom's column. I agree with you about the points you make, especially with regard to Social Security. SS affects the mulitplier and that has to be good.

I hope you saw the post I did on 'Crony Capitalism.' My attitude is that until we stop paying tax dollars for corporate welfare, we have no business talking about other forms of welfare for ordinary citizens.

Unfortunately, both sides are at fault for this state of affairs which began with our own Civil War.

I support government investment in green projects that are well thought out. Boondoggles by cronies are not in that category. Also, investment in infrastructure is critical, although the state governments seen better able to tackle this issue. At least that is true here in Virginia. Dianne

rosaria said...

You are right on the money!

Retired Syd said...

I love it when in the sea of mis-information I get to read a smart, articulate, common-sense piece. Thank you for being the small island of sanity today.


Dr. Kathy McCoy said...

This is an excellent, well-reasoned post, Tom, and a welcome bit of sanity in this whole insane run-up to the elections. I also would second your recommendation of "The Week." I think it's the best news magazine out these days!

Jono said...

Excellent! I nominate you for economic adviser to whoever gets or stays in the white house next.The never-ending campaign is a tragic comedy.

Douglas said...

Nicely written!

Stephen Hayes said...

A well-balanced assessment of our current situation. Nicely stated.

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Dick Klade said...

I'm thinking you hit four of five exactly right. The miss is that college educations have not become excessively expensive.

I doubt any child from a low- or middle-income family could work their way through college as I pretty much did years ago. The fault lies with state legislatures. Thirty years ago they financed about 75 percent of costs of state universities. Now, most provide about 25 percent of budgets.

The super rich have no trouble sending their kids on to higher education. Most others have a struggle, or the grads finish with huge debts they have for a lifetime.

Nance said...

Good job of debunking!

I especially applaud your take-down of the "Rich People Create Jobs" notion. I'd love to see some figures that show what percentage of start-ups for, say, 2010 were funded by wealthy "angels." I'd like to see 2005 and 2006, too, while we're at it.

I have two members from separate branches of my family who have started small new businesses since 2008. Neither of them were able to get bank loans, despite having excellent business plans and proven track records. They used their retirement savings or got help from other family members. They are surviving, but they'd be thriving and growing and hiring in a better economy.

Linda Myers said...

Great post. I feel better!

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