In the past week, I’ve had conversations with people who voiced the following myths. Read and learn, lest you embarrass yourself in the same way.
Myth #1: Federal debt has been increasing under all presidents since World War II.
Reality: Federal debt steadily declined from the mid-1940s to the early 1980s, then it increased dramatically (with a brief hiatus in the mid-to-late 1990s). Ronald Reagan reversed four and a half decades of safe, responsible fiscal policy, and every successor except Bill Clinton followed his lead. See for yourself:
Myth #2: The Bush tax cuts were worth the cost. They stimulated the economy.
Reality: President Bush signed the tax cut bills in 2001 and 2003, when the economy was recovering from the 2000-01 recession. If they stimulated the economy, we should see higher-than-usual economic growth, compared to other post-WWII recoveries. Instead, we saw lower-than-usual growth in GDP, consumption, investment, net worth, wages and salaries, and employment:
The 2000s weren’t just weaker than average. They were weaker than any previous decade or half-decade since the Great Depression:
According to supply-side theory — which was used to justify the cuts, especially in 2003 — lower taxes will encourage the rich to consume less and invest more, increasing the supply of goods and services. But investment grew far faster after the tax increases of 1990 and 1993 than after the tax cuts of 2001 and 2003:
The employment-population ratio never returned to its pre-recession levels. Look at this horrifying, steady decline after the tax cuts:
That’s worse job growth than any other post-WWII expansion:
…and the biggest increase in poverty of all the post-WWII expansions:
Myth #3: The 2009 stimulus wasn’t worth the cost. It didn’t stimulate the economy.
Reality: President Obama signed the American Recovery and Reinvestment Act (ARRA) on February 17, 2009. Almost immediately, GDP growth turned around:
Private sector job growth also turned the corner immediately following the ARRA:
A few weeks after Congress passed the ARRA, the stock market unexpectedly began a strong, steady rise:
It’s true that GDP and job growth has been slower during this recovery than previous post-WWII recoveries, but recoveries following financial crises are almost always weaker than recoveries that follow traditional recessions. Compared to other debt-burdened recoveries, this recovery has been better than usual.
Another reason for the slow GDP and job growth is the lack of stimulus. No, that’s not a typo. The ARRA may have injected $787 billion into the economy, but state and local governments cut their budgets by roughly the same amount. Overall, government spending hardly budged from its long-term trend:
A lot of economists have tried to measure the historical “government multiplier,” or “bang for your buck,” but only a few have studied periods that are comparable to today: deep recessions where interest rates can’t go any lower. Such responsible studies estimate that the multiplier ranges from 1.5 to 2, which means that $1 in government spending increases GDP by $1.50 to $2.
Stimulus critics predicted that interest rates would rise because the government borrowed too much, competing with private investors for scarce lending. Instead, the opposite happened:
In fact, interest rates are the lowest they’ve been in many decades:
Some stimulus critics also predicted that inflation would soar because the government would print money to pay for the stimulus. Actually, inflation is lower than it was before the recession, lower than it was in the 1980s and most of the 1990s, and out of dangerous deflation territory, thanks to the ARRA:
Myth #4: If we continue to borrow and spend, we’ll have to pay it all back with higher taxes in the future.
Reality: Our government always has some debt outstanding. We never pay it all off. Nor should we. Issuing bonds is how the Fed curbs inflation, and buying back those bonds is how it stimulates the economy. Government debt is essential for effective monetary policy.
We will pay off some of the debt, but it’ll be easier to do so when the country is richer. Remember that multiplier effect?
Of the $787 billion stimulus, only $499 billion was government spending. (The rest was tax cuts, which have a much lower multiplier. Not cost-effective.) With a multiplier of 1.5, that spending will boost GDP by $748 billion.
When you and I earn that $748 billion, the government will take its usual cut. With an average marginal tax rate of 1/3, we’ll pay $249 billion back to the government. So the government only has to borrow $250 billion to pay for $499 billion of spending.
Sorry for all the numbers. Here’s the bottom line: The economy grows by $748 billion, but we only have to pay $250 billion down the road…and that’s only if we pay off all the debt, which we never do. That’s a huge return-on-investment. Any company would be thrilled to make that deal.
Myth #5: President Obama is exhibiting poor leadership by attacking House Republicans when he needs their help to raise the debt ceiling.
Reality: On June 29, the President held a press conference where he criticized Republicans’ refusal to include tax increases in the debt ceiling deal, despite Democrats giving them spending cuts in return. On that point, he was correct. Their proposal is asymmetric. As Ezra Klein put it, “Democrats give in on spending cuts and Republicans give in on not destroying the nation’s credit.” That’s not politics. That’s a hostage negotiation.
The President’s speech had two parts. First, he described four bills that might improve the economy, and he urged Congress to pass them. Then, he recommended ways to reduce the deficit. Here’s how he responded to the Republicans’ intransigence on closing tax loopholes:
…if we choose to keep those tax breaks for millionaires and billionaires, if we choose to keep a tax break for corporate jet owners, if we choose to keep tax breaks for oil and gas companies that are making hundreds of billions of dollars, then that means we’ve got to cut some kids off from getting a college scholarship. That means we’ve got to stop funding certain grants for medical research. That means that food safety may be compromised. That means that Medicare has to bear a greater part of the burden.
…before we ask our seniors to pay more for health care, before we cut our children’s education, before we sacrifice our commitment to the research and innovation that will help create more jobs in the economy, I think it’s only fair to ask an oil company or a corporate jet owner that has done so well to give up a tax break that no other business enjoys. I don’t think that’s real radical. I think the majority of Americans agree with that.
That’s it. That’s his “attack.” He repeated this argument during Q&A, adding that he thinks “the Republican leadership in Congress will, hopefully sooner rather than later, come to the [same] conclusion.”
I hope their fragile egos can sustain such a vicious attack.
You want to talk about leadership? Was it good leadership when House Republicans eliminated the “Gebhardt rule” — which automatically raised the debt ceiling when Congress passed a new budget — and then passed a budget that required raising the debt ceiling? That’s right: They created the crisis, and now they’re capitalizing on the political chaos.
Was it good leadership when Mitch McConnell told reporters that “the single most important thing we want to achieve is for President Obama to be a one-term president”? Was it good leadership when Eric Cantor walked out of the negotiations altogether?
Was it unreasonable for the President to interpret those actions as signs that Republicans were unwilling to cede any ground to him? If you were in such a position, wouldn’t you take your case to the American people and try to convince them to support a compromise?
Maybe not. Maybe you’d soften your position even more. Maybe you’d offer them another tax cut. Maybe you’d offer to sign the exact deficit reduction package that Congressional Republicans proposed in March. Well, the President did all that, and Republicans said no.