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6 Myths About the Economy

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If you pay attention to social media, or even just talk amongst your friends, you may have heard some awful things about the economy.  Many people, Republican and Democrat, are convinced that things are simply not improving.  The feeling tends to be stronger among Republicans, especially Tea Partiers, who believe that socialist policies are still killing us.  But the mood crosses party lines rather fluidly.

It boils down to six persistent myths about our economy today.  Some are based on old news, taken from horror stories from the depths of this depression around 2010.  Some are simply wrong.  But all of them reinforce the emotional reason why this is indeed a depression, a dark feeling shared across society.  It’s also rather wrong.  Let’s run them down.

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Inequality vs Sustainable Growth

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Is wealth and income inequality holding the economy back?  A recent study by the Pew Foundation shows that from 2009-2011 the wealthiest 7% of the US saw their net worth climb 24% – to an average of nearly $3.2M – while the other 93% of the population saw their wealth plummet 7%.  More than being unfair, it may also be holding back economic growth overall.  The rich may be happy with their take, but it may stop coming.

A number of studies have shown the effect over a number of countries, and the effect is undeniable.  At what point does income and/or wealth inequality slow growth?  Like an excess of debt it’s hard to say, but the two taken together lead to a compelling argument that the search for sustainable, meaningful growth is a strongly bipartisan, left and right issue – and something we should get moving on as a priority.

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Crunching the Numbers

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At what point does public debt become a problem?  If you ask many Republicans  when the debt hits 90% of GDP we’re in trouble.  Given that the Federal Debt is above this level you can see why there is a push for budget control if not outright austerity.  But where did that magic figure come from?

The answer is a  work by two Harvard economists, Reinhart and Rogoff’s 2010 paper “Growth in a Time of Debt.”  But now that this magic number has been debunked in spectacular style, will the call for austerity ease?  Given how the sides have retrenched, no way.  But it is true that a certain level of debt is indeed a problem – it just isn’t something you can pull from a formula and throw onto autopilot.

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Revisiting Job Dynamics

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While waiting for new information, it’s always good to go over the old stuff and see how we’ve done so far.  Barataria used to use the weekly unemployment initial claims as an instant guide to how the Depression has been running, but stopped a year ago.  The rationale at the time was that we were close to equilibrium at about 360k jobs lost every week.   There wasn’t much reason to expect a change.

How did that assumption fare?  And was this really proof, along with job growth leading GDP growth, that we are in an unusual economic event?  Let’s go back over some old ground and see how the old predictions went.   Some of this went well and some not so well.

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Low Growth, the New Normal

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What does a future of low economic growth look like?  The Congressional Budget Office (CBO) economic forecast estimates a real growth (adjusted for inflation) of less than 2% for the foreseeable future.  We have discussed before how this pattern is likely to hold through the next generation and around the world as population growth slows and new opportunities will come only through technology improvements.

The implications are vast, if for no other reason than investing and saving for retirement are going to be very different concepts than we have come to expect.  Everything changes – and a few things may even change for the better.  It’s worth thinking through, and carefully.

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