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Economics 101 for Voters

October 11, 2012

A strikingly high proportion of America’s college students these days take at least one economics course as part of their studies. Judging from most campaign rhetoric, though, candidates assume an electorate having next to no understanding of the subject. To help voters grasp some of the basics, I’ve prepared a brief tutorial in a friendly Q and A format.

Q: Does the President run our economy?
A: Certainly not. The U.S. has what economists call a “market economy.” Most economic decisions are made by companies and individual workers, consumers, managers, investors, and property owners. Communist dictators tried to run economies in Russia and China and still do so in North Korea, but economists agree that a top-down economy is unlikely to be efficient.

Q: Is it true that the best way the government can help the economy is to get out of the way of businesses?
A: Yes, this is certainly true for companies that make products whose safety consumers can easily evaluate, for companies that operate in competitive markets and face competition when trying to hire workers, for companies that create no negative externalities like pollution, and for companies that don’t expect to be bailed out by government rescue packages. For those businesses to which one or more of those conditions fail to hold, however, economics teaches that government can help to produce more efficient outcomes.

Q: What about stimulus and government deficits? Hasn’t Keynesian theory been debunked and aren’t government deficits our main problem today?
A: Keynes argued that markets on their own don’t effectively guarantee the full employment of either labor or capital. There can be bouts of depressed demand which set in train spirals of economic decline: companies lay off workers because demand for their products falls, this reduces demand for other companies’ products and leads to still more layoffs, those layoffs cause further declines in demand, and so on. Increased government spending can reverse and thus reduce the severity of these bouts, called recessions. Policy-makers around the world continued to use Keynesian remedies until the most recent crisis, when the view that deficits are the main threat to growth began to shove the old consensus aside. The new view wasn’t based on economic analysis but simply on anti-tax and anti-government sentiment. As Paul Krugman argues, it may be condemning us to a decade of economic stagnation.

Q: Does tinkering with the distribution of income harm economic growth?
A: There’s no evidence that progressive taxes and expenditures harm economic growth. Actually, a large body of evidence shows that countries with more equal distributions of income enjoy faster economic growth. The United States itself enjoyed faster growth under the progressive tax systems of the 1950s through ‘70s than under the less progressive codes of more recent years. Inequality is bad for growth because it prevents quality education from getting to those with the greatest potential talents, leaving education to serve more as a credentialing device for already-advantaged children than as a way to build a society’s competitiveness. The low quality of education associated with weak public funding of schools in the United States is the most important reason to fear near term economic decline of our country.

Q: Why re-elect a president with a weak track record on the economy?
A: President Obama listened to economic advisors who counseled overly timid measures, wasted precious time trying to reach agreement with intransigent opponents, failed to demand reasonable conditions from the financial institutions he bailed out, and paid too little attention to the reforms needed to prevent the next financial sector meltdown. But the alternative is a return to the policies that put us into the economic hole we’ve been in since 2008. Returning Obama to office may help the economy little, though, unless we also elect representatives who’ll work for national economic recovery. Were Massachusetts to return Scott Brown to the Senate because they like his nice guy demeanor and his pickup truck, they’ll be depriving Democrats of a vote they desperately need in the Senate. They’ll thereby be failing ECON 101 and indicating that economists have it all wrong when they assume that people can be counted on to act rationally in their own interest.

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