Sunday, July 6, 2003

Something must be in the water here, because the same old economic myths are being repeated every year as the gospel truth.

Politicians love to spread these fictions because they offer convenient, easily accepted answers to difficult problems. The national media are frequently all too eager to promote these myths — when it fits their liberal agenda.

Over the years, I have attempted to collectively dispel some of these myths in my column. Here are some of the worst, and my reasons why they are patently untrue:

Myth: Budget deficits cause interest rates to rise.

There is no connection between them. Interest rates skyrocketed in the 1970s when the deficit was relatively low, and fell in the 1980s as the deficit rose to record levels. Interest rates dropped again in the 1990s, when we had budget surpluses, and fell further in recent years as the deficits shot up again.

Myth: The deficits and federal debt will impose huge long-term burdens on future generations of taxpayers.

The national debt is an instrument of fiscal policy. People, banks and other institutions lend the government needed money and get a return on their investment.

But in an $11 trillion economy, and in a government that rakes in more than $2 trillion a year, some debt is not necessarily bad. To the feds, it can be a short-term liability that will be paid in due course, often at low interest rates. To the lender, it is a financial asset that is as good as gold.

In good times, when the economy is growing rapidly (as we saw in the go-go ‘90s), budget surpluses can pay down the debt relatively quickly. Indeed, budget officials forecast in the late ‘90s, before the bubble burst, that the public debt owed to outside lenders would be paid off in 15 years — the length of a common home mortgage.

Myth: Trade deficits are bad for America.

On the contrary, they are a sign of our growing affluence. We buy much or most of what we produce, but as a result of our wealth as a nation, we have enough left over to buy a lot of imported stuff, too.

We sell roughly $1 trillion in goods and services abroad each year, which helps keep a lot of Americans employed. But we spend more on imported goods, creating a trade deficit. The opposite is not necessarily a good thing. We had trade surpluses during the Great Depression. Japan ran surpluses, but it has been in a recession for two decades.

Myth: Free-trade agreements destroy American jobs.

You tend to hear this more when our economy is in a periodic slump, but it is a phony charge.

Jobs were plentiful in the 1990s, although we were just as aggressively engaged in global trade, particularly under the successful North American Free Trade Agreement. The U.S. unemployment rate dropped to below 4 percent at the end of the ‘90s, when the biggest problem facing businesses was finding enough labor for jobs that went unfilled.

Unemployment is now a little more than 6 percent, though that has a lot to do with weak trading partners who need to cut their tax burdens, reduce or eliminate their trade tariffs, deregulate their economies and open their markets to foreign investment.

Myth: The government needs to further regulate the economy to prevent corporate abuses and bring down excessive pricing, particularly in the health-care industry.

Ohio Rep. Dennis Kucinich, a Democratic candidate for president, says he wants to “take the profit out of the health-care industry.” But, looking at the history of the free market, one sees that, over time, the markets find ways to bring down their costs and lower their prices.

In the 1970s, IBM sold its mainframe 370-168 computer for $3.4 million. Now you can buy a personal computer for around $800 that is about 1,000 times faster. When the cellular phone first appeared, it cost more than $200. Now, companies give them away when you buy into a service plan.

Countries such as the former Soviet Union and pre-capitalist China, both of which took the profit motive out of their economies, plunged ever more deeply into poverty and social decay. Their shift toward free markets and capitalism has turned them into two of the fastest-growing economies on the planet.

Donald Lambro, chief political correspondent for The Washington Times, is a nationally syndicated columnist.

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