10 economic fallacies that have led to the economic collapse in America

“The rich are not paying their fair share!” “Too many tax cuts contributed to the mess the United States is in!” “Corporations need to be regulated in America!” “Capitalism and free markets hurt the poor and let Americans bail out the banks!” “Government is the only entity that can solve the crises we’re in!”

If you have headed to an Occupy Wall Street protest, walked by a union rally or even visited a political comments section on the Internet, you’re probably aware of some of the fallacies that have been going around as to why the United States economy collapsed in 2007/2008.

Unfortunately, misinformation spreads and many are being taught that only the federal government can save the country. If the average person who believed in the aforementioned has his or her way, corporations would be taxed 100 percent of the time, the president would slap quadruple the amount of regulations on business and everyone would be earning $50 per hour.

There were many reasons why the collapse of the U.S. economy occurred, such as too much government intervention in the economy, the Federal Reserve’s policies and an enormous amount of public spending. But let’s address 10 economic fallacies that have led to the economic collapse in America today.

1) Cutting government spending takes money out of the economy

It seems a significant portion of Americans tend to believe that the government has a money tree in Capitol Hill and that’s how it funds programs. However, the only way the federal, state and local governments pay for expenditures is through taxation – later borrowing and inflating, but that’s a different story.

Republicans and Democrats endlessly tax and claim that it will benefit society as a whole. The argument is that if they cut spending or cut taxes then that would suck more than $1 trillion out of the economy, but what is not seen is that the money was taken out of the economy in the first place.

If, for instance, the U.S. adopted retired Texas Republican Congressman Ron Paul’s plan to cut a $1 trillion out of the federal budget that would mean that huge sum would be put back into the private sector and lead to more money in the pocket of the consumer, businesses would invest and hire and Americans would better handle their own money.

This would be a good time to quote Nobel laureate and author of “Free to Choose” Milton Friedman:

“The fallacy that it is feasible and possible to do good with other people’s money has two flaws. If I’m going to do good with other people’s money, I first have to take it away from them. Secondly, very few people spend other people’s money as carefully as they spend their own.”

2) Free trade is responsible for the deindustrialization of the U.S.

Free trade is one of the greatest economic factors in the history of the world. By companies competing on a global level, there is a lot of choice for the consumer. For some reason or another, though, a lot of Westerners have started to complain about free trade and have called for more of an isolationist economic policy.

Union workers will argue that China has ruined manufacturing in the U.S., companies moving offshore to obtain low-wage labor have killed jobs in the country and, again, corporations are greedy and will go anywhere to get richer.

First off, corporations should be permitted to move their operations anywhere they like, but that’s a different argument for another topic.

There are many factors to consider about the deindustrialization of the country:

–          Unions have squeezed companies so bad that sometimes they have no alternative but to leave the country

–          The U.S. tax rates are high and a zero percent corporate tax rate for manufacturing companies would be a great start

–          The customer demands lower prices of goods and services (see Apple or Walmart)

–          A lot of Americans prefer to avoid blue-collar jobs and want to work at desk jobs or Wall Street

–          Regulations are rampant in the U.S. and ECN reported that businesses spend $1.5 trillion a year to abide by federal and state regulations

3) Unions create prosperity and raise real wages

Anyone has the right to form a union – you can’t force someone to join a union – but the power of the unions has become so great that many politicians are terrified to stand up to them, even if it is causing a country, a state (province) or city to go bankrupt (see California).

Unions constantly cry and demand real wages, real benefits and job security, while claiming that, again, corporations are greedy and don’t care about a “living wage.” The unions, like always, hurt businesses and workers and are not needed in society today. Even when they were initially created, workers were doing fine.

Here are a few things to consider:

–          Henry Ford paid his workforce 1 ¼ ounce of gold each week prior to the unions, which equals to approximately $2,000 per week in today’s dollars

–          Unions demand high wages and benefits, even if the company can’t afford it

–          Companies will pay skilled workers more than unskilled workers

–          General Motors was paying its janitors and security workers $75 per hour; it nearly went bankrupt

–          Unions make it difficult to fire under-performing workers, which hurts productivity in the long-run

4) Fiscal stimulus programs work

The stimulus package of President Barack Obama was meant to stimulate the economy and create a recovery. Whenever the government speaks, it usually means the opposite.

Federal government stimulus hurts an overall economy because it takes money from the private sector and then misallocates those resources into inefficient, bureaucratic and often political ends. All what stimulus programs do is put money into one hand and give it to another.

Oklahoma Republican Senator Tom Coburn and Arizona Republican Senator John McCain released a report titled “Summertime Blues: 100 Stimulus Projects that Give Taxpayers the Blues” in 2010. It looked at the various wasteful projects that the $862 billion Recovery Act of 2009 created.

Here is a brief list:

–          $1.9 million for international ant research

–          $200,000 to aid Siberian communities to lobby the Russian government

–          $89,298 to replace a new sidewalk that leads to a ditch in Boynton, OK

–          $712,000 to help scientists create a joke machine

–          $71,623 went to Wake Forest University researchers to see how monkeys react to the effects of cocaine

Seen from the short list above, this does not stimulate the economy, it does not provide long-term stability and the money is not invested wisely. Why? See the Friedman quote above: people spending other people’s money on others.

5) A weak dollar helps the economy

The U.S. dollar has devalued tremendously since the inception of the Federal Reserve in 1913. In recent years, Federal Reserve chairman Ben Bernanke has further hurt the dollar because of his inflationist policies, such as quantitative easing and acquisitions of Treasuries and bonds.

To some, a weaker dollar helps grow the economy, but this argument has been refuted on numerous occasions. A weaker dollar does not help the lower and middle class. A devalued dollar will buy less, while prices rise at the grocery store, at the local pharmacy and a nearby restaurant.

A strong dollar will create confidence in the consumer and in the private sector. A tangible currency can lead to wealth of a consumer, while also encouraging investment domestically and foreign. Indeed, ask yourself a question: would you prefer a dollar that buys a nickel’s worth or a dollar that purchases a dollar’s worth?

6) Printing money creates prosperity

Similar to No. 5 on our list, printing money is deemed by Keynesians and central bankers as a wealth creator. The Fed has created so much inflation that many are speculating that hyperinflation will occur in the future and wreak havoc in the country.

The act of printing money usually occurs for political reasons. When the government has spent too much and it can’t tax enough or borrow more from foreign nations then the Federal Reserve works overtime and prints a lot of money.

Of course, if printing money created prosperity then why aren’t the printing presses on 24 hours a day seven days a week and everyone is given $1 million of that freshly printed money? Because situations like Zimbabwe or the Weimar Republic happen.

As noted in a previous story, the Fed causes the business cycle with inflation, while also causing impoverishment because of a rise in unemployment and the rise in prices that cannot be escaped whatsoever.

7) Tariffs help domestic production

One of the virtues of competition is that the consumers have choices and save a lot of money. If store A has the same product as store B does but it’s $3 cheaper than the customer will surely head over to store A.

However, some of the products may be foreign produced. This means the government will step in and impose a tariff (a tax applied to imports or exports) in order to protect companies at home from foreign competition.

The unintended consequence, of course, is that the prices will be higher and the consumer loses out. Furthermore, tariffs do hurt the very same entities that the government is trying to help because it benefits a few and harms the rest.

For instance, the American textile industry, which did have some gains for the companies and their workers, lost approximately $12 billion in 2002 and each year representatives of the very same industry lobby Congress to reinstate tariffs.

8) Technology destroys jobs

Some say capitalism is a zero-sum game, somebody wins and somebody loses and either you get a larger piece of the pie or you don’t. Technology is often used as an example, but all what technology has done is create an even bigger pie or a brand new pie for everyone.

Technology has created endless opportunities and has even allowed workers to find other fields to invest their time in. It has also made work easier for everyone. Sure, some industries come to an end, like the men who used to deliver ice and the horse-and-buggy businesses, but they all just found different work later on.

The technological industry has improved our standard of living, has created new wealth and has certainly made everyone’s lives less difficult. It has even helped start revolutions across the globe and helped developing countries start to enjoy the fruits of the middle class.

Jobs are not destroyed when it comes to new technology. Instead, men and women apply their skills to other trades. Humans are a very adaptive species and can persevere in any situation just so as long as the government doesn’t interfere.

9) War is good for the economy

This notion was quite prevalent prior to the invasion of Iraq in 2002. Pundits, analysts and politicos discussed how invading Iraq would be good for the U.S. economy and that it would be paid for with oil. Well, it turns out that the trillion-dollar-plus Iraq and Afghanistan wars took money out of the private sector and instead was invested into destruction.

Another failed concept is that World War II helped get the U.S. out of the Great Depression. This isn’t true. The Great Depression ended when the federal government slashed spending at massive rates and put money back into the hands of the people.

War is good for some facets of the economy, like weapons manufacturers and defense contractors, but for society as a whole, there is no long-term benefit for war just more debt and needless loss of life.

Just do a quick comparison of any industry that has made a significant impact of our lives in a positive way and war: Ford, Microsoft, Google and even Facebook have done more for populations than the Libyan War, the drone strikes in Yemen and the Vietnam War.

10) Disasters like hurricanes boost the economy

In November, economists and public officials declared that the reconstruction efforts of Hurricane Sandy in the east coast would be a boom for the U.S. economy. Keynesians claim that disasters create economic growth, but just like everything else preceding this idea, it’s fallacious.

This perception is known as the Broken Window Fallacy, the belief that we should break everyone’s windows, initiate perpetual destruction and start unimaginable damage because it’s fantastic for the economy.

19th century French economist Frederic Bastiat first put forth the refutation in 1850 with his piece titled “That Which is Seen, and That Which is Not Seen.”  In the first part of his article, Bastiat talks about a shopkeeper, who has his window broken by some individual and he now must hire a local window repairman to fix the damage. The local townspeople are distraught by the news, but they make the case that this will benefit the economy because he has to employ the window repairman.

What must be discussed is that if his window was never broken in the first place, he would have had money that he could’ve done something else with, like heading to the local cinema, dining out at the local jazz club or purchasing clothing from a local tailor. There could’ve been countless other ways he could’ve spent his money, but instead he had to spend it on a broken window.

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  1. The first NON BIASED article I have seen about the economy,,,I would love to read your predictions on the economy for 2013….

  2. Philip Arlington says:

    Most of these are sound but No.2 is such nonsense that it ruins your credibility. Free trade boosts output at the global level. It does not follow that any particular group benefits, and most Americans clearly haven’t benefitted. that it just observable reality. To argue the other way you have to leave reality behind and resort to ideological posturing.

    PS. I am not American.

  3. Andrew Moran says:

    @ Phillip:

    Of course Americans have benefited. In the area of technology, for instance, they have received cheaper prices on smartphones, computers, televisions, etc.

    You have to realize that our labor wages are artificial while prices are increased due to excessive regulations, labor laws, unions, moneyprinting and taxes.

    By having protectionist measures, it only exacerbates the status quo and doesn’t help us to be competitive.

    Thanks for commenting, Phillip!

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