Myths from the Left

There are a number of propositions being tossed around regularly by the left as justification fro proposed action. I considered being cruel and calling this post "Lies from the Left" but that would be unfair. Lying implies that the source knows that he is not telling the truth. The left believes all or most of what they are saying but they are wrong, anyway. These have reached mythic status because they are constantly repeated. They are also dangerous because they are setting a basis for government action.

The deficit is caused by the Bush tax cuts (for the rich). This is two myths in one. Currently the left cannot resist adding those last three words. It gives the impression that Bush's tax cuts were limited to the rich. Actually, the tax cuts were pretty much a 5% rate cut across all margins. Regardless, the cost of the Bush tax cuts over a decade was estimated to be less than the current one-year deficit and the deficit for 2007 which included the tax cuts was a fraction of the current deficit. The deficit is caused by a combination of decreased revenue caused by high unemployment and underemployment combined with increased government spending.

This myth is being used to set the groundwork for rolling back the Bush tax cuts on people making more than $250,000. That will not make a meaningful change to the deficit. If anything, it will take the pressure to cut spending off of lawmakers.

President Bush took a budget surplus and turned it into a deficit. This is often combined with the first myth about the Bush tax cuts. It is true that the budget went from surplus to deficit under Bush but there is more to the story. Budget projections when Bush took office were based on uninterrupted economic growth. That did not happen. The country had slipped into a mild recession by the time Bush took office. The economic hit caused by the September 11 terrorist attack also affected the budget. In addition, the economy under Clinton was influenced by the dot-com bubble which was unsustainable. The truth is that the surplus would have vanished regardless of who was elected.

Originally this myth was being used in campaigns to justify electing Democrats. The understanding was that once the Democrats were in charge they would rein in the deficits. Obviously that did not happen. It still surfaces as a reason to keep Democrats in office, even though they have not shown any interest in fiscal restraint.

The Gap between the rich and poor is growing because of the Reagan tax cuts. This is an example of a questionable cause. Just because one thing happened after the other does not mean that one caused the other. Yes, the rich have gotten richer but the tax cuts are not the sole reason. Slate did a piece on this recently and concluded that the Reagan tax cuts were not big enough to have caused the shift in wealth. Other explanations have been suggested but the truth is that no one is positive. This myth takes the one about Bush's tax cuts and does it one better, laying the foundation for a return to redistributive tax rate.

The rich "waste" their income by saving it. Robert Reich, Secretary of Labor under Clinton, uses this one constantly. This is rooted in Keynesian economics which holds that recessions are caused by a slowdown in the velocity of money. The multiplier effect comes when I pay you a dollar and you use part of it to buy something else. If I pay you a dollar and you either save it or use it to pay down a debt then there is no multiplier and the economic benefit is "wasted".

Originally this was used as an excuse for excluding the rich from the stimulus. Now it is being used as an excuse for raising taxes on the rich.

The audacity of this myth is breathtaking. It presumes to dictate how money should be used i.e. to the benefit of society in general instead of for the individual. It assumes that the rich already have more money than they can use and will just stick the extra someplace. It also seems to assume that the rich stick their money in a mattress or, at best, a savings account. What Reich calls "saving", everyone else would call investing. The money might go into the stock market or the bond market or straight into a business. All of these are essential for the proper functioning of our economy. To call any of these "wasted" is to totally misunderstand how the economy works.

If taken to its logical conclusion then this myth turns outright scary. The logical extension of this is that the government should confiscate wealth above a specific amount since it is being wasted, anyway.

We can end the recession if we just spend enough in stimulus. It is an accepted fact that World War II ended the Great Depression. Nobel Prize-winning economist Paul Krugman simplifies this relationship, claiming that massive government spending ended the Depression. He goes on to suggest that we can end the current recession if we just spend comparable amounts. He recently suggested $30 trillion or $100,000 for every man, woman, and child in the country. The current national debt is $17 trillion so he would nearly triple it.

This shows that wining a Nobel Prize for work in micro-economics does not make you competent to comment on macro-economics. The only way that Krugman's stimulus would work would be if we spent the $30 trillion waging war on the rest of the world with the goal of destroying their industrial capacity.

No stimulus has ever ended a recession. Krugman's answer that no stimulus has never been big enough remains unprovable because the ruinous amount of debt that a government would have to take on to try it.

Bush and the Republicans caused the recession because of deregulation of the financial sector. The left hates Bush and it hates deregulation so the two must be linked and have caused the recession. Things are a lot more complicated.

First, the financial instruments that caused so much damage in the financial sector were so new that they had never been regulated. Second, the parts of the mortgage industry that were under federal regulation were under heavy government pressure to behave in an unwise manner. Banks were told to increase minority home-ownership. In order to do that, they had to drop long-standing loan standards. There were many fingerprints on this including prominent congressional Democrats.

They got away with this for years because the new standards caused a housing bubble. As long as prices rose, someone could default on a loan and still come out ahead y selling the property for a profit.

This led to a general credit-bubble. Consumer debt rose from 90% of annual income to 130%. None of the rules put in place by FDR or since covered this in any way. Likewise, the creation of Too Big to Fail institutions had nothing to do with Bush. This started in the mid-1980s when state legislatures began relaxing rules about interstate banking and was capped by the Riegle-Neal Interstate Banking and Branching Efficiency Act which was signed into law by Bill Clinton.

All told, these myths form a justification for the biggest expansion of government power in decades. They are being repeated constantly in opinion pieces and in interviews. They are harmful and must be countered.