Sunday, May 15, 2011

Tea Party Economics

There seem to be four persistent economic myths among tea party types and other populist conservatives. Unfortunately, none of them of true.

Myth 1: We should be worried about inflation. Here's a chart plotting the consumer price index all the way back to 1985.

Yes, inflation is up from the depths of a profound deflationary recession, but by historic standards inflation is quite mild. Responsible conservative economists, such as Greg Mankiw, acknowledge as much. Sometimes this argument goes on to criticize the way in which core inflation is calculated. It is the core inflation rate that the Fed uses to guide monetary policy, and core inflation excludes volatile items, such as energy and food. The problem with using energy and food prices to calculate the inflation rate is not just that they are extremely volatile. It also worth remembering that prices in these areas are often controlled by international events beyond the reach of governmental fiscal or monetary policy.


Myth 2: The current deficit is because the government is spending too much. This is intended as a swipe against Obama fiscal profligacy. However, what is actually the source of the current deficit?

As you can see, about half of the deficit is caused by a drop of tax receipts brought on by a weak economy in crisis. What about the remainder, all that excess spending?


Here's where the extra spending comes from: increased outlays for income security (food stamps, unemployment insurance, etc.) and Medicaid, both of which have increased also because of the financial crisis. The deficit is almost entirely due to the effects of the recession, not current fiscal policy.

Myth 3: We are harming the economy because the dollar has gotten so weak. Well, how weak is the dollar relative to historical standards?

It is about as weak as it was in 1995 and the current decline is not nearly as dramatic as it was during the Reagan administration.

Myth 4: "We have a spending problem not a tax problem." This bromide is trotted out routinely by conservatives as a way of explaining why deficit reduction policy cannot include even the smallest increase in revenues.


As the data clearly shows, the surpluses of the Clinton administration were caused by less spending AND higher taxes. Similarly, our current predicament is the result of both higher spending AND lower tax receipts. Furthermore, current tax receipts as a percentage of GDP are the lowest they have been since the Truman administration.

All of the myths are the result not of a serious analysis of the current economic conditions, but from partisan hackery from Obama's political opponents.

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