Economic Myths 101

Diane Swonk lists her top 10

CHICAGO--(BUSINESS WIRE)--In the October issue of Themes on the Economy^®, Chief Economist Diane Swonk tackles common myths about the economy. Buying into an easy answer for a complex question can lead to “conclusions that are misleading at best and would be outright disastrous at their worst.” Tinkering with a cutting-edge economic model as a student at the University of Michigan, she learned that the simplest solution to reducing the budget deficit – eliminating one big category like the defense department – could create numerous, unintended reactions. “The results were devastating: employment plummeted, unemployment soared, incomes declined, spending contracted, investment imploded and the economy was driven into a deep recession. The federal deficit narrowed, but only temporarily.” Then entitlements soared as a result of the sharp, economic contraction.

“Congress would still have to find another $750 billion… to put the deficit on a more sustainable path.”

It’s the same story if one believes that tax increases or spending cuts alone could solve our deficit problems. Spending cuts? 25% cuts across the board in entitlements could do that. Try cutting Medicare or Social Security for current recipients, a generation that votes religiously. Tax increases? Even if all the Bush and Obama-era tax cuts were repealed, with the exception of the alternative minimum tax, “Congress would still have to find another $750 billion… to put the deficit on a more sustainable path.”

Another myth: Increases in the Federal Reserve’s balance sheet equal government spending. Actually, they “represent an investment in an asset rather than spending on a specific project or program, such as building roads and bridges. Quantitative easing (buying assets to expand the Fed’s balance sheet) has so far “generated substantial profits (almost $200 billion); those profits have been returned to the Treasury and helped to reduce, rather than increase, the federal budget deficit.”

To see more economic myths exploded about the euro, government data and hyperinflation, read this month's issue of Themes on the Economy^®. Archived issues can be found at mesirowfinancial.com.

Mesirow Financial is a diversified financial services firm headquartered in Chicago. Celebrating its 75th anniversary this year, the firm remains independent and employee-owned, with approximately 1,200 employees globally. With expertise in Investment Management, Global Markets, Insurance Services and Consulting, Mesirow Financial strives to meet the financial needs of institutions, public sector entities, corporations and individuals. For more information about Mesirow Financial, visit its website at mesirowfinancial.com.