Sorting the politics from the economics

By Joel L. Naroff

We enter this campaign season with the economy sputtering, households spending cautiously, and businesses uneasy about hiring. Unfortunately, the political urge to simplify matters often leads to incredible and outrageous economic claims.

So, as a public service, here's one economist's perspective on several common political claims.

Spending on infrastructure will revive the economy: While most economists agree that infrastructure is the best use of government money, it takes too much time to design and build roads, bridges, transit lines, schools, and water projects to help the economy in the near future.

Better infrastructure improves growth potential over time, but it provides limited immediate punch.

Tax cuts will boost the economy and shrink the deficit: Alas, the economic literature clearly shows that cutting taxes increases the deficit, especially in the near term.

Tax breaks go to all who qualify, not just those who invest or spend more as a result. To create significant additional economic activity, only those taxes that dramatically and quickly change business and household spending decisions should be reduced.

Otherwise, businesses and households will get tax breaks for doing what they would have done anyway. That means less tax revenue and greater deficits without the benefit of more growth.

Spending cuts will increase growth and reduce the deficit: Reducing government spending does not increase growth in the short term. A dollar not spent - no matter who doesn't spend it - is a dollar not spent. This is what economists call contractionary fiscal policy, because it causes the economy to contract.

Over time, a credible deficit-reduction package will create more confidence in the dollar and keep interest rates lower, increasing long-term growth. But it will not accelerate growth right now.

The financial bailout was a waste of money: Few economists believe we should have allowed the financial system to crash and burn. We can debate the way it was done and lament the bad decisions and wasted money involved, but the result was a financial system that is at least stable. The alternative would have been even more bankruptcies and even tighter credit.

The stimulus was a great success: The stimulus did begin the process of recovery, as neither businesses nor households were going to spend during the first half of 2009. But a lot of money was wasted. Programs such as Cash for Clunkers and first-time home-buyer credits affected mainly the timing of demand.

How much additional spending the stimulus created will be debated for years. But I think it's fair to say it didn't do as much as hoped for or as little as some argue.

In this year of voter discontent, the economy is the paramount political issue. But that doesn't mean all or even any of the political claims we're hearing make economic sense. If you get your economics from a politician, you will get the economy you deserve.