THE BLOG
10/26/2012 12:12 pm ET

Economic Myths 101: A Top Ten List

Grad School Lesson
When I was in graduate school at the University of Michigan, I got to work with the "Michigan Model," a statistical model of the U.S. economy that had gained national recognition for its accuracy and simulation capabilities. I was worried about growing federal budget deficits and wanted to see what would happen if I cut spending aggressively. I looked through the model to find something large enough to make a difference in the deficit and easy to cut in one fell swoop.

Defense was the lowest hanging fruit. It was easy to identify without going through the minutiae of the model, but large enough to make a real dent in government spending. This was during the Cold War in 1985 when defense spending accounted for a whopping 7.4% of GDP. That compares to a 5.5% share during the peak of recent wars in Iraq and Afghanistan. It even exceeds by one percent the peak that residential investment hit, prior to the collapse of the housing market bubble and the havoc that wreaked in the economy.

In my experiment, 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.

I bring this up now because I am amazed at how many people on both sides of the political aisle are focused on one-off solutions to complex economic problems. What's worse is that many of those so-called "solutions" are more based in myth than fact, regarding the U.S. economy and how it works. The conclusions are misleading at best and would be outright devastating at their worst.

This report takes a closer look at some of the more prevalent myths, why they are wrong, and how we might more productively tackle the underlying problems. Some are incomplete representations of how the economy works, as people confuse cause and effect; others are rooted in ideology instead of fact and just plain wrong.

"Myth: a person or thing having an imaginary or unverifiable existence"
-Merriam-Webster Dictionary

The following provides a list of eleven economic myths. My list originally had ten myths, but conspiracy theories surrounding the release of the September unemployment rate compelled me to expand that list by one.

#1. "Credible" deficit reduction can be achieved either through spending cuts or tax cuts alone.

Read the full article on our Economic Minds blog.