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Why misguided “common knowledge” holds back our economic recovery


The American economic picture remains very grim. The recovery from the Great Recession can only be called “tepid” – especially on the job creation front. New cuts in government spending resulting from budget shortfalls are only making matters worse by eliminating more jobs in the short run.

At the same time, the nation is experiencing divided government – both electorally and philosophically – with little consensus on what should be done for the economy and jobs.

Given these facts, the parameters for action are quite narrow – particularly for those that wish to see public action to create significant job growth.

To break through this logjam will not be easy.

Whereas most Americans would have happily supported strong public action to create jobs a few decades ago, attitudes and perceptions of joblessness in the U.S. have shifted. Today, sadly, Americans are not as accommodating of serious government interventions to expand employment opportunities as they were a few decades ago.

Indeed, much of this economic pain and woe of the last few years has been self-inflicted, even unnecessary. The debt ceiling debate was the classic example. It did nothing about our most pressing problem – unemployment.

Unfortunately, several decades of well-funded conservative propaganda has taken its toll. Today, a collection of widely-held, conservative myths are at the root of these failures of understanding and action. (This is not to say that there aren’t economic myths on the left as well. Some people, for instance, still cling to the myth that government can solve all problems.)

Right now, however, it is not an overreliance on government that is at the heart of our problems; it is rather a series of conservative illusions about macroeconomics.

First and foremost, is the failure to comprehend the differences between household and public finance. For ordinary families, assets are good and liabilities are bad. This is an easy-to-grasp concept and it’s perhaps understandable that so many want to apply it directly to the public sphere. But it is a mistake to apply such an idea simplistically on a large scale.

At the national economy level, assets and liabilities simply reflect different ownership groups — bond sellers and buyers.

In other words, analogies can mislead. Household common sense is not always right. The world is often paradoxical.

Here’s another illusion – the notion that the widespread pursuit of “self-interest” always promotes the common good. In fact, collective failures in the marketplace frequently occur when individual households act “rationally” in the near term for the good of their family but ultimately, despite their good intentions, lower productivity or magnify inequities.

Think about household savers and home builders, for instance. When conditions lead to more saving and less buying, these events will only slow the economy further. At such points, the seemingly rational act of more household saving is akin to hoarding, not building a nest egg for the future.

And, of course, economy-wide failures, such as various “bubbles” abound. Stock buyers can get too excited and overreach, thereby sending stock values to unrealistic prices, or act, like an escaping herd, selling at the same time.

Pejorative wording and dogmatic doctrines can harm too. Too often, politicians and policy makers fall back on simplistic ideas they think sound good or bad – terms like “sound finance,” “gold standard,” “free enterprise,” “balanced budget,” “wasteful spending,” “budget deficit” and “property rights.”

The upshot of all this is that the American economy would be much better off if more leaders and citizens understood and promoted the pragmatic and flexible, but activist, prescriptions of the great economist John Maynard Keynes. Indeed, reliance upon a consistent Keynesian position on all these issues is more likely to promote economic health during periods of both deflation and inflation.

Though frequently blasted by those on the far right, Keynes was no leftist. He was very open to changing his mind and disagreed with many orthodox left ideas. In addition, Keynes wrote a great deal on probability and did not believe that economics could escape from risk. He would not be surprised by the recent financial crisis.

He would have also conceded that even if we act appropriately in the current situation by designing and executing a strong stimulus package, many key decisions (things like magnitude, timing, implementation/administration, the mix of tax and spending measures) will be more akin to an art than a science.

Ultimately, though, he would have agreed with one overriding fact: More must be tried to help the jobless and speed the recovery. Mere reliance upon hoary clichés and simplistic bits of “common knowledge” is a recipe for continued economic stagnation.

Bill Schweke is a Senior Fellow at CFED (Durham office) and a member of the job creation working group.