2011's Ten Dumbest Economic Ideas

Since the advent of Republican "trickle-down" economics, this country has been on a downhill slide economically -- and it resulted in our current recession and massive job loss. Unfortunately, these ideas have also infected other developed nations, most notably in Europe, and they have followed us down that economic hill.

One would think with the serious consequences of the recession, these people would have learned their lesson and returned to a more sensible economic policy. Sadly, that has not happened. They keep proposing the same old failed policies, and assuring us that someday they will work. All we have to do is just look at the really dumb economic ideas currently being proposed and pursued.

Jeff Madrick, over at the blog New Deal 2.0, has compiled a list of what he considers the ten worst economic ideas proposed and pursued in 2011. It's hard to argue with his list, because these are some incredibly stupid ideas. Unfortunately, too many people are still buying into them. Here is his list:


1. Taxes should be more regressive.
At the top of the list for sheer scandalous insensitivity are Herman Cain’s and New Gingrich’s tax plans for America. Cain and Gingrich are both flat tax advocates. Cain proposes “9-9-9″ — a 9 percent sales tax, 9 percent income tax, and 9 percent corporate tax. He would also eliminate most deductions. Would this raise more or less money? The romantic conservatives claim the lower income tax rate would mean more growth. Never mind that the evidence to support that claim has been found profoundly lacking time and again.


2. Austerity works.
Is it conceivable that we have learned nothing from history — or from economic theory, for that matter? It is hard to believe that after a year or so of the momentary return of Keynesianism in the wake of the deep recession of 2007-2009, it has been utterly renounced in practice in most rich nations around the world. The U.S. refuses to adopt a new fiscal stimulus as fears of a long-term deficit now determine short-term policy. The eurozone’s decision makers are even more obtuse and dangerous. . . IMF economists have recently produced solid research putting the lie to claims that austerity has led to rapid growth in some countries in the past. It almost never has, and in the couple of cases it has, it was because the countries devalued their currencies sharply to promote exports.


3. Export growth models are sustainable.
Germany is especially proud that it has exported its way to becoming the strong man of Europe. It has suppressed wage growth, used subsidies to make its products more competitive, and taken advantage of the fixed euro, set at too low a rate to maintain trade balances. It is determined to remain oblivious to the fact that such a model requires countries that buy its products to run deficits and therefore borrow lots of money. This is why export models are known as beggar-thy-neighbor models, and it is why Germany has a moral obligation to help bail out nations like Greece, Italy, and Spain. Export models are really debt models on a global scale.


4. Fannie and Freddie did it.
 The crisis was created by the highly risky mortgages bought and sold by the private sector between 2003 and 2006, when Fannie and Freddie were cutting back their activities. They became big buyers when the damage was already done. And even now, their mortgage defaults as a percentage of their portfolios, despite the devastation in the housing market, are much lower than defaults in the private sector. Those who want to blame the government for the crisis keep coming back to this stale and very misleading issue. Get over it. And as for the SEC, can it be that the only case they can drum up against high-level executives is at Fannie and Freddie? You mean there were no bad big-time execs at Citigroup, Merrill Lynch, Morgan Stanley, Lehman, Goldman, and so on?


5. Cutting Social Security benefits is a priority.
We have a very long-term deficit problem, not a short-term one. Social Security did not contribute to the short-term deficit — the Bush tax cuts, the recession, and the slow recovery are the main culprits over the next 10 years. But even in the longer run, Social Security benefits will rise from a little under 5 percent of GDP to 6 percent of GDP. Cutting these benefits is not a priority and any deficit can be fixed with affordable tax increases. 


6. Inflation is just around the corner.
Remember the claims by the right wing that all that Federal Reserve stimulus in 2008 and 2009, not to mention the Obama spending bill, would lead to big-time inflation? Nothing would be better than a little inflation in the U.S. right now, but the economy has been too weak to deliver it. Bring on some inflation, please.


7. The Medicare eligibility age should be raised.
Reports had it that President Obama had momentarily agreed to raise the Medicare eligibility age from 65 to 67. Indeed, a New York Times editorial recently seemed (a little less than wholeheartedly) to endorse the idea. Yes, this might reduce Medicare expenditures, but it would raise the total amount Americans spend on health care. In fact, the Kaiser Family Foundation figures it would increase private health care costsfor most of the seniors leaving Medicare by more than $2,000 a year on average. There would be other cost-raising effects, as, for example, healthier seniors left Medicare. Kaiser figures the increase in total health spending by Americans would be twice the amount of savings to Medicare. And of course some seniors would simply give up coverage. Call it triage.


8. Competition between Medicare and private health insurance will reform the health care system and reduce costs.
Say it ain’t so, Ron Wyden. The Democratic senator from Oregon has teamed up with Congressman Paul Ryan to propose an option for Medicare recipients to buy private plans. They would be offered a flat payment to buy private plans if they so chose. Competition for these dollars will supposedly make Medicare and the health insurance companies more efficient. More likely, however, it will result in misleading claims by the health insurance companies or reduced coverage plans. It will raise costs for Medicare as healthy seniors are induced to take cheaper private plans with healthier individuals. . . But that’s not even the big rub. It is that Medicare payments will be limited to growing just 1 percent faster than GDP. Health care costs have risen considerably faster than that for a long time. Somehow Wyden thinks that such a limit will force reforms. In sum, it will simply lead to less coverage and more expense for beneficiaries.


9. Federal spending should be capped at 21 percent of GDP.
The president’s Simpson-Bowles budget balancing commission proposed this capbecause it is the average for the last 40 years. How’s that for reasoning? With fast-rising health care costs and an aging population, such a limit is patent nonsense. For a nation that needs significant investment in infrastructure, energy savings, and education, it is especially damaging. There is no evidence to support the claim that such a cap would promote economic growth.


10. Balancing the budget should involve equal parts tax hikes and government spending cuts.

This is not economics; it is politics. But economists argue for it all the time as if it is good economics, not admitting their conservative bias that high taxes are bad for growth and government social and investment spending never helps.

Most of the major budget balancing plans of 2010 and 2011 argued for more spending cuts than revenue increases. The Bowles-Simpson plan is comprised of two-thirds spending cuts, one-third revenue increases. Obama’s budget plan last spring also had much more in spending cuts than tax increases. Only the Rivlin-Domenici plan was balanced. The one conspicuous exception was the plan from the Congressional Progressive Caucus, which of course got short shrift in the press. It was about two-thirds tax increases to one-third program cuts.