Myth #1: Economists Can Predict the Future
In late 2007, only 2 of 54 economists surveyed predicted a recession, per this post on X (they were wrong…a little). In August of 2022, over 70% of economists surveyed predicted a recession – and they missed the mark too, as 2023 came and went without a recession. In the late 1980s, economists were telling us that Japan was the new paradigm and that Japan’s boom would continue unabated – but not so much.
In the late 1990s, many economists had jumped on the new “tech paradigm” bandwagon – right before the dotcom crash. When the CPI (inflation) hit 5.6% in July of 2008, economists were very worried about inflation, and they called for rate increases – right before Lehman Brothers collapsed and we saw deflation.
In 2008, when America first launched QE, economists screamed that it would foster inflation…and we saw deflation.
Myth #2: Presidents and The Fed Can Quickly Influence Economic Outcomes
Presidents and the Fed can actually do surprisingly little to influence the economy other than stay out of the way, as analysts like George Gammon often remind us (as it is entrepreneurs and businesses that ultimately drive the economy).
But the bigger point is one that economist Steven Hanke often makes: There is often at least an 18-month lag before we see the impact of a change in policy simply because the U.S. economy is so large and complex. So, no, I don’t think Mr. Trump can save the day (if our economy is in a recession now). And this is also why some of the inflation that popped up during the Biden era was also caused by Mr. Trump’s policies.
Myth #3: The U.S.’s Massive Borrowing And Resulting Supply of Treasuries Will Push Up Interest Rates
George Gammon frequently reminds us that we saw U.S. government debt increase from $9 trillion in 2008 to $37 trillion now – and rates barely increased (and were actually lower during much of the runup). Gammon further points out that increasing spending and borrowing will likely slow the economy further and ironically increase the demand for Treasuries. Japan has also been able to keep their rates very low, despite having debt to GDP ratios that dwarf America’s.
Myth #4: The U.S. Has The Worst Debt Problem In The World
If we account for state, local, corporate, and consumer debts along with federal debt, China has much more debt than the U.S. – and Japan crushes the U.S. There are major countries that have less debt than the U.S., but their economies are performing poorly, and they do not have a reserve currency that allows them to print money like the U.S. does – so they’re much worse off overall. This is why Brent Johnson always says the “U.S. is the cleanest dirty shirt in the laundry” when he explains why the dollar will hold up longer than most people expect.
Myth #5: Government Deficits Cause Inflation
Economist Steven Hanke often reminds us that deficits don’t always cause inflation, like he did in this December 14th post on X. George Gammon makes similar points quite often too. Deficits cause inflation when government borrowing results in an increased money supply, per Hanke, and that only happens when the Fed is buying Treasuries via Quantitative Easing. Gammon points out too that government spending does not always cause inflation unless it is in the form of stimulus checks sent to consumers who spend the money quickly – thus increasing the “velocity” or turnover of money in the economy.
Myth #6: Tariffs and Tax Increases Increase Government Revenues/Cut Deficits
I saw this post on X (from a pro-Trump account) saying that Trump’s tariffs will “cut the deficit by trillions” – and I thought good gravy; I need to blog about this. I see similar posts when tax increases are proposed. The Congressional Budget Office projects revenues from new taxes and tariffs as if behavior will not change, but it always does. And as a result, new taxes and tariffs never bring in the amount of revenues that are projected.
As an aside, no matter where tax rates are, it is very difficult to collect more than 20% of GDP in income taxes, and there is some evidence to show that collecting more than 18% of GDP in taxes results in recessions.
