This is an oldie but a goodie. William Vickrey was a Canadian economist and Nobel Laureate. He was well known for being critical of most things out of the Chicago School of Economics. This piece on 15 economic fallacies has been largely ignored, but the lessons are important and certainly as relevant today as they were in 1996 when Vickrey wrote them. Here are three of my favorites:
Myth 1 – Government deficits are inherently bad and burden our children.
“Deficits are considered to represent sinful profligate spending at the expense of future generations who will be left with a smaller endowment of invested capital. This fallacy seems to stem from a false analogy to borrowing by individuals.
Current reality is almost the exact opposite. Deficits add to the net disposable income of individuals, to the extent that government disbursements that constitute income to recipients exceed that abstracted from disposable income in taxes, fees, and other charges. This added purchasing power, when spent, provides markets for private production, inducing producers to invest in additional plant capacity, which will form part of the real heritage left to the future. “
As I often note, deficit spending adds to the private sector’s net financial assets. Now, this doesn’t necessarily mean that government spending is always good or efficient, but Vickrey clearly understood double entry bookkeeping. He understood that a government’s balance sheet was not like a household’s balance sheet and so we shouldn’t be so quick to jump to conclusions about the damage of government spending. Just as all private spending isn’t necessarily good, all public spending isn’t necessarily bad.
Myth 2 – In order to improve the health of the economy we must all save more so we can spend and invest.
“Urging or providing incentives for individuals to try to save more is said to stimulate investment and economic growth. This seems to derive from an assumption of an unchanged aggregate output so that what is not used for consumption will necessarily and automatically be devoted to capital formation.
Again, actually the exact reverse is true. In a money economy, for most individuals a decision to try to save more means a decision to spend less; less spending by a saver means less income and less saving for the vendors and producers, and aggregate saving is not increased, but diminished as vendors in turn reduce their purchases, national income is reduced and with it national saving. A given individual may indeed succeed in increasing his own saving, but only at the expense of reducing the income and saving of others by even more.”
This is a point I really hammer on in my book because it’s so common and so destructive. We often hear this fallacy of composition about saving more and how more saving means you can spend more later. Of course, if you save more of your income then someone else earns less income. In the aggregate this means that output will fall. Saving doesn’t lead to more future consumption. In fact, it is investment that adds to total aggregate saving.
Myth 3 – Inflation is always a bad thing.
“Inflation is called the “cruelest tax.” The perception seems to be that if only prices would stop rising, one’s income would go further, disregarding the consequences for income.
Current reality: The tax element in anticipated inflation in terms of gain to the government and loss to the holders of currency and government securities, is limited to the reduction in the value in real terms of non-interest-bearing currency, (equivalent to the increase in the interest rate saving on the no-interest loan, as compared to what it would have been with no inflation), plus the gain from the increment of inflation over what was anticipated at the time the interest rate on the outstanding debt was established. On the other hand, a reduction in the rate of inflation below that previously anticipated would result in a windfall subsidy to holders of long-term government debt and a corresponding increase in the real impact of the debt on the fisc.”
In a fiat monetary system with endogenous money the money supply is just about always expanding. That is, we are constantly creating money via bank loans or other sources in order to meet our economic goals. When used productively, this increase in the money supply does not hurt our living standards. In fact, so long as our incomes keep up with the rate of inflation then we are likely to be better off even with some inflation because we not only have a higher income, but we have the productive resources we created from using the newly created money. Inflation does not represent our standard of living. You must keep things in the right context.
Read all the myths here.
H/T Lars Syll