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April 6, 2014

Simple Economics Lessons for Hard Times

If my physician told me I had but one more day to live, I would start it off by attending a kid’s swim meet and top it off with an economics lecture. This wouldn't actually extend my time on Earth, but it'd sure feel like it.

Over the past few weeks, I have sat through parts of a three-day swim meet in Indianapolis.­ Since my tepid athletic career never progressed past college intramurals, my empathy lies with the parents of athletes. I suspect most readers know exactly what I mean. While it is moving to watch a youngish teenager win a medal or beat a record, the real inspiration lies in what their parents have done.

Behind every teenage athlete lies a family that has sacrificed for a decade or longer. Most of the time, these families are not thinking about gold medals or trophies, but simply teaching their kids real lessons about life; it is sacrifice and hard work that leads to success. In this lies a valuable economic lesson for our time.

Far too much worry is placed in the short-run ups and downs of the economy. This has become a common complaint about business, but I am not worried about business where errors are ultimately punished. The real worry is that public policy will extend their embrace of short-run fixes, which are chimerical. We are now facing a very long period of economic stagnation. The problems that confront the nation’s economy are neither new, nor are they easily remedied. They are however simple.

Long-run prosperity demands federal government spending shrink from its current level of 24 percent of GDP to less than 20 percent. This still leaves us with a post-World War II level debt, which should probably command another 3-5 percent of GDP to pay off. This will still take a generation or more to pay down to acceptable levels. Some cuts can come from defense spending, which is still far below Cold War levels, but most must come from social spending that will only worsen with our aging population.

We will also need more tax revenue. Right now we are collecting about 3 percentage points of GDP less than we need. It would be convenient if this could come from raising tax rates. It cannot. The rhetoric just doesn't match the math. Instead we must broaden the tax base, eliminate loopholes and become serious about our nations' solvency. This means political courage, of which there is no surplus.

America needs more people working, and fewer people taking. This sounds like a ham-handed political slogan, it is not. In the past decade labor force participation has shrunk as baby boomers retired. Since the recession they have declined at unexpectedly fast rates. We cannot afford for so many folks not to work and not to pay taxes. We cannot afford to pay so many people to be idle. It may be hard to find politically tractable solutions for our problems, but understanding them is not difficult.

Link to this commentary: https://commentaries.cberdata.org/728/simple-economics-lessons-for-hard-times

Tags: law and public policy, unemployment and the labor market, economic recovery, budget and spending


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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