Wednesday, May 11, 2011

5 Myths About Economics That Every Debater Should Understand

As nationals approaches, you will find that a few important things separate high-level nationals contenders from the rest. I'll give you a hint: It's not their speaking. Most people at nationals are good speakers. I'll give you another clue: It's also not their cases. So, what is it? In four years of competition I learned that the single factor that distinguishes good teams from great teams is knowledge. I'm not talking about having good evidence. I'm talking about truly understanding and truly owning the topic.


One area of discussion that many debaters are often ignorant in is economics. We often hear sound-bites in round about the economy that are simply tidbits of misinformation absorbed from the evening news. It's time to bust some of these myths, so the next time your opponents whine about economic gloom and doom, you can smack them in the head with the fist of truth. 


Myth 1: We are in a recession
Reality: The economy is growing. 
Happy MBA Man has reason to smile! 
Debaters throw around terms like "in this time of recession", "with the recession going on", "with our economy in recession" etc. Guess what? There is no recession. Recessions are defined as a sustained (2 quarters or more) period of GDP loss. As a matter of fact, the recession ended in June 2009.GDP growth has been positive every quarter since then. Jobs are being added at a rate beyond what even the most optimistic analysts predicted. If you check the data, you see a pretty healthy economic picture. 


Additionally, it is worth noting that recessions are often considered beneficial. As long as they are short and controlled, they can be very effective at tempering the inflation that comes from aggressive growth. The 09 recession gave us a brief period of deflation that has largely stabilized US currency worldwide. Stable currency is good, kids.



Myth 2: The government prints money 
Reality: The government expands the currency base, but does not pay for government programs with printed money. 


Here's one we've probably all heard a lot. "We can print money to pay for this plan." Erm, yes, but only if you want to destroy the economy. The US government DOES NOT print money to pay for its programs. It prints limited and controlled amounts to ensure a healthy growth of the currency base. But we have never once in history decided to print a stack of cash to pay for government programs. Policies like that lead to hyperinflation. 


For example, in 1920s Germany, the government began printing money to pay off its debts from World War 1. Inflation soared to over 5 billion percent, and it soon cost trillions of marks to pay for a loaf of bread. Currently, the government of Zimbabwe is in a program of aggressive printing to pay for infrastructure projects. They print so much that World Bank estimates are that their currency's value is cut in half every ten minutes. They are currently printing 100 trillion ZD notes. Unfortunately, you need approximately 1,000,000,000,000,000,000 units of Zimbabwean currency to exchange for a US dollar. 


That's what happens when the government prints money to pay for things. Fortunately, our government doesn't do that. Neither should an affirmative plan. 


Myth 3: The government borrows money
Reality: Foreign nations purchase US T-bills.


Neg runs a spending DA: "We have to borrow money from China to pay for this!" Erm... no. The way it works is much more complicated and cooler than that. When the government has to spend in a deficit, it pays for the overspending by selling treasury bonds known as "T-bills." People can buy these bills, and then when the bonds mature they get nifty interest from the government. 


We run into "debt" when foreign nations decide to buy T-bills. It's interesting to note that a huge portion of our 14 trillion dollar debt is held by US citizens. When people like you and me buy t-bills, the government "owes" us the future interest on the bill. That's government debt. Unfortunately, we are often told that our debt is owed to China and Japan. In reality, this simply means that the governments of these nations have purchased our treasury bonds. 


What's perhaps most important to understand is that this "debt" isn't really a bad thing. There are certainly problems with being in debt, but the fact that foreign nations are willing to buy our T-bills is a sign of international confidence in the US economy, and in US finances. 


Myth 4: Free markets solve everything
Reality: Market failures create many problems.


Here's the sacred cow of conservative economics: freedom will solve any problem. It's a nice concept, but one that doesn't really work in practice. Free markets succeed at one thing: increasing profits for business. Unfortunately, this is often at the expense of socially optimal outcomes. 


For one, consumer ignorance makes a true free market undesirable. Consider lead in toy paint, toxins in gasoline, e-coli in spinach, etc. Things of such a nature are incredibly dangerous and have very real and harmful effects on consumers. Yet in the absence of government regulation, they can't be solved because consumers don't have the knowledge base to avoid these problems. Do you honestly think parents can test for lead in the paint on their child's toys? Not likely. Government solves ignorance.


Secondly, externalities are extremely damaging. We saw this in the case of BP in the gulf. Natural resources that are universal access like beaches, forests, and the air are subject to damage by free markets. No company has an incentive to protect the environment; they don't own it. We see this in northern states when it comes to roads. In the winter, people use studded tires for traction in the snow. But these tires tear up the roads, so in the summer the government is forced to pay to repair. Here's an example when a useful application for an individual (more traction) has a bad impact on everyone else (bad roads). Free markets are useful, but they aren't perfect. 


Myth 5: INFLATION!!!!
Reality: Our inflation rate is almost perfect.


Here's the debate blurb: "Prices are already rising!" What they fail to add to the end is the important bit: "but wages are rising faster." Inflation is a natural economic phenomenon that occurs as productivity, output, and the currency base grow. Long-term empirics show that the healthiest economies experience inflation of 1-2.5% annually as a natural outcome of growth.

American inflation has been right in this sweet spot for several years now. Yes, the price of food may rise, and gasoline is expensive. But this does not indicate the larger vulnerability or instability of the US dollar. Our currency continues to be valued internationally (remember the Zimbabwe example where their currency is literally worthless). In fact, in 2009 we had slight deflation where prices went down.