Debunking 20 Economic Myths That Will Not Die

In a time where the internet allows the spread of the most baseless myths, it is no surprise that many spread like wildfire. In a world where feelings often Trump facts (pun intended), I thought I would do my part and debunk twenty hilariously wrong myths put forth by the right and left.

1.Women earn 77 cents for every dollar a man earns. 
Is this still a thing? Sadly it is. The wage gap exists only if you take the average wage for all men and all women. None of this takes into account basic factors like hours worked, differences in employment, compensation preferences, education, experience, or likelihood of dying. Men generally work more hours than women, are more likely to receive family friendly benefits, and makeup ninety-three percent of workplace fatalities. This is why when the CONSAD Research Corp report for the Labor Department found the wage gap was about five percent after adjusting for education, experience, type of job, career interruptions, and hours worked. Now to be clear, the remaining five percent does not mean there is a five percent wage gap. The difference can easily be because of factors not controlled in the study or the margin of error.

2.The minimum wage does not kill jobs
One of the first things you learn in an Introduction to Microeconomics course is that demand slopes down. What this means, is that as prices increase demand decreases, and when prices decrease demand increases. Likewise, supply slopes up and behaves inversely, price and quantity have a positive association. For the minimum wage to be effective it has to be set above market equilibrium where supply and demand meet, otherwise is would be at or below where wages are and not change them. As the supply and demand graph below shows, when you set a price floor (a minimum price) above market equilibrium you have more quantity supply than quantity demanded which is the definition of a surplus, in this case, we would call it unemployment.


This basic economic theory is supported by the economic literature. As labor economist David Neumark has said, “the vast majority of these studies point to job losses for the least-skilled.” A recent study by Jeffrey Clemens of the University of California, San Diego, found that the effective minimum wage increase from 2006 to 2010 among 16 to 30-year-olds with less than a high school education, saw a decrease in employment by 5.6 percentage points. Studies like those by Jonathan Meer of Texas A&M, and Jeremy West, use an improved methodology compared to studies which the left cites find similar results.

3.(Illegal) immigrants take our jobs
This is known as the lump labor fallacy, which basically says there is a fixed amount that will be produced so there will be a fixed amount of labor to produce it, so all immigrants taking American jobs. Of course, this is silly; when you increase the labor force you increase productivity. This is why a 2010 study from the National Bureau of Economic Research found “…immigration has a positive net effect on native employment…”.

4.Free trade kills jobs
The Chicago University IMG forum of leading economists found overwhelming results on this question. Not one economist disagreed with the statement that “freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.” The same overwhelming result held when economists were asked if “on average, citizens of the U.S. have been better off with the North American Free Trade Agreement than they would have been if the trade rules for the U.S., Canada, and Mexico prior to NAFTA had remained in place.” A World Bank study found that “…there are only two major cross-country empirical studies that look at the impact of trade policy on unemployment rates. One is [a] paper by Dutt, Mitra, and Ranjan (2009) and the other is [a paper] by Felbermayr, Prat, and Schmerer (2011). Both papers show that countries that have less protectionist (more open) trade policies have lower unemployment rates.”

5.Outsourcing kills jobs
This is another fallacy that makes a lot of sense on the surface but actually falls apart upon closer examination. While outsourcing does move jobs overseas, it moves jobs that other countries are better at overseas, freeing up American labor to be more productive once the market recomposes. The same 2010 study cited in number three found “evidence in favor of a positive productivity effect such that …offshoring has no effect on it [native labor].”

6.We do not produce anything anymore
Manufacturing output is at historic highs.

fredgraph (1).png

7.We exploit the poor through free trade
If by exploit you mean “lower their poverty rates and make them richer”, then I certainly agree. Every voluntary interaction is exploitation in a subjective sense. Both sides always perceive that they are better off than before, so they have “exploited” the other side.


8.Imports shrink GDP
Many protectionists are under the assumption that trade deficits shrink Gross Domestic Product or GDP (calculated by adding consumption, investment, government spending, and net exports). The basic argument goes like this, “because GDP is calculated by adding net exports (subtracting imports from exports), more imports than exports mean that this would subtract from GDP and make the economy smaller”. While they are technically right about imports technically subtracting from GDP, they ignore why. GDP is Gross Domestic Product and as its name implies, it is about domestic production. Imports are counted when you purchase them in consumption but since they aren’t produced domestically, they need to be subtracted via net exports, meaning that the effect is neutral.

9.Government spending helps the economy
To an extent, this is probably true. The relationship between government spending and economic growth is nonlinear. Up to a certain point, government spending helps the economy by providing the rule of law, defense, infrastructure, etc. but beyond this point, government spending crowds out private spending, hurting the economy. A pair of Iranian economists looking at low to middle-income countries found that growth was maximized in these countries with government consumption between 16.2% and 16.9%. A pair of Nottingham University economists found the optimal level for government spending for developed countries to be at 17.96%.

10.Democratic presidencies do better than Republican ones
This claim comes from a study done originally in 2014 by two Princeton economists, which showed that Democratic administrations did better economically than Republican ones. Those who cited this study as proof of the superiority of Democratic policies ignored two important sections– that differences in policies were not responsible, and that it could be because of “good luck”.

Research that looks at specific policies actually supports many Republican policies. According to two Federal Reserve economists, “we find that states with greater economic freedom, defined as the protection of private property and private markets operating with minimal government interference, experienced greater rates of employment growth. In addition, we find that less restrictive state and national government labor market policies have the greatest impact on employment growth in U.S. states.”

11.We had a 90% tax on the rich back in the day
Here is the top marginal effective tax rate or labor income according to the Congressional Research Service from 1965 to 2012. Marginal tax rates are before loopholes and effective tax rates are after.


12.Higher taxes do not hurt the economy
In late 2015, the Federal Reserve released a really interesting study looking at corporate taxes on similar pairs counties that bordered each other but were in different states. They looked at when one state raised or lowered their corporate tax rate, how their county compared to the other county. Although they found that tax cuts did not work to boost economic activity outside of recessions, they did find “…significant reductions in employment and income” when they were raised. A study from the European Central Bank, looked at over twenty-five countries for a period of time of over forty years and found “…an increase in the total tax rate (measured as the total tax ratio to GDP) by 1% of GDP has a long-run effect on real GDP per capita of –0.5% to –1%.” For the progressives reading this, a study on Denmark found their high tax environment caused a twelve percent reduction in their total income.
13.The rich will pay for X
They really will not. Since the 1950s, federal revenue has always stayed between 19.7% of GDP and 14.4% of GDP no matter the tax rates. Currently, we are at 17.6% of GDP so we could probably squeeze a little more out of the rich but at a certain point, they will change their income forms, where they live or something else to avoid taxes.

fredgraph (2)

14.The rich are getting richer while the poor are getting poorer
In 1979, those making over $350,000 accounted for a .06% of the population but were 1.79% in 2014. Similarly, those making over $100,000 were only 13% in 1979 but were 31.15% in 2014. This increase came from a shift from the bottom ($99,999 or less) to the top ($100,000 or more). In 1979, 87% of the population was in the “bottom”, as defined in the line above, but in 2014 it was only 68.85%. This all adjusted for inflation. Similarly, we can see real median family income increasing for more than double in sixty-two years and real median personal income increasing 33% in forty-one years. Lastly, below is a chart showing how large inflation-adjusted income groups are, and how their size changes over time.


15.The rich do not pay their fair share
No, the only group to pay a higher share of federal taxes than their share of before-tax income is the top twenty percent (an even bigger disparity for the top one percent).


16.Government ended child labor
No, the free market and productivity growth did this. The reality of child labor is that it exists because the children would starve otherwise. To paraphrase libertarian historian Tom Woods, it is not like children were playing in fields of rainbows and unicorns before capitalism came along and made them work in factories. Before children worked in factories they worked on family farms. In both instances, they worked to help produce enough food for the family to survive, and it was only through capital investment by the evil factory owners that productivity became great enough for adult wages to be sufficient to sustain a family without child labor.

This is why, when child labor laws are enacted by the United States against poorer countries, as Paul Krugman has pointed out, they ended up “in even worse jobs, or on the streets — and that a significant number were forced into prostitution.” In an article for the Economic History Association, Robert Whaples of Wake Forest University wrote “Most economic historians conclude that this legislation was not the primary reason for the reduction and virtual elimination of child labor between 1880 and 1940. Instead, they point out that industrialization and economic growth brought rising incomes, which allowed parents the luxury of keeping their children out of the work force.”

17.Government spending drives scientific research
“But what about the moon landing and internet?” While the government can create scientific innovation by pushing a ton of money into programs, the overall research and development budget does not support this view. A Bureau of Labor Statistics study found that “the overall rate of return to R&D is very large, perhaps 25 percent as a private return, and a total of 65 percent for social returns. However, these returns apply only to privately financed R&D in industry. Returns to many forms of publicly financed R&D, are near zero.”

18.The New Deal ended the Great Depression
This is an old myth taught in schools as fact but is much more questionable than most students know. A survey of economists found that half generally agreed or agreed with conditions that the New Deal made the Great Depression worse, while the other half generally disagreed. A study by UCLA economics gave support to the former group by finding that the New Deal extended the Great Depression by seven years. Even leading Keynesian economists like Christina Romer, President Obama’s former Chairwoman of the Council of Economic Advisers, conceded it did not work, although they think it was because the New Deal was too small. The two charts below show unemployment and GDP per capita throughout the Depression.

ndchartunnamed (7)

19.Scandinavia is socialist
The Scandinavian model is a relatively free market system, and regressive taxes to fund a generous welfare state. It is not state ownership of the means of production.

20.(Marxian) Socialism works
HAHAHA! I think it is a little ridiculous to say that countries which lack toilet paper, have people swim across ninety miles of shark infested waters in dinghies, and need a wall to keep people in are successful. A 2013 meta-analysis from the Czech National Bank , reviewing 60 studies looking at the effects of economic liberalization found, “strong positive effects on long-run growth” even after correcting for bias and misrepresenting evidence. Another study found that privatization makes firms more efficient. But seriously, you should not need studies to tell you that the system which collapsed is inferior to the system which brings millions out of poverty.

Ben Shapiro is fond of saying that facts do not care about your opinions and he is right. Facts also do not care about the opinions of the masses.

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