Myths we teach our children
By Scott Sumner
When we teach false things to our students there’s usually an explanation. Thus, today it’s trendy to teach about the “myth of the model minority”. But that claim is itself a myth, as Asian-Americans are indeed a model minority; at least if by model minority you mean relatively successful—and what else could it mean? Presumably there’s an agenda here; perhaps we don’t want other minorities to feel bad.
In economics, we teach many different myths. Here I’ll list a few and then speculate as to what sort of hidden agenda might explain these myths.
1. We teach our students that before the Fed was created, our banking system was highly unstable due to a lack of regulation. Economists such as Larry White and George Selgin have punctured this myth. Less regulated banking systems in places like Canada were far more stable than the US system, and our worst banking panics and depressions occurred after the Fed was created. Our banking instability was caused by misguided regulations.
2. I’m told that German students are taught that the hyperinflation of 1920-23 led to the rise of the Nazis. Actually, the Nazi party was quite weak as late as 1929, and then soared in popularity during the severe deflation of 1929-33.
Think about the attitude of American intellectuals toward banking regulation, and the attitude of German intellectuals toward inflation, and then think about whether these attitudes might have been shaped by the myths that we teach our students.
3. Our students are taught that stock prices reached wildly overvalued levels in mid-1929, and that it was inevitable that the “bubble” would burst. In fact, stock prices were quite reasonable even at the peak of the 1929 stock boom. Then 71 years later, a similar myth would be created about the stock boom of 2000. Then 6 years later another myth about a housing price “bubble“.
4. Our students are taught that FDR produced a rapid recovery from the Depression with a highly expansionary fiscal policy, and that the relapse into depression in 1937 was caused by a tight fiscal policy. Actually, both events were caused by shifts in monetary policy. Fiscal policy was not particularly expansionary under FDR (until WWII).
5. Our students are taught that President Johnson’s deficit spending caused inflation to rise sharply during the 1960s. Actually, Johnson did not run large budget deficits, and it was monetary policy that drove inflation sharply higher in the late 1960s.
6. Our students are taught that supply shocks explain the high inflation of the 1970s, even though real GDP rose at well over 3%/year during 1971-81 and it was the nominal GDP growth of 11% that caused the high inflation. In other words, monetary policy.
7. Our students are taught that Reagan’s budget deficits boosted aggregate demand, producing the fast growth of the 1980s, even though growth in aggregate demand actually slowed during the 1980s.
8. Our students are taught that the 1987 stock crash didn’t produce the sort of depression that the equally bad 1929 stock crash produced, because this time the Fed aggressively cut interest rates. Actually, the Fed cut interest rates more aggressively after the 1929 crash. It is accurate to teach students that monetary policy was more expansionary after the 1987 crash, but monetary policy isn’t about interest rates.
9. We teach our students that the US government can borrow at very low rates because the dollar is the international reserve currency (the “exorbitant privilege”), even though most other developed countries borrow at lower rates than the US government.
10. We teach our students that the Great Recession was caused by the crash of the “unregulated” US housing and banking markets even though the people that proposed that theory generally expected the recession to be much milder in supposedly “regulated” Europe, and even though the recession was actually far worse in Europe. Of course the ECB had a much tighter monetary policy. Perhaps we don’t want our students to think that central banks might have caused the Great Recession.
11. We teach our students that the Fed did everything it could to prevent the Great Recession, but it was out of ammunition due to the zero bound problem, even though interest rates were not cut to 0.25% until mid-December 2008, a year into the recession and a time when output was already nearing the recession lows. And even though the Fed enacted interest on reserves in October 2008, a contractionary policy. And the Fed refused to cut interest rates after Lehman failed in September 2008. Excuses made for the ECB are even more absurd, as they didn’t hit the zero bound until 2013.
12. We teach our students that a foolish policy of “fiscal austerity” slowed the recovery from the Great Recession, even though the recovery sped up after fiscal austerity was enacted in January 2013 (due to easier money).
13. Our explanation of the 2008 banking crisis focuses on big banks and subprime mortgages, whereas the biggest problem was small and mid-sized banks with bad commercial loans.
14. We are told that in late 2007 and early 2008 we slid into recession because velocity slowed down—the Fed was printing money. Actually, the Fed stopped increasing the monetary base in late 2007 and early 2008, and we went into recession despite velocity increasing.
I see some common themes in these myths:
1. We want our students to believe that fiscal policy is powerful and monetary policy is weak.
2. We want our students to believe that monetary policy is about interest rates.
3. We want our students to believe that market economies are unstable, in need of regulation. We want them to believe that asset price bubbles are real, and can cause problems.
4. We want them to believe that big business is the villain and the government is the hero.
To summarize, we don’t teach true facts, we teach facts that we’d like to believe are true.