Economics 101: Economics Explained to Non-Economists

A panel of hands-on economists explain the common mistakes people make regarding economics.
Economics 101: Economics Explained to Non-Economists
Economic journalist Greg Ip likes to explain the inside jargon and abstruse economic theory used in the economic news reporting. Formerly a reporter for the Wall Street Journal, he is the U.S. economics editor of the Economist and author of 'The Little Book of Economics: How the Economy Works in the Real World.' He spoke Feb. 1 at the Urban Institute. (Gary Feuerberg/The Epoch Times)
2/10/2011
Updated:
2/10/2011

<a href="https://www.theepochtimes.com/assets/uploads/2015/07/Mannon_Feb1_11+014M_medium.jpg"><img src="https://www.theepochtimes.com/assets/uploads/2015/07/Mannon_Feb1_11+014M_medium.jpg" alt="Donald Marron has been director of the Urban-Brookings Tax Policy Center since May 2010. He was a member of the Council of Economic Advisers (2008-2009) and deputy director of the Congressional Budget Office. He is the editor of '30-Second Economics.' Dr. Marron spoke Feb. 1 at the Urban Institute, 'What Policymaker, the Public, the Press, and Parents Need to Know about Economics---in 90 Minutes or Less.' (Gary Feuerberg/ Epoch Times)" title="Donald Marron has been director of the Urban-Brookings Tax Policy Center since May 2010. He was a member of the Council of Economic Advisers (2008-2009) and deputy director of the Congressional Budget Office. He is the editor of '30-Second Economics.' Dr. Marron spoke Feb. 1 at the Urban Institute, 'What Policymaker, the Public, the Press, and Parents Need to Know about Economics---in 90 Minutes or Less.' (Gary Feuerberg/ Epoch Times)" width="320" class="size-medium wp-image-120375"/></a>
Donald Marron has been director of the Urban-Brookings Tax Policy Center since May 2010. He was a member of the Council of Economic Advisers (2008-2009) and deputy director of the Congressional Budget Office. He is the editor of '30-Second Economics.' Dr. Marron spoke Feb. 1 at the Urban Institute, 'What Policymaker, the Public, the Press, and Parents Need to Know about Economics---in 90 Minutes or Less.' (Gary Feuerberg/ Epoch Times)
<a href="https://www.theepochtimes.com/assets/uploads/2015/07/Ip_Feb1_11+023M_medium.JPG"><img src="https://www.theepochtimes.com/assets/uploads/2015/07/Ip_Feb1_11+023M_medium.JPG" alt="Economic journalist Greg Ip likes to explain the inside jargon and abstruse economic theory used in the economic news reporting. Formerly a reporter for the Wall Street Journal, he is the U.S. economics editor of the Economist and author of 'The Little Book of Economics: How the Economy Works in the Real World.' He spoke Feb. 1 at the Urban Institute. (Gary Feuerberg/The Epoch Times)" title="Economic journalist Greg Ip likes to explain the inside jargon and abstruse economic theory used in the economic news reporting. Formerly a reporter for the Wall Street Journal, he is the U.S. economics editor of the Economist and author of 'The Little Book of Economics: How the Economy Works in the Real World.' He spoke Feb. 1 at the Urban Institute. (Gary Feuerberg/The Epoch Times)" width="320" class="size-medium wp-image-120376"/></a>
Economic journalist Greg Ip likes to explain the inside jargon and abstruse economic theory used in the economic news reporting. Formerly a reporter for the Wall Street Journal, he is the U.S. economics editor of the Economist and author of 'The Little Book of Economics: How the Economy Works in the Real World.' He spoke Feb. 1 at the Urban Institute. (Gary Feuerberg/The Epoch Times)
WASHINGTON—The debates in Washington on almost everything—health care, taxes, education, college loans, and housing—are heavily laden with economic terms and concepts.

Few Americans have the training to understand the meaning of inflation, deflation, federal deficit, tax subsidies, liquidity, and debt limit, yet politicians use these terms frequently.

To address the gap between lay people, including most elected officials, and economists on the use and misuse of economic theory, think tank Urban Institute convened a panel of five scholars last week titled “What Policymakers, The Public, The Press, and Parents Need to Know about Economics … in 90 Minutes or Less.”

Each panelist has written extensively in books, articles, and blogs on economic fundamentals, attempting to reduce the arcane science of economics to common sense principles.

Robert Reischauer, president of the Urban Institute and former director of the Congressional Budget Office, noted that only 40 percent of adults who have a 4-year bachelor’s degree have ever taken an economics course. He estimates that less than one in five in the overall population has had any kind of formal economics training.

‘Investments’ or ‘Spending’?

President Obama in the State of the Union speech introduced what he called investments, or tax incentives intended to promote economic growth. He spoke of “investment in American technology, infrastructure, and education,” as “our Sputnik moment.” Republicans countered the president’s investments by saying it simply is a euphemism for more spending.


<a href="https://www.theepochtimes.com/assets/uploads/2015/07/Rogers_Feb1_11+049M_medium.JPG"><img src="https://www.theepochtimes.com/assets/uploads/2015/07/Rogers_Feb1_11+049M_medium.JPG" alt="Diane Lim Rogers applies her knowledge of being a mother to economic issues. Dr. Rogers is the chief economist and blogger (EconomistMom.com) at the Concord Coalition. Previously, she has worked at the Council of Economic Advisers, Congressional Budget Office, House Ways and Means Committee, and House Budget Committee. She spoke Feb. 1 at the Urban Institute. (Gary Feuerberg/ Epoch Times)" title="Diane Lim Rogers applies her knowledge of being a mother to economic issues. Dr. Rogers is the chief economist and blogger (EconomistMom.com) at the Concord Coalition. Previously, she has worked at the Council of Economic Advisers, Congressional Budget Office, House Ways and Means Committee, and House Budget Committee. She spoke Feb. 1 at the Urban Institute. (Gary Feuerberg/ Epoch Times)" width="320" class="size-medium wp-image-120377"/></a>
Diane Lim Rogers applies her knowledge of being a mother to economic issues. Dr. Rogers is the chief economist and blogger (EconomistMom.com) at the Concord Coalition. Previously, she has worked at the Council of Economic Advisers, Congressional Budget Office, House Ways and Means Committee, and House Budget Committee. She spoke Feb. 1 at the Urban Institute. (Gary Feuerberg/ Epoch Times)
Sometimes, the public is confronted with contradictions when prudent economic behavior from the standpoint of an individual person or business is applied at the macro level. Greg Ip, U.S. economics editor of The Economist, gave the example of the thrift paradox. “Saving for the individual may provide benefits to the individual, but if everybody saves, the economy may implode,” said Ip.

A beneficial policy for a particular business may not necessarily be good for the country as a whole, said Ip, who is the author of “The Little Book of Economics: How the Economy Works in the Real World.”

Another difference of opinion, frequently mentioned, is on the contentious issue of tax cuts. Two dominant views prevail, said Donald Marron, director of the Urban-Brookings Tax Policy Center. Some say that tax cuts improve incentives, people work harder, and the economy grows. A contrarian viewpoint on tax cuts is that revenues will fall, the national debt will be higher, and the economy will be hurt.

Which view is correct? According to Marron, who was a former member of the White House Council of Economic Advisers, “both are true under certain conditions.” He lays the blame on the news media, which too often shortchanges its readers with its myopic coverage of economic issues.

Basic Economics

Economists are generally in agreement on the importance of certain concepts, such as incentives.

“The single most important insight from economics, in my humble opinion, is that people respond to incentives,” Marron said.

Marron likes to point out how incentives don’t always work the way they were intended. If you encourage people through tax incentives to purchase more fuel-efficient cars, they drive them more. When you provide a more efficient light bulb, people leave lights on longer. When the government provides a mortgage interest reduction, “you should not be surprised that it encourages more people to assume more debt on their home,” said Marron.

“People will respond to incentives and that will moderate what will happen,” Marron added.


<a href="https://www.theepochtimes.com/assets/uploads/2015/07/Steuerle_Feb1_11+052M_medium.JPG"><img src="https://www.theepochtimes.com/assets/uploads/2015/07/Steuerle_Feb1_11+052M_medium.JPG" alt="Eugene Steuerle is the Richard B. Fisher chairman at the Urban Institute and author of 'Contemporary U.S. Tax Policy.' He was chairman of the 1999 technical panel advising Social Security on methods and assumptions. He spoke Feb. 1 at the Urban Institute. (Gary Feuerberg/ Epoch Times)" title="Eugene Steuerle is the Richard B. Fisher chairman at the Urban Institute and author of 'Contemporary U.S. Tax Policy.' He was chairman of the 1999 technical panel advising Social Security on methods and assumptions. He spoke Feb. 1 at the Urban Institute. (Gary Feuerberg/ Epoch Times)" width="320" class="size-medium wp-image-120378"/></a>
Eugene Steuerle is the Richard B. Fisher chairman at the Urban Institute and author of 'Contemporary U.S. Tax Policy.' He was chairman of the 1999 technical panel advising Social Security on methods and assumptions. He spoke Feb. 1 at the Urban Institute. (Gary Feuerberg/ Epoch Times)
In addition to incentives, balance sheets and marginal costs are two other basic concepts in economics that non-economists, such as policymakers, find useful in their assessments. When balance sheets and marginal costs are applied in a strict and unbiased way, a more accurate picture can emerge of the true cost of a law or program.

For example, consider tax cuts. Eugene Steuerle, Urban Institute fellow and former deputy assistant secretary of the Treasury for tax analysis gave the hypothetical example of a new tax cut to dairy producers that amounts to a tax credit of 5 cents for every gallon of milk produced, providing a subsidy of $100 million. Steuerle says there is little difference between this “tax cut” and a direct spending program that ends up costing $100 million.

“An expenditure increase to dairy producers can be designed or disguised as a tax cut,” said Steuerle. This way it doesn’t show up in the expenditure column in the budget.

“Either way, this expenditure must be paid for through higher tax rates,” said Steuerle. The politicians like to employ this legerdemain because it enables them to take credit for a benefit—helping dairy farmers in the hypothetical example—while not showing the cost side of their deeds. Down the line, other taxpayers are going to have to make up for the loss in revenue.

“The nation’s fiscal system is a balance sheet, and the tax or expenditure side can be looked at separately only by closing one eye,” Steuerle says in his book, “Contemporary U.S. Tax Policy.” What appears to be a tax cut, and a reduction in government interference can actually expand the government’s interference in the economy by raising the overall tax burden on the rest of us.

“Many tax preferences are effectively spending programs run through the tax code; that poses a challenge for how we talk about tax reform and the size of government,” testified Marron before the Senate Committee on the Budget on Feb. 2.

The discipline of economics, however, has become more polarized and we don’t see the unity among economists as in the past, according to Ip, who criticized economists for “deliberately ignoring or downplaying what they know to be countervailing facts in order to drive home a political point for a political gain.”


<a href="https://www.theepochtimes.com/assets/uploads/2015/07/Panel_Feb1_11+064M_medium.JPG"><img src="https://www.theepochtimes.com/assets/uploads/2015/07/Panel_Feb1_11+064M_medium.JPG" alt="A panel of hands-on economists explains the pitfalls in contemporary use of economic terms and theory. Speaking Feb. 1 at Washington think tank Urban Institute, from left to right are: Donald Marron, director of Tax Policy Center; Diane Lim Rogers, chief economist and blogger, Concord Coalition; Robert Reischauer, president, Urban Institute and formerly director of the Congressional Budget Office (2000-2009); Eugene Steuerle, author of Contemporary Tax Policy; and Greg Ip, U.S. economics editor, The Economist. (Gary Feuerberg/ The Epoch Times)" title="A panel of hands-on economists explains the pitfalls in contemporary use of economic terms and theory. Speaking Feb. 1 at Washington think tank Urban Institute, from left to right are: Donald Marron, director of Tax Policy Center; Diane Lim Rogers, chief economist and blogger, Concord Coalition; Robert Reischauer, president, Urban Institute and formerly director of the Congressional Budget Office (2000-2009); Eugene Steuerle, author of Contemporary Tax Policy; and Greg Ip, U.S. economics editor, The Economist. (Gary Feuerberg/ The Epoch Times)" width="320" class="size-medium wp-image-120379"/></a>
A panel of hands-on economists explains the pitfalls in contemporary use of economic terms and theory. Speaking Feb. 1 at Washington think tank Urban Institute, from left to right are: Donald Marron, director of Tax Policy Center; Diane Lim Rogers, chief economist and blogger, Concord Coalition; Robert Reischauer, president, Urban Institute and formerly director of the Congressional Budget Office (2000-2009); Eugene Steuerle, author of Contemporary Tax Policy; and Greg Ip, U.S. economics editor, The Economist. (Gary Feuerberg/ The Epoch Times)

Common Misconceptions

We hear a lot about wasteful spending, but it is mostly empty rhetoric, according to Diane Lim Rogers, former chief economist for the House Budget Committee and blogger for EconomistMom.com.

Rogers used the analogy of a housewife, who just won a contest, to be allowed for an interval of time to have free as much as she can stuff into a shopping cart. The federal government pretends it can put whatever it likes into a shopping cart, as if it were free. Shopping with a credit card too can give the illusion that it is all free because payments may not come due for a long time.

Today, one can drive away a new automobile out of the dealership without paying a penny, Rogers said. Our credit system gives the illusion that the things we buy are free.

“The way the federal government spends money is as if it has an unlimited credit line. It puts whatever it likes in the shopping cart, as if it were free. The problem is not the debt incurred—that is a misconception,” Rogers said.

“Borrowing by a family or the government is sometimes necessary,” she says. The problem is that the federal government does not have unlimited resources, and so its spending behavior is “the definition of an economically unsustainable situation.”