Opinion and Economic Analysis

Hicks: Economics lessons for today are simple, hard

April 5, 2014

Over the past few weeks, I have sat through parts of a three-day swim meet in Indianapolis. My empathy lies with the parents of athletes. 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 lead 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 its embrace of short-run fixes, which are chimerical. We face a long period of economic stagnation. The problems that confront the nation’s economy are neither new nor easily remedied.

Long-run prosperity demands federal government spending shrink from its current 24 percent of gross domestic product to less than 20 percent. This still leaves us with a post-World War II level debt, which should probably command another 3 percent to 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. 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 nation’s 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, but it is not.

In the past decade, labor force participation has shrunk as baby boomers retired. Since the recession, it has 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.•

__________

Hicks is director of the Center for Business and Economic Research and a professor of economics at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

ADVERTISEMENT

Recent Articles by Mike Hicks

Comments powered by Disqus