Research Stories

by Carrie Barnett

The U.S. government debt is massive —and growing out of control. Our debt is a burden on our grandchildren; failing to decrease it today is selfish and myopic. Those are statements that most Americans have become accustomed to hearing. Edward Prescott says they are two of seven widely propagated myths. Prescott is a 2004 Nobel Laureate and a professor of economics at ASU's W. P. Carey School of Business. He tried to do some myth busting during a presentation at the Economic Club of Phoenix.

Myth 1: Alan Greenspan caused the economic boom in the 1990s
The economic boom in the 1990s was not caused by Fed Chairman Alan Greenspan's monetary policy, but by the increasing productivity of, and increasing investment in intangible capital—anything of value that an organization creates but can't be touched.

Myth 2: Gross Domestic Product (GDP) growth was rapid in the 1990s
Looking at above-trend GDP growth historically, the economic expansion in the 1990s was actually relatively small compared to expansions in the 60s, 70s, and 80s, Prescott suggests.

Myth 3: The 1978-82 recession was caused by tight monetary policy
"Everybody says that former Fed Chairman Paul Volcker caused the 1978-82 recession with his tight money (high real Federal Funds rate) policies," says Prescott. But looking at the data historically, there is no consistent relationship between monetary policy and real economic activity.

Myth 4: Americans don't save
Looking at the full picture—at economic wealth—Prescott said that we save roughly the same amount as we always have: about 5 times gross national product. "We're saving the right amount—the amount that theory says we should be saving," he says.

Myth 5: The U.S. government debt is big
Prescott looks at privately held interest-bearing public debt relative to gross national income; he sees current levels that are quite similar to historic levels. From a historical perspective, the current U.S. government debt is not big.

Myth 6: Government debt is a burden on our grandchildren
According to Prescott, not only is the U.S. government debt not relatively large, it's also not going to burden anybody. To the contrary, Prescott suggested that the current U.S. government debt is not big enough.

Myth 7: U.S. economy is doing much better than the European economy
Europe's problems, Prescott suggests, are policy related. "Europe is as productive as the U.S.," he says. "It's just that their tax rates are too high and as a result they work too little."

Many of the preconceptions behind Prescott's seven myths have to do with data that's not accurately measured or represented. To avoid falling into that trap, Prescott suggests that we do our own independent research. Though it may take some getting used to, he says, going to the Internet to look the numbers up ourselves is not as hard as it may appear.