Pay Attention, Even If It Hurts

Though this column dates from February 2002, most of its points are timeless.

Hi. My name's Andrew Lindemann Malone. I'm normally the movie reviewer for this paper, but all the movies last year sucked, so this year I'm going to write a column. The purpose of this column is to illuminate and debate issues related to economics, business, finance, public spending - in short, all the subjects related to money.

The difficulty many people have encountered when attempting this task is that all of these subjects are incredibly boring. (As an economics major myself, I am in as good a position as anyone to know.) These subjects all use incomprehensible terminology like "six-month discounted interest rate," they teem with statistics that have no obvious relationship to the real world, and they involve math to a degree that immediately turns off about nine-tenths of all human beings. In fact, most of these subjects at their core are just vast interconnected nets of word problems, and unless you're a freak like me you probably have no desire to revisit that portion of your education.

So what makes those word problems worth solving, or at least knowing something about? The answer is simple: Unlike posers about trains leaving Topeka and Wichita traveling at 60 mph, these word problems all deal with money - in many cases, huge sums of money. The related literature, in which we encounter lovely, lively terms like "market behavioral indices" and "long-term capital-labor ratio"? All about the dough as well. Ignorance of economics, business and finance has ruined individuals, bankrupted corporations and toppled empires; basic knowledge of them can help you make sense of much that would otherwise be bewildering.

For example, politicians toss around wacky theories of economics all the time, and if you can think critically about what they say you can figure out which of them are trying especially hard to BS you today. Case in point: Recently, when discussing the deep economic doo-doo in which we currently find ourselves, Senate Majority Leader Tom Daschle (D-S.D.) asserted that the tax cuts that Congress enacted last year at President George W. Bush's urging "probably made the recession worse." Let's think really hard about this: A recession is a period of negative growth in the economy, caused by individuals or businesses not spending as much money as they were. Tax cuts mean the government gets less money and we get more, and thus more money is spent in the economy. There is no possible way a tax cut can worsen a recession.

If we want to take a charitable view of what Daschle said, we could argue that he really meant that Bush's constant economic trash-talking about the impending recession during the budget dealings last year actually helped to create the recession. Economists have noticed an obvious thing: when you create an expectation in people's minds, it tends to come true to some extent. But since no news reports mentioned Daschle meaning that, we will have to just assume that he was on a flight to Moronville during that part of his speech.

This recession stuff, as you probably realize, is serious business, especially for those of you who, like me, are graduating seniors and will have to brave the job market without the kind of parentally-endowed trust funds that many of our top governmental leaders enjoyed. You may well have wondered, then, what the specific differences were between the Democratic and Republican stimulus plans, neither of which in the end made it into law. After all, they both provided for mixes of tax cuts (which HELP END recessions) and new spending.

The key difference was that the Republican plan gave more of the money to rich people and corporations, in the form of capital-gains tax cuts and the elimination of the corporate alternative minimum tax, which a limit on how little tax a corporation can pay. (The elimination of the corporate alternative minimum tax, by the way, would have resulted in the government sending Enron a check for $254 million.) The Dems, meanwhile, gave more to middle-class and poor people, in the form of increased unemployment benefits and such. Since the stimulus packages are designed to stimulate spending, and since it's pretty obvious that the less money you have, the more likely you are to spend more money if you have more, you may well conclude that the Republican leadership took a few flights to the same city as Daschle. Bush's State of the Union address endorsed some elements of both plans; we'll see how it plays in Congress in the next few weeks.

Of course, preliminary economic data indicates that the recession may have ended already, with the economy growing (incredibly slowly, but growing) in the fourth quarter of 2001. If we actually have managed to avoid a recession, you can thank not the squabbling politicians but the Federal Reserve Board, which controls interest rates and which does not have to deal with people trying to give Enron tax relief when it acts. The Fed, led by hero-worshipped chairman Alan Greenspan, cut interest rates aggressively in the past few months. Since lower interest rates mean that people are more likely to be able to repay loans, we didn't have to pay so much interest on some of our massive consumer debt, freeing up money for spending. Auto financing became incredibly cheap, fueling the rise in auto sales that, in turn, fueled our preliminary growth. Businesses were better able to make investments, and some needed to, even in the wake of Sep. 11. And when businesses invest, they create jobs, some of which us much-troubled graduating seniors can compete to fill.

The point is that even though these vast sums of money and seemingly distant statistics are in and of themselves boring, their movements eventually make themselves felt in your pocketbook. If you can follow the cash around and see what's making it move, you'll not only be enlightened but also be in a better position to get (a bit of) the money. Dollar dollar bill, y'all.

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