Meerkat populations have been dwindling because of the danger they face from highly venomous scorpions in their breeding grounds.
Unless you are a zoologist or a big fan of the television show Meerkat Manor, you probably don't know that the sentence above is completely untrue -- meerkats are actually immune to the venom of the scorpions in the Kalahari. Without prior knowledge, though, it would have been difficult to figure out that what I wrote is utter bunk, since I wrote it declaratively and I managed to get it published for you to read. And it seems to make sense.
The average American does not have an advanced degree in economics, nor should they. But in the world we live in, a pretty thorough understanding of economics is often essential to ferret (or possibly meerkat) out the facts from what we hear in the news.
Here are three myths that feel like sandpaper on my brain when I hear them perpetuated in the popular -- and sometimes less-popular -- media.
Myth 1: Spending by the U.S. government is the only thing keeping us from the abyss -- and that's not sustainable.
Reality: Don't get me wrong, I love blaming the government just as much as the next guy. Whether it's a stubbed toe or bad weather, it seems there's never a bad reason to shake your fist at Uncle Sam.
But alas, the numbers simply don't support blaming government spending for creating an unsustainable economy. Thanks largely to a hefty amount of defense spending, the government's share of the economy reached nearly 30% in the 1960s, but it's steadily fallen since then and made up just more than 18% of GDP in the first quarter of 2009.
I'm sure that defense contractors like Lockheed Martin and Boeing (NYSE:BA) would love it if the government ramped defense spending to past levels, but I think they may be out of luck in that regard.
And then there are those who would like to see the government make up a much smaller portion of the U.S. economy. That's a subject for another article (potentially in a political publication). For now, the point is that government spending is well within the bounds of where it's been for a long time.
Myth 2: Consumer spending on superfluous items like big-screen TVs and Coach purses has been driving the U.S. economy, and is now set to ruin it.
Reality: Right about now I'm sure companies like Coach (NYSE:COH) and Best Buy (NYSE:BBY) wish there were a problem with excessive spending on discretionary items. But job losses and concerns about where the economy could be headed have caused many consumers to scale back their discretionary budget, and this has many investors spooked.
There is reason to be concerned about consumer spending, as it makes up more than 70% of GDP. And there's likewise reason for near-term concern if you're considering an investment in a company like Starbucks (NASDAQ:SBUX); as long as the recession stretches on, consumers are likely to be cautious about discretionary spending.
However, the concern that the entire U.S. economy is perched atop a massive mountain of unsustainable discretionary spending is simply untrue. As a percentage of total consumption spending, purchases of clothing and accessories declined from nearly 15% in 1930 to about 9% in 1970 and sits at around 5% today.
How about those TVs and home theatre setups? Back in 1930, spending on video and audio goods made up 1.3% of consumption expenditures. Today? Just about 1%.
And it would also appear that Americans haven't been stuffing their garages full of new cars. New autos made up as much as 5.4% of consumption spending in 1950 and have declined to just more than 1% today. Guess that makes the General Motors situation a little more understandable.
Myth 3: The U.S. had a vapor economy built on the false revenue of financial institutions like Goldman Sachs and Lehman Brothers.
Reality: Given the spasms that the entire financial system went through as Lehman Brothers failed, AIG (NYSE:AIG) failed in all but name, and JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) had to absorb nearly a basketball team's worth of defunct (or nearly defunct) companies, it would seem only right to blame them for just about everything.
To be sure, the financial industry has earned plenty of blame for its role in the banking meltdown. But the idea that the financial sector has created fictional production and inflated overall GDP simply misses the mark.
Economic production comes from a witch's brew containing things like labor, capital equipment, technology, and land and other natural resources. Try as they might, even the most talented financial alchemists can't turn money into labor or land that isn't already there. So the financial industry may have been stimulating economic production by making sure people had access to money -- which is generally a good thing -- but it can't create fictional economic activity.
So fear, but not too much
I don't expect that debunking these myths will result in green shoots bursting forth and sending the economy and stock market into full-blown recovery. There can be confounding factors that create enough friction in the economy that we don't produce at or even near full capacity -- a situation that we're experiencing now.
The silver lining, though, is that the U.S. economy isn't an old jalopy in need of a complete overhaul. We actually have a large, very flexible economy that I believe will show its true mettle as we continue to work through the near-term problems. And as we do march onward from repulsive to recovery, those that have invested in top-flight companies that have been doing the right things during lean times will be rewarded.
Think I'm completely off base? Got a myth of your own that you've debunked or would like to see debunked? Chime in below in the comments section!
Further Foolishness:
- Is Social Security a Giant Ponzi Scheme?
- Roundtable: Can You Believe These Earnings?
- Are You Preparing for Financial Armageddon?
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