Myths We Teach Our Children

5.  Our students are taught that President Johnson’s deficit spending caused inflation to rise sharply during the 1960s.  Actually, Johnson did not run large budget deficits, and it was monetary policy that drove inflation sharply higher in the late 1960s.

6.  Our students are taught that supply shocks explain the high inflation of the 1970s, even though real GDP rose at well over 3%/year during 1971-81 and it was the nominal GDP growth of 11% that caused the high inflation.  In other words, monetary policy.

7.  Our students are taught that Reagan’s budget deficits boosted aggregate demand, producing the fast growth of the 1980s, even though growth in aggregate demand actually slowed during the 1980s.

8.  Our students are taught that the 1987 stock crash didn’t produce the sort of depression that the equally bad 1929 stock crash produced, because this time the Fed aggressively cut interest rates.  Actually, the Fed cut interest rates more aggressively after the 1929 crash.  It is accurate to teach students that monetary policy was more expansionary after the 1987 crash, but monetary policy isn’t about interest rates.

9.  We teach our students that the US government can borrow at very low rates because the dollar is the international reserve currency (the “exorbitant privilege”), even though most other developed countries borrow at lower rates than the US government.

10.  We teach our students that the Great Recession was caused by the crash of the “unregulated” US housing and banking markets even though the people that proposed that theory generally expected the recession to be much milder in supposedly “regulated” Europe, and even though the recession was actually far worse in Europe.  Of course the ECB had a much tighter monetary policy.  Perhaps we don’t want our students to think that central banks might have caused the Great Recession.

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