Six Ways Existing Economic Models Are Killing the Economy

April 5, 2023

Americans have been hammered for decades with an economic message that amounts to this: When wealthy people like me gain even more wealth through tax cuts, deregulation, and policies that keep wages low, that leads to economic growth and benefits for everyone else in the economy. And equally, that investing in you, raising your wages, forgiving your debt, or helping your family would be bad—for you! This is the trickle-down way of thinking about economic cause and effect, and there can be no doubt that it has substantially contributed to the greatest upward transfer of wealth in the history of the world.

What happens to the economy if the federal government spends $1 billion? The normal person would say that it depends what they spend it on, and how the policy is designed.

Not so in most economic models. They assume that any government spending will have less of a return than whatever private businesses spend their money on. Always.

But that’s not all. They say that government spending even comes with a penalty: It automatically causes businesses to spend less, leading to lower overall investment. Always.

Essentially, models assume that every increase in public investment is canceled out by the combination of lower returns and reduction in private investment. Taking this assumption to its logical extreme, there’s almost nothing government should ever invest in. It’s a good thing Eisenhower took office before the neoliberal style of thinking came to dominate Washington, or instead of interstate highways we’d still have dirt roads.

These assumptions aren’t even well hidden in models but baked directly into the math. As economist Mark Paul has noted, the Congressional Budget Office model assumes that all public investments are exactly half as productive as private investments. Public investments return 5 percent annually, while the same amount of private investment returns 10 percent.

Prospect.org, April 5, 2023

Recent Posts

New Report – State of the Climate: New Jersey 2024

Overview The State of the Climate: New Jersey report annually summarizes updated scientific information on climate trends and projections that can be used by state and local decision-makers, researchers, hazard planning and climate resilience professionals, and...

NJSPL: How E-Bikes Could Bridge the Healthcare Gap

by Yingning Xie Pedaling Toward Access: How E-Bikes Could Bridge the Healthcare Gap Imagine needing medical care but being sidelined by the simple fact that you can’t get to your provider. In New Jersey, and across the U.S., accessing healthcare and wellness support...

“Work Trends RU” Podcast with Rachel Korberg

This week's guest on the Heldrich Center's Work Trends RU podcast is Rachel Korberg, Executive Director and Co-Founder of the Families and Workers Fund. Rachel is also a member of the Heldrich Center’s National Advisory Board. In this episode, Rachel shares: The...

Report Release: R/ECON Forecast Summer 2025

Read Report R/ECON’s economic forecast for New Jersey as of mid-2025 continues to show a slowing trajectory. Annual GDP growth is projected at just 0.5% for 2025, significantly lower than in prior forecasts and markedly below the national rate of 1.5%. Growth will...

New Publication from Payne: Digital Twin or Digital Kin?

Digital Twin or Digital Kin: Misunderstandings and Myths about Urban Simulation, and Directions for Change Abstract Using three case studies from the United States and Australia, this article explores the conditions required to make urban digital twin projects...