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Wednesday, November 19, 2014

5 More Economic Myths That Just Won’t Die

Another dose of data from free-market reality

Still seeing Internet memes that get economics painfully wrong? Often, the same anti-market assertions get repeated enough that they are taken as true. Unfortunately, these myths are much older than the Internet.

The digital age offers greater exposure for the falsehoods, but it also gives us a more powerful tool to counter the claims with a dose of economic literacy. Basic economic theory is enough to undo most of the disinformation, but sometimes people need to see the data before they're willing to open their minds to the economic way of thinking.

My previous Freeman article “5 Economic Myths That Just Won’t Die” barely scratched the surface. Here are five more assertions of “common knowledge” that the empirical evidence shows to be untrue.

Myth 1: Immigrants take American jobs and reduce American wages.

Contrary to the conventional wisdom, which asserts that immigrants reduce wages, research on US immigration published by the National Bureau of Economic Research (NBER) has shown that “immigration has a positive net effect on native employment.” A study published by German economists on immigration in wealthy countries  has shown that immigrants have a “positive impact on GDP per capita and a negative impact on aggregate unemployment, [as well as on] native and foreign born unemployment rates.” According to a review of the empirical evidence on immigration and American wages published by the Brookings Institution,

Economists find that, on average, previous waves of immigrants [have] tended to boost American wages. In fact, studies have shown that immigration has caused small but  positive gains in wages of American-born workers of between 0.1 percent and 0.6 percent between 1990 and 2006.

Many claim that immigrants come to the host country to take advantage of welfare benefits, ultimately costing the government a fortune. However, a Harvard University review of the empirical evidence on the economic impacts of immigration found that “on average, immigrants appear to have a minor positive net fiscal effect for host countries.” To give a specific example, despite Sweden’s extensive welfare state, a recent study found that the net fiscal contributions of Romanian and Bulgarian immigrants were “substantially positive.”

Myth 2: Multinational corporations are shipping our jobs overseas.

This argument typically comes from the anti-globalization crowd. In their view, corporations ship American jobs overseas to countries where they can treat their workers like animals and pay them barely enough to live. The implication of such beliefs is that trade should be restricted for the benefit of both the foreign-born workers who are being exploited and the native workers who are having their jobs outsourced.

But this worldview is lacking one crucial component: evidence. Most people simply take it to be true that an American job shipped overseas is an American job lost and that multinational corporations exploit their workers. However, according to a study by the US International Trade Commission,

Foreign affiliate employment in high-income countries is complementary with US parent employment (US employment in manufacturing is higher when foreign affiliate employment in high-income countries is higher); foreign affiliate employment in low-income countries seems to have no effect on US parent employment. This last point runs contrary to the claims of the opponents of offshoring that posit that jobs abroad replace jobs at home.

In other words, American multinational corporations that offshore jobs to their foreign affiliates aren’t actually reducing their domestic employment.

Also, offshoring jobs to high-income countries is associated with an increase in employment in the domestic parent company. Other studies corroborate this finding. One review concluded, “The empirical evidence to date, while still tentative, actually suggests that increased employment in the overseas affiliates of US multinationals is associated with more employment in the US parent rather than less.”

Furthermore, in regard to the claim that multinational corporations exploit their workers, a review of the evidence published by the NBER finds that

As an empirical matter … there is virtually no careful and systematic evidence demonstrating that, as a generality, multinational firms adversely affect their workers.… In fact, there is a very large body of empirical evidence indicating the opposite is the case. Foreign ownership raises wages by both raising labor productivity and by expanding the scale of production, and, in the process, improves the conditions of work.

Opponents of globalization and freer trade often rely on their arguments being taken at face value, and when taken at face value their arguments are quite persuasive. However, the underlying assumptions of their arguments are demonstrably false.

Myth 3: Government spending and hiring alleviates unemployment.

Two economists from the University of Delaware, Burton Abrams and Siyan Wang, used data from 20 developed countries over three decades to examine how government spending as a share of GDP affects the unemployment rate (when accounting for other relevant factors). They found

That increases in government outlays hamper economic growth and raise the unemployment rate. Moreover, different types of government outlays are found to have different effects on growth and unemployment, with transfers and subsidies having a larger effect than government purchases. In addition, Granger causality tests suggest unidirectional causation from government outlays to economic growth and the unemployment rate.

These findings are notable because they don’t just establish a correlation; they use causality tests to find that government spending causes higher unemployment, not the other way around. Research by other economists arrives at similar results.

Moreover, scholars have examined the relationship between public employment and private employment. Using data from a sample of developed countries over the years 1960 to 2000, European researchers found, “On average, [the] creation of 100 public jobs may have eliminated about 150 private sector jobs, slightly decreased labour market participation, and increased by about 33 the number of unemployed workers.”

And recent study by the International Monetary Fund comes to the following conclusions:

High rates of public employment, which incur substantial fiscal costs, have a large negative impact on private employment rates and do not reduce overall unemployment rates … Public-sector hiring: (i) does not reduce unemployment, (ii) increases the fiscal burden, and (iii) inhibits long-term growth through reductions in private-sector employment.

All this evidence suggests that bigger government isn’t the solution to persistent unemployment. In fact, there is reason to believe that bigger government results in undesirable employment outcomes.

Myth 4: “Conservative” economic policies lead to slower employment growth.

Recently, opponents of the free market have taken to social media to compare the high employment growth of California, a state that raised taxes, to the low employment growth of Kansas, a state that lowered taxes. However, they ignore that Kansas has an unemployment rate of less than 5 percent, whereas California’s is 7.4 percent, one of the worst in the country.  But besides that, these are cherry-picked statistics. One cannot determine the impact of a specific policy or policies on employment by using data from two states for only one year.

Luckily, researchers from the Federal Reserve have examined how “conservative” economic policies, which are actually classical liberal policies, affect employment growth. After controlling for around a dozen other confounding variables, the authors find that states with less government intrusion in the economy have faster employment growth. According to Thomas A. Garrett and Russell M. Rhine of the Research Division of the Federal Reserve Bank of St. Louis,

States with greater economic freedom — defined as the protection of private property and private markets operating with minimal government interference — experienced greater rates of employment growth. In addition, we find that less restrictive state and national government labor market policies have the greatest impact on employment growth in US states.

Further results suggest that labor market freedom and a smaller state government, which are two components of overall economic freedom, are important determinants of employment growth across US states.

On a similar note, economists Lauren Heller and Frank Stephenson examined data on the 50 states from 1981 through 2009. The authors found that, after accounting for other confounding factors, states with more economic freedom had lower unemployment, higher labor-force participation and higher employment-to-population ratios (the percentage of the working-age population that is employed).

Myth 5: Government spending is good for economic growth.

Research shows that in wealthy countries, further government spending leads to slower economic growth, even when the possibility of reverse causality is taken into account. A survey of the evidence on the subject undertaken by Swedish economists Andreas Bergh and Magnus Henrekson states, “The research is rather close to a consensus: the correlation [between government size and economic growth] is negative, and the sign seems not to be an unintended consequence of reverse causality.” And a World Bank study on the relationship between government and well-being in Europe concluded, “Make government more efficient, or make it smaller.”

It may be desirable for developing countries to limit the size of their governments as well. Research has shown that “important indicators of economic freedom such as openness to trade and small size of the government are robustly associated with poverty reduction.”

In 2013, economist Livio Di Matteo of the Fraser Institute, a Canadian think tank, published important research attempting to pinpoint the size of government (measured as government spending as a share of GDP) that maximizes economic growth. Using data from 70 countries over the period 2000–2011 and controlling for the effects of numerous other relevant variables, Di Matteo found that “annual per capita GDP growth is maximized at 3.1 percent at a government expenditure to GDP ratio of 26 percent; beyond this ratio, economic growth rates decline.”

For reference, in the United States, government spending as a share of GDP was over 40 percent in 2012. This ratio exceeded 50 percent in countries such as France, Denmark, and Sweden. Thus, these countries are at the point where their governments’ size and scope are likely detrimental to economic growth — and consequently detrimental to the advancement of the populace’s standard of living.


Claims should be backed by evidence. Unfortunately, people often forget to offer up data, and therefore claims that get repeated enough become accepted as “common knowledge.” Many people simply assume that the government can create jobs — or that one more employed immigrant means one more unemployed native — rather than bothering to look up the scholarly research on the matter.

Ultimately, it is wisest to be skeptical about any economic assertions until their authors provide convincing evidence. 

  • Corey Iacono is a Master of Business graduate student at the University of Rhode Island with a bachelor's degree in Pharmaceutical Science and a minor in Economics.