28 Years of Irresponsible Behavior

October 24, 2009

http://tinyurl.com/ykssx38 Lawrence Kudlow obtained a degree in history at the University of Rochester in 1969.  He subsequently attended Princeton University’s Woodrow Wilson School of Public and International Affairs but failed to obtain a degree.  Despite a limited education in economics, he has held positions as advisors to presidents with respect to economic policy and as an economist for Wall Street firms.  He’s part of the problem, and people like him are responsible for the mess our nation faces in the ever approaching future.

In a piece he wrote at nationalreview.com he makes some rather outrageous claims.  One is that free-market capitalism “conquered the inflation of the Carter years”.  We all know that the Fed policy under Volcker did that.  But Kudlow wouldn’t know this.  It’s taught in Economics 101, a course that Kudlow never took.

Another outrageous claim is that the prosperity of the past 25 years is a result of free-market capitalism.  Now I’m not crazy to suggest that free-market capitalism isn’t a good thing.  In fact, free-market capitalism with limited government intervention would be the best policy for the long term.  But that’s not what we’ve been experiencing.

One of the engines of our prosperity over the past 28 years has been subsidies.  That’s right.  Subsidies.  The U.S. economy has been subsidized over the past nearly three decades like nothing before in the history of the planet.  The U.S. has been subsidizing itself through various methods to give us temporary prosperity but at a very high long term cost.

First is the dollar.  The U.S. has maintained a strong dollar policy.  There’s nothing wrong with that.  A stable currency is good.  But look what it’s done.  For decades foreign countries, businesses and investors have been investing their savings in U.S. dollars and dollar dominated securities.  How do they get these dollars?  They give us stuff.  They sell to us and then keep the currency or use it to invest.

In a normal situation we use dollars to buy oil from Mexico and in turn they’d use those dollars to buy chicken from us or something else.  But instead foreign interests have been selling to us but not buying anything back from us in return.  Some might say, “It’s not our fault.”  But we have gladly gone along with this.  We have maintained a strong dollar policy for years with this intent.  The Fed can produce money, and we can use it to buy stuff giving us the appearance of prosperity.

Another thing we do is just borrow and borrow and borrow, and I’m not just talking about the Federal government’s deficit.  The Federal government has spent irresponsibly and run up a national debt that my mind is unable to fathom.  But the Fed’s low interest rate policies have also encouraged consumers (that’s what we are) to spend and spend.  Student loans, credit cards, home equity loans that are tax deductible these policies have encouraged consumers to spend and spend.  Many people were counting on selling their homes, buying less expensive retirement homes and using the huge profit as a retirement nest egg.  Now that those hopes have been dashed, the government is borrowing from foreign interests again so that it can subsidize and encourage consumers to spend even more through the cash-for-clunkers monstrosity and credits for first-time home buyers.

They want to get GDP growth back up and unemployment back down so they can be re-elected in the next election cycle.  “Consumer spending is 70% of the economy,” they say. “We’ve got to get consumers spending again.”  God forbid they should save.

Another subsidy is Social Security.  People are counting on a fat monthly Social Security benefit upon retirement so therefore they don’t save as much.  Instead they spend more.

Sooner or later the credit cards and home equity loans have to be paid back.  Sooner or later those Social Security benefits are going to have to be paid.  And what happens if all those foreign investors no longer want to hold their savings in dollars and dollar dominated securities?  The borrow-and-spend policies of the past 28 years have dug us in a hole so deep that it will take the rest of our lives to dig out of.  If it comes collapsing down on us it could mean one of the most severe economic and fiscal crises that this nation has ever faced with high inflation, high unemployment and negative economic growth.  Whoever is president at the time will get the blame despite the fact that it’s the fault of all of us.

At a minimum we’ll have these debts to pay off.  Those of us that are younger are going to be paying for the retirement of those that cause all of this.  And it’s disgusting that people like Kudrow are still endorsing the very policies that got us into this mess.