More From Kudlow

Lawrence Kudlow has more in common with Cujo the mad dog than just a similar sounding name. They both also lack degrees in economics. That’s evident in a recent column by Kudlow http://tinyurl.com/ybhb6hd where he continues to encourage the destructive economic policies that got us into the mess in which we now find ourselves.

He criticizes President Obama for announcing to the world to not count on the American consumer to lead the world out of recession as he encourages Americans to save more and spend less. Kudlow refers to Obama’s encouragement of Americans to save more and spend less as “limits-to-growth wisdom”. Evidently Kudlow thinks that saving more and spending less is somehow a detriment to the American economy.

It is my contention that saving less and spending more has gotten us into a hole that will take decades, maybe even generations, to climb out of. For close to three decades now, the U.S. has had a strong dollar policy. A strong dollar with low inflation sounds good, but we’ve gone overboard with this policy.

A strong dollar is good for consumers. With a strong dollar (as compared to the currencies of other countries) foreign goods are cheaper. For example, a dollar that can buy two gallons of oil is better for consumers than a dollar that can buy only one gallon of oil. This policy makes imports relatively cheaper for the American consumer. So far so good.

A strong dollar also makes American goods relatively more expensive to foreigners. Because of the exchange rate caused by a strong dollar, 10 euros buys only one pair of shoes instead of two. Thus, foreigners can afford to buy less American goods with the money they have. This hurts business. Most of our sneakers are made in other countries. The U.S. textile industry has suffered. Industries like steel, sugar, oranges, cotton, automobiles among others that have long dominated world market share have struggled over the past quarter century. There are other factors involved also, but the strong dollar policy contributes to this.

In summary, a strong dollar encourages consumers to buy foreign goods instead of domestic goods. This has contributed to the U.S. trade deficit which over the past quarter century has resulted in the U.S. going from the largest creditor nation to the largest debtor nation. We often hear about the national debt. That represents the debt of the Federal government. That’s risen outrageously over the past 28 years. But what’s also risen is private debt. We owe more to the rest of the world than any other nation. In addition to that we’ve sold off scores of businesses and properties in the U.S.

Some argue that foreign investment is good for the economy. If a foreign corporation builds a manufacturing plant in Mississippi, then it provides jobs for U.S. citizens and increases our gross domestic product. That is true. But unfortunately foreign investment over the last quarter century has replaced U.S. investment, not added to it. And what has it gotten us? Individuals, banks, businesses and governments federal, state and local are in debt up to our ying yangs. Yes, GDP had increased, but we’ve spent it away, and our net wealth has suffered. In addition to that we’ve got seemingly unfathomable liabilities for Social Security and Medicare to pay for.

Kudlow laments, “Because of the slumping dollar, U.S. import prices have jumped 10 percent at an annual rate over the past three months… This is a tax hike on consumers and businesses, and it could depress holiday sales.” Depressed holiday sales would be a good thing. Rather than buying foreign goods at Wal-Mart, consumers should be saving and using the money to either pay off their debt or invest in U.S. businesses.

We’ve always heard that consumer spending represents X% of the economy. During the brief downturn in the early 90s, President Bush asked that everyone go out and buy a car thinking it would “jump start” the economy. Again in 2001 interest rates were lowered so that consumers (that’s what we are to them) could go out and buy cars. Auto financiers were offering 0% interest rates. Then interest rates were lowered even more to encourage consumers to spend more. Low interest mortgages were offered so that people could buy houses or take home equity loans to finance consumer spending.

Borrowing from abroad can give us a temporary illusion of prosperity. That has been our policy for the past quarter century. But it can only be effective for a finite period of time. President Obama understands this. Encouraging consumers to borrow even more to spend even more to “jump start” the economy has gotten us into a big hole. It will take decades to recover from the damage that economic policy has caused. Continuing the same destructive policy, as Kudlow proposes, will only make it more difficult in the future.