Tuesday, September 30, 2008

Newt Gingrich Gets It Half Right

A couple of people have sent me information on Speaker Newt Gingrich's Solutions Day. Because of my teaching schedule I was unable to participate, but I went to his site to get an overview. I clipped the following partial excerpt from the Solutions Day site:

No Economic Growth = No Recovery = No End to the Financial Decay The most important thing to remember is that without economic growth there will be no end to the downward spiral.Without economic growth there will be another bailout next year and another bailout the year after. The number one goal should be to restore economic growth.

I agree with Speaker Gingrich's belief in reducing taxes and in reducing government. However, his growth mantra is misleading.

Growth as measured by economists is a vacuous concept. If there is additional unproductive economic activity, then there is growth. For instance, if banks continue to make subprime mortgage loans, their activities count as "economic growth". Speaker Gingrich fails to differentiate between fake growth and real growth, and so invites a repeat of the current banking problems despite his protestations to the contrary. The nation allowed the banking system to pay itself exhorbitantly and to bankrupt itself because it handed them large sums of money at public expense.

The way to distinguish between real and fake growth is by limiting access to credit. By expanding the money supply Speaker Gingrich would facilitate growth. Supply side economics, i.e., Reaganomics, is a repackaged Keynesian economics that has led to the current bank failures. Banks fail because they lend too much. Increasing the monetary base enables them to lend too much. The only way that fake growth can be limited is by restricting monetary growth. That would cause pain to Wall Street and commercial banking.

You cannot have it both ways. Flooding the nation with more liquidity will simply facilitate obese financial and hedge managers' ever greater obesity. Limiting monetary growth will cause interest rates to rise, some unemployment and prices to stabilize. In turn, authentic entrepreneurs in the Silicon Valley and elsewhere will find ways to make their inventions work because their returns will exceed the interest rate. Wall Street will find it more difficult to sell stocks because only the real firms will grow. Fake growth will be ended.

By ending fake growth, and Speaker Gingrich fails to differentiate between fake growth and real growth, waste in the system will be reduced. Thus, the 35-year-long decline in the real hourly wage that has occurred during the era of supply side economics or Reaganomics will be ended.

In order to make real growth a reality, a gold standard is needed. Continuation of the supply side principles that Speaker Gingrich oversaw in the 1990s will lead to further decline.

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