Under the title: “Republicans Hammer Away on the Growth
Theme” and the subtitle: “It's a key to winning big in November,” Larry Kudlow
has given the GOP a plan to shoot itself in the foot. The plan in question is
put in the form of an article that Kudlow wrote, and had it published on March
14, 2014 in National Review Online.
Before we look at the details of the plan, let's put down
one definition and one principle of economics. First, the definition: What is
an economy? Answer: An economy is the sum total of the commercial transactions
taking place in a jurisdiction. Second, the principle: When does a commercial
transaction take place? Answer: A commercial transaction takes place when
someone (called the supplier) sells something he produced or procured to
someone (called the consumer) that needs it.
From those two points, we deduce that an economy is made of
two parts: There is the supply side which produces goods and services, and
there is the consumption side that needs those goods and services, and will buy
them. Well, we must add the caveat that it will buy them provided it can pay
for them. Otherwise, it will only buy what it can afford. But this will also
mean that the supply side will not sell as much as it can produce. True,
therefore we must add the caveat that it will not sell them unless it can find
buyers outside the jurisdiction who have the means to pay for what is produced
in excess.
This leads to a new question: What is the size of an
economy? Answer: In a closed economy where all that is bought and sold takes
place internally, the size of the economy is the value of what is produced
during a given time frame such as a month, a quarter or a year. And of course,
what is produced would equal what is consumed. And given that the size of an
economy depends on how much is bought and sold, it must be said that an economy
grows or shrinks when both sides of the equation vary together either
positively or negatively. But if a sizable portion of the economy takes place
through trade with other jurisdictions, the equation breaks down, and another
picture emerges, the shape of which depends on the many factors that could
affect the equation.
At this point we must sound a note of caution because there
is a demarcation line that is still working itself into the system. It is a
line that divides the before-globalization and the after-globalization. Things
were simple before globalization because the industrialized countries supplied
the underdeveloped countries with high value-added goods and with sophisticated
services in return for raw material and perhaps a good time for the tourists
that took a vacation in those countries. The first were rich people because
they were able to be; the second were poor people because they had no choice.
Then globalization happened. And this meant the advent of
freer trade between the jurisdictions, as well as an easier movement of capital
such as cash, and of capital equipment such as machinery and even complete
factories. The result has been that industry and some services started to
migrate to the underdeveloped countries where labor and other production
expenses were cheaper. Needless to say that, forced to compete against the
cheap labor of the underdeveloped countries, the labor of the advanced
economies started to become cheaper too.
This made poor the once rich consumers, now unable to buy
much of what is produced locally. They turned to what was produced in the
poorer countries and bought it at a price that did not make the working
consumers of those places any richer. But there is a catch as well as an irony
in this story. Those who were rich because they could be were no longer able,
and they became poor because they had no choice. As to those who were poor
because they had no choice, did develop the choice to become rich but chose not
to be because they preferred to sell cheaply and abundantly so as to complete
their program of industrialization.
But be careful now because what applied to the consuming
side of the economy did not apply to the supplying side. In fact, while the
working consumers remained poor in both jurisdictions, it was different when it
came to the suppliers in both jurisdictions. Now able to produce goods and
services in a country whose standard of living was less than a tenth that of
the rich countries, the suppliers sold their products cheaper in those rich
countries, and still made a bigger profit than ever before. As to the suppliers
in the underdeveloped countries, they found themselves with a large pool of
people who had nothing and were happy to work for something, no matter how
little that something was. The result has been that the suppliers in both
jurisdictions became very rich.
This is where matters stand now, and where Larry Kudlow says
he has a plan to bring the good times back to America 's working class. He can do
it, he says, because more people will be working, and they will be paid higher
wages. The secret, he goes on to say, is in the hands of the Republican Party
that should run on a “growth” platform. In fact, come to think of it, this is
what the Republicans are doing right now, he says. So instead of coming up with
something of his won, he simply tells what some Republicans have been saying.
He specifically mentioned Marco Rubio who advocated the “building of a national
infrastructure network of interstate pipelines – like Keystone – to expedite
the boom in oil and natural-gas shale development.” And he mentioned Paul Ryan
who said that the export of LNG would remove Putin's energy grip on Ukraine and Europe .
Is that it? This is what they say will bring back America 's
economic might and its glory? Oh no, he says, there is more to it than that.
Well tell us, what's that? Here is one thing: “Rubio wants the immediate
expensing of any business investment” as well as the usual reduction in taxes.
Anything more? Yes. Here it is: “congressional Republicans like Ryan, Rubio,
Portman, Mike Lee, Ron Johnson, Eric Cantor, and many others are working on
growth plans to stop the economic stagnation, pessimism and defeatism.” Wow, so
you mean to say they are going to sell platitudes to the electorate?
No, that's no platitudes. No? No platitudes, you say? How is
that when you're saying they are “working” on plans? We ask to see the plan and
you say they are working on it, and then you say it will stop stagnation,
pessimism and defeatism … and you say this is no platitudes? Well, all I can
say is that if you don't believe me; let me tell you how Ryan put it to me. He
said: “Here's a vibrant agenda to create jobs, to increase take-home pay, to
restart mobility.” That's vibrant. Do you understand vibrant? That's what Ryan
said. As to Rubio, he said that the reforms will bring “a new American
century.” Get it? That's real, man. That’s no platitudes and no bull either.