On his cable TV show June 21, Larry Kudlow took it upon himself to lead the United States economy back to 5% annual GDP growth. The plan? "Cutting spending." Sometimes idealism can be confused with genuine ambition, however, the acclaimed economist and quirky television host's out of the blue quest might be best described as silly.
GDP for an economy can be likened to annual sales for a company. Certainly a pertinent valuation metric showing the size of the entity, but not a remotely relevant indicator of actual performance or efficiency. Through fiscal policy encouraging consumer activity, transactions that are not feasible under free market conditions are subsidized and contribute substantially to GDP. These transactions transfer debt from businesses to consumers and governments, and ultimately increase leverage rather than paying down out of control debts.
How Mr. Kudlow expects to induce growth with spending cuts is a mysterious riddle we'll unlikely hear an answer to, as the television host rarely follows through on frequent bold assertions. In order to return the United States to sound financial shape, however, spending cuts are key. Before growth can be achieved, the economy must be allowed to focus on and re-establish efficiency. Reducing ballooning debt payments can only be accomplished by paying down debt and sacrificing other spending. Despite stifling growth in the short term, a reset balance sheet for consumers and institutions would be conducive to sustainable long term expansion.
The best solutions don't always make for the happiest of fairy tales. While the United States is teetering on a resumed slide towards economic depression, we have every reason to feel fortunate not to face disasters that have struck Japan and the MENA region. Europe's financial crisis is unresolvable in the current state of opposing factions with unique agendas.
Are we so arrogant that a year or two of negative growth is impossible to swallow? Reducing GDP should be a primary goal for the U.S. economy alongside debt reduction, rather than a nightmare avoided by inflationary measures.
Too bad every policy decision is made by John Maynard Keynes, a British economist dead since 1946.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
