Saturday, August 18, 2012

How Entitlement Reform will Promote Economic Growth


Last night on CNBC, Larry Kudlow called entitlement reform a distraction from economic growth; I can't find the transcript, but this tweet Kudlow sent out yesterday captures the same message:
Message to #Romney/Ryan: Don't lose the growth message.  Econ is still #1 issue.  #tcot
If Larry Kudlow believes entitlement reform is a distraction from economic growth and productive employment, then he's lost his marbles.  I can explain.

A long time ago, economists identified a phenomenon called crowding out.  Crowding out is a fancy-pants, highfalutin' term that means when Washington D.C. spends us into oblivion, there's less money left for businesses and consumers to consume and invest as they see fit.  Given that Business Investment is the primary driver of economic growth, any action that restrains Washington D.C.'s ability to crowd out business investment promotes economic growth and productive employment.

Medicare is the largest component of the Federal Budget.  It's also the fastest growing.  Left unchecked, Medicare will consume the U.S. economy.  Thus, getting Medicare on a sustainable less suicidal path is essential if we want to restrain Washington D.C.'s ability to spend us into oblivion crowd out business investment.  As Glenn Beck explains in the 2010 best-seller Broke:
As any budget expert will tell you, no honest discussion about getting the country back on a sustainable track can happen without talking about mandatory spending, of which entitlement programs are the most common form....In 2010, autopilot programs...will eat up 56 percent of our federal budget, and that does not include the interest that we pay on the money we pay on the money we have to borrow to meet those commitments (146-7)
Of course, being a blue-blooded, Wall Street, Republican Establishment type, Larry Kudlow would NEEEEEVER listen to Glenn Beck; thus, I will quote another eloquent and erudite economic analyst:
Harking back to the Founders' principles of constitutional limits to government is a very powerful message.  It's a message of freedom, especially economic freedom.  The tea partiers have delivered an extremely accurate diagnosis of what ails America right now: Government is growing too fast, too much, too expensively, and in too many places -- and in the process it is crowding out our cherished economic freedom.
That quote was from Larry Kudlow in April 2010.

Bottom Line: If you believe restoring free-market capitalism is the best path to prosperity, then putting Medicare on a less suicidal trajectory is critical to free up business investment.

Back to you Larry Kudlow.

Update: It might have been better to say that increased productivity is the primary driver of economic growth, and that business investment is the primary driver of increased productivity.

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