Opinion: Bailout Won't Cure What Ails Us

By Ravi Batra, professor of economics at Southern Methodist University.

Bailouts have captured headlines over the past 12 months -- Bear Stearns, Freddie Mac (FRE Quote), Fannie Mae(FNM Quote), AIG (AIG Quote), Goldman Sachs (GS Quote), and finally the autos. The Federal Reserve and the government have spent over $2 trillion, yet our economy is facing the worst trouble since the Great Depression. What is wrong?

The answer is simple: Supply and demand, or productivity and wages. Productivity is the main source of national supply, while wages are the main source of demand. Economic balance requires that

Supply = Demand

As productivity grows, supply rises over time. Therefore, demand must grow to maintain the economic balance, implying that the real wage must rise proportionately to productivity. However, the policy-makers, especially the former Fed chairman Alan Greenspan loved to see the rise in productivity but not in the real wage. As a result, the hourly minimum wage, which peaked at $10 in 1969 in terms of 2008 prices, is now less than $7. Incidentally, the unemployment rate in 1969 was just 3.5%.

With the real wage trailing productivity, a wage-productivity gap develops and

Supply > Demand

Then how do you maintain the economic balance? This is where Greenspan’s genius worked. The balance can also be maintained through new debt. From 1981 on, U.S. budget deficits, with Greenspan advising President Reagan, grew apace. Economists called it fiscal policy, but in reality it was debt creation. Thus, for a while, economic balance occurs when