IN the wake of the hugely disappointing budget deal and the S.& P.'s
debt downgrade, maybe we need to hang a new sign in the immigration
arrival halls at all U.S. ports and airports. It could simply read:
"Welcome. You are entering the United States of America. Past
performance is not necessarily indicative of future returns."
Josh Haner/The New York Times
Thomas L. Friedman
Because our country is now finding itself in the worst kind of decline
— a slow decline, just slow enough for us to keep deluding ourselves
that nothing really fundamental needs to change if our future is to
match our past.
Our slow decline is a product of two inter-related problems. First,
we've let our five basic pillars of growth erode since the end of the
cold war — education, infrastructure, immigration of high-I.Q.
innovators and entrepreneurs, rules to incentivize risk-taking and
start-ups, and government-funded research to spur science and
technology.
We mistakenly treated the end of the cold war as a victory that
allowed us to put our feet up — when it was actually the onset of one
of the greatest challenges we've ever faced. We helped to unleash two
billion people just like us — in China, India and Eastern Europe. For
us to effectively compete and collaborate with them — to maintain the
American dream — required studying harder, investing wiser, innovating
faster, upgrading our infrastructure quicker and working smarter.
Instead of doing that at the scale we needed — that is, building
muscle — we injected ourselves with massive amounts of credit steroids
(just like our baseball players). This enabled millions of people to
buy homes they could not afford and to fill jobs in construction and
retail that did not require that much education. Our European friends
went on a similar binge.
All this debt blew up in 2008 in the U.S. and Europe, and that led to
the second problem: Homeowners, firms, banks and governments are all
now "deleveraging" or trying to — meaning that they are saving more,
shopping less, paying off debts and trying to dig out from mortgages
that are under water.
No one better explains the implications of this than Kenneth Rogoff, a
professor of economics at Harvard, who argued in an essay last week
for Project Syndicate that we are not in a Great Recession but in a
Great (Credit) Contraction: "Why is everyone still referring to the
recent financial crisis as the 'Great Recession?' " asked Rogoff. "The
phrase 'Great Recession' creates the impression that the economy is
following the contours of a typical recession, only more severe —
something like a really bad cold. ... But the real problem is that the
global economy is badly overleveraged, and there is no quick escape
without a scheme to transfer wealth from creditors to debtors, either
through defaults, financial repression, or inflation. ...
"In a conventional recession," Rogoff noted, "the resumption of growth
implies a reasonably brisk return to normalcy. The economy not only
regains its lost ground, but, within a year, it typically catches up
to its rising long-run trend. The aftermath of a typical deep
financial crisis is something completely different. ... It typically
takes an economy more than four years just to reach the same per
capita income level that it had attained at its pre-crisis peak. ...
Many commentators have argued that fiscal stimulus has largely failed
not because it was misguided, but because it was not large enough to
fight a 'Great Recession.' But, in a 'Great Contraction,' problem No.
1 is too much debt." Until we find ways to restructure and forgive
some of these debts from consumers, firms, banks and governments,
spending to drive growth is not going to come back at the scale we
need.
Our challenge now, therefore, is to deleverage the economy as fast as
possible, while, at the same time, getting back to investing as much
as possible in our real pillars of growth so our recovery is built on
sustainable businesses and real jobs and not just on another round of
credit injections.
Regarding deleveraging, Rogoff suggests, for example, that the
government facilitate the writing down of mortgages in exchange for a
share of any future home-price appreciation.
Regarding growth, we surely need a much smarter long-term fiscal plan
than the one that just came out of Washington. We need to cut spending
in areas and on a time schedule that will hurt the least; we need to
raise taxes in ways that will hurt the least (now is the perfect time
for a gasoline tax rather than payroll taxes); and we need to use some
of these revenues to invest in the pillars of our growth, with special
emphasis on infrastructure, research and incentives for risk-taking
and start-ups. We need to offer every possible incentive to get
Americans to start new businesses to grow out of this hole.
If juggling all these needs at once sounds hard and complicated, it
is. There is no easy, one-policy fix. We need to help people
deleverage, cut some spending, raise some revenues and reinvest in our
growth engines — as an integrated strategy for national renewal.
Something this big and complex cannot be accomplished by one party
alone. It will require the kind of collective action usually reserved
for national emergencies. The sooner we pull together the better.
