The economy is taking its first shaky steps toward recovery.
Pass a second federal stimulus package that would go into effect in 2011, when the effects of the first stimulus have largely worn off?
Move to reduce the deficit because the biggest threat to the nation's future is the huge amount of debt that the country ran up in the bubble and after the bubble burst?
Or something else? And exactly what?
Those were questions I was asked at a Sept. 15 symposium in Washington, D.C., sponsored by the New America Foundation. It was the second in the foundation's Bernard Schwartz series, which has a goal of generating ideas to throw into the policy debate in Washington.
My answer is that the country needs (no, not a good 5-cent cigar) a clearly articulated national growth strategy. One that's simple to understand. That's got a real commitment from the administration and the major powers in Congress. And that investors can believe in.
I'd recommend building it around investment in infrastructure. You know, bridges, roads, high-voltage power lines, ports and airports, an upgraded Internet. Everybody understands that improving these bones of our economy can lead to gains in productivity and higher economic growth.
Stimulus, take 2That's what a lot of us had hoped we'd get in the first stimulus package. Some of us got really excited at the idea that the country was finally going to put real money into its decaying infrastructure after decades of neglect. We were also really, really disappointed when the infrastructure money included in the final package turned out to be peanuts.
And I know from reading your e-mails and comments that many of you still think that a serious investment in infrastructure would generate serious growth. You and I certainly spend enough time looking for infrastructure plays involving other countries. Why not here?The other folks who spoke at the symposium, many of them liberal economists, made a convincing case that we have to do something. And something radical. Otherwise we're going to be stuck with unemployment at 10% or so for an unacceptably long time. Years, not months.
I don't even want to think about what years of 10% unemployment would do to politics in the U.S. of A. I think we'd wind up looking back the on the time when a congressman called the president a liar on the floor of the House as the good ol' days.
The problem -- as Carmen Reinhart, a co-author with Kenneth Rogoff of "This Time Is Different: Eight Centuries of Financial Folly," told the gathering -- is that while in a normal recession it takes two years for the economy to go from peak to trough and then another two years to regain its former heights, a recession accompanied by a financial crisis lasts much, much longer. Japan's lost decade wasn't an aberration. That's about how long it takes to heal a ravaged financial sector, which kills off every incipient recovery by uncovering another round of bad debt or another wave of bankruptcies.
And, boy, do we have a lot of financial-sector damage to undo. Although the rhetoric right now focuses on the huge run-up in government debt, the real need for debt reduction is on the private side. According to figures put together by Sherle Schwenninger and his team at the New America Foundation from Federal Reserve data, the total debt -- public, household and corporate sector -- of the United States hit 373% of gross domestic product in the first quarter of 2009. (That means that we owe an amount equal to 3.73 times the annual output of the entire U.S. economy.)
That 373% is a record, by the way. In 1980, it was just 161% of GDP.
And it's not only politicians who are lousy at handling money. U.S. household debt climbed to 97% of GDP in the first quarter of 2009 from just 48% in 1980. And financial-sector debt climbed to 120% in the first quarter of 2009 from a relatively minuscule 19% in 1980.
This huge debt overhang in the private sector is why the economy is likely to grow at such a slow speed for so long. You don't get sustained growth at 3% or 4% when you constantly have to drain income or profits out of any expansion to pay off debt.
And it's why any attempt to "solve" our current problems by focusing on cutting the public or government debt isn't going to work.