#57 Addiction to Debt, Part II

On August 10, 2011

Hello Everyone,

Some of you may have noticed a recent headline in the New York Times — “China Tells U.S. It Must ‘Cure Its Addiction to Debt’ ” (see attachment A). In my 40th Obamagram on March 12, 2009 (“Culture of Addiction and Impatience”), I wrote about this topic – the addiction’s decades long pathology and how pervasive it is across our culture, not just in our government.

I wrote then that we also look for simple solutions and quick fixes – our “culture of impatience.” In that vein, Frank Bruni recently wrote a column entitled, “True Believers, All of Us,” about Gov. Perry’s prayer rally and its larger lessons (see attachment B).

[We all yearn] for easy, all-encompassing answers. Didn’t the debt-ceiling showdown show us that? That battle was defined largely by the unshakable, grandiose convictions of low-taxes, small-government puritans in the House… It felt more like theology than science.

…Liberals think magically, too, becoming so attached to a certain approach that they wind up advocating it less as option than as panacea.

It has always been thus, all around the world and all through history. Marxism was supposed to be the answer to everything. Prohibition was supposed to redeem America, and unionization was supposed to guarantee a decent life for workers forevermore. Not all worked out exactly as planned.

Even lesser, more specific initiatives command a reverence out of proportion with actual facts. Look at the early-education program Head Start…Discussion about it has almost always centered on how best to protect or, ideally, expand it, because it so surely accomplishes such great good…Except maybe it doesn’t.

…In government and so much else there are a multitude of options to weigh, a plenitude of roads to take and a tendency to puff up the one actually taken, because doing so squelches second-guessing and quells doubt…Clarity seduces. So does simplicity.

…And right now, with the stock market floundering and our credit rating downgraded and millions of Americans stranded in unemployment and Washington frozen in confusion, the temptation to look for one summary prescriptive — for certainty, even miracles — is strong. We’d be wise to resist it. To get us out of this mess, we need a full range of extant remedies, a tireless search for new ones and the nimbleness and open-mindedness to evaluate progress dispassionately and adapt our strategy accordingly. [Sounds like President Obama to me.] Faith and prayer just won’t cut it. In fact, they’ll get in the way.

At President Obama’s 50th birthday dinner party in Chicago last week, I happened to pose the first question to him – which was really a comment. I said, “Thank you, Mr. President, for defending the word ‘compromise.’ ”

Tom Friedman was on the same wavelength last Sunday in his piece, “Win Together or Lose Together” (see attachment C).

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.

No one better explains the implications of this than Kenneth Rogoff, a professor of economics at Harvard [and co-author of This Time is Different: Eight Centuries of Financial Folly; I quoted him in my Obamagram on 7/27/10, “Long- Term Solutions for Short-Term Dissonance”]…[He] argued in an essay last week…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…But the real problem is that the global economy is badly overleveraged…

… Many commentators have argued that fiscal stimulus has largely failed not because it was misguided…in a ‘Great Contraction,’ problem No. 1 is too much debt [with nearly everyone, everywhere, not just governments].” 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 [not the same as simply cutting government spending] 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 ustainable 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…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…

In January, the President’s State of the Union address was built on a similar theme, “We need to out-innovate, out-education and out-build the rest of the world.” Notice his emphasis on the word “we.” That is the forward-looking, collaborative theme we all need to keep in mind.

Recently, another opinion piece asked “What Happened to Obama?” Some of you have pointed it out to me. It urges the President to summarize in a simple narrative what has gone wrong and how we get out of our jobs and debt hole. Way too simplistic for me. Reaganesque or Rooseveltian-narratives – about American exceptionalism or blaming Wall Street or how we quickly return to “normal” – make little sense to me. President Obama does, however, need to constantly reiterate our need to “out-innovate, out-educate, and out-build.”

We first must to recapitalize our economy, while dealing with our ubiquitous addiction to debt.

And, we have to “win together.” Collaboration, not confrontation. Compromise is indeed a grand and honorable word.

Please, as always, pass it on. And, remember that previous Obamagrams are stored on http://obamagrams.com.

Chuck

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adobe pdf file Attachment: Attachment A

 

adobe pdf file Attachment: Attachment B

 

adobe pdf file Attachment: Attachment C

 

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