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How Long Will ‘Walking Pneumonia’ Economy Linger? Rogoff’s Sobering Reality . . . . Recommended

Posted by Larry Doyle on June 15, 2012 8:15 AM |

I have long compared our economic malaise to a severe case of ‘walking pneumonia.’

Is there any doubt that our economic pleurisy persists? America knows it does because collectively we feel the daily pain and anguish of this condition. Our President and his policy mavens seem to have just now learned they cannot fool the American public into thinking our economy is improving while the public experiences a very different dynamic.

Given the reality of our ‘walking pneumonia’ economy here at home and an equally serious case of this malady in Europe, two questions are screaming to be answered:

1. How long will this situation persist?

2. What can we do about it? 

Let’s go to the smartest man and woman in the room in terms of historical, economic analysis to get some answers. Who might they be? Harvard University’s Kenneth Rogoff and his associate from the University of Maryland, Carmen Reinhart.

At Project Syndicate, Rogoff recently wrote a fabulous commentary entitled Austerity and Debt Realism. Rogoff addresses my first question posed above and writes:

In a series of academic papers with Carmen Reinhart – including, most recently, joint work with Vincent Reinhart (“Debt Overhangs: Past and Present) – we find that very high debt levels of 90% of GDP are a long-term secular drag on economic growth that often lasts for two decades or more. The cumulative costs can be stunning. The average high-debt episodes since 1800 last 23 years and are associated with a growth rate more than one percentage point below the rate typical for periods of lower debt levels. That is, after a quarter-century of high debt, income can be 25% lower than it would have been at normal growth rates.

Of course, there is two-way feedback between debt and growth, but normal recessions last only a year and cannot explain a two-decade period of malaise. The drag on growth is more likely to come from the eventual need for the government to raise taxes, as well as from lower investment spending. So, yes, government spending provides a short-term boost, but there is a trade-off with long-run secular decline.

A 23-year average duration for those with a debt enslaved ‘walking pneumonia’ economy?  Not very appealing given that we are not even five years into this crisis. In regard to the debt itself, while our debt to GDP ratio is now oft quoted at approximately 110%, do not forget that figure does not address all of the accompanying burdens associated with our entitlement programs.

So, let’s address question 2.

What are we going to do about this? The answer is called Simpson-Bowles.

With the 2012 Presidential campaign in full swing, we hear daily platitudes and political promises from both sides of the aisle. America deserves so much better than the drivel put forth by the campaigns and the clanging noise emanating from the compliant media.

Playing on the insecurities of some and the lack of intelligence and/or understanding of others may be standard political procedure for those seeking re-election, BUT it is NO WAY to run a country in the midst of a severe economic crisis. Let’s dispense with the fear-mongering, class warfare, and redistribution of wealth and income and start to embrace real ‘sense on cents’ so we can save the future for our children and grandchildren. How so? Let’s dust off and revisit the Simpson-Bowles plan which lays out the following:

If we do not act soon to reassure the markets, the risk of a crisis will increase, and the options available to avert or remedy the crisis will both narrow and become more stringent. If we wait ten years, CBO projects our economy could shrink by as much as 2 percent, and spending cuts and tax increases needed to plug the hole could nearly double what is needed today. Continued inaction is not a viable option, and not an acceptable course for a responsible government.

The plan has six major components:

1) Discretionary Spending Cuts: Enact tough discretionary spending caps to force budget discipline in Congress. Include enforcement mechanisms to give the limits real teeth. Make significant cuts in both security and non-security spending by cutting lowpriority programs and streamlining government operations. Offer over $50 billion in immediate cuts to lead by example, and provide $200 billion in illustrative 2015 savings.

2) Comprehensive Tax Reform: Sharply reduce rates, broaden the base, simplify the tax code, and reduce the deficit by reducing the many “tax expenditures”—another name for spending through the tax code. Reform corporate taxes to make America more competitive, and cap revenue to avoid excessive taxation.

3) Health Care Cost Containment: Replace the phantom savings from scheduled Medicare reimbursement cuts that will never materialize and from a new long-term care program that is unsustainable with real, common-sense reforms to physician payments, cost-sharing, malpractice law, prescription drug costs, government-subsidized medical education, and other sources. Institute additional long-term measures to bring down spending growth.

4) Mandatory Savings: Cut agriculture subsidies and modernize military and civil service retirement systems, while reforming student loan programs and putting the Pension Benefit Guarantee Corporation on a sustainable path.

5) Social Security Reforms to Ensure Long-Term Solvency and Reduce Poverty: Ensure sustainable solvency for the next 75 years while reducing poverty among seniors. Reform Social Security for its own sake, and not for deficit reduction.

6) Process Changes: Reform the budget process to ensure the debt remains on a stable path, spending stays under control, inflation is measured accurately, and taxpayer dollars go where they belong.

What are the first three ingredients necessary to implement Simpson-Bowles?

1. The intelligence to understand the magnitude of our problem.

2. The political will and SENSE OF URGENCY to embrace the plan.


Please share with me the names of those running for public office this fall who have these three qualities and the character to act upon them. Please also share this commentary with your friends, family, and colleagues. 

LET’S SAVE OUR NATION from the ne’er do well nitwits on both sides of the aisle who are interested in self-serving party politics. That dog no longer hunts.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • LD

    Mr. Romney must decide just how pregnant he plans to be. He can fight a rearguard action but that risks putting him into a defensive crouch. As it is, the campaign has too frequently lumped entitlement reform into the category of unpleasant spending cuts that Washington must make. This is a negative message that leaves Mr. Romney open to accusations that he’d balance the budget on the backs of seniors.

    The alternative is for Mr. Romney to go Scott Walker and embrace reform as central to his stated desire to save the country for future generations. The positive GOP message makes the case that these changes save and strengthen these programs, giving Americans more choice. It notes bipartisan support for reform, and it contrasts that with Mr. Obama’s own lack of leadership.

    That focus gives Mr. Romney the needed vision for his presidency. Should the Supreme Court strike down ObamaCare, it gives him an argument for what must come next. Most importantly, it lays the groundwork for reform itself.

    Republicans are intently focused on November 2012, though just as important is January 2013. Entitlement reform is huge, and Americans will not have it force-fed to them. If a President Romney and a Republican Congress are to have any chance of accomplishing these crucial reforms, they will need to have been elected to do just that.

    WSJ, Arizona and The Entitlement Baby

  • Why don’t we start with cutting the, staff, salaries and benefits of our Congressional representatives? If they had to live like the rest of us they might find it easier to govern or at least the insight.

    I don’t think we can count on anything making a difference until we regulate Wall Street derivatives. Investors are not coming back to the table any time soon without some safeguards and assurances that the “party” is over.

  • Frank

    after spending almost 3 years in the mix in Washington, it is obvious that:

    1)the banks own the congress,

    2) elected officials are interested in being re-elected

    3) there are very few if any leaders.

    This piece just may be your best to date.

    And if you think you have seen it all wait until you look at this, Investors with ties to Soros, Buffett,Obama Plan Eminent Domain Grab

    Keep up the good work

  • Donald

    There is no Simpson-Bowles Plan because it was rejected by the committee.

    Since austerity is what prolonged the Great Depression until WW II forced a stimulus. It’s a shame that views other than austerity are rarely allowed to be heard since we are in the process of replicating the past with the current Great Depression II.

    I predicted this from the beginning given those running (ruining) the economy that are more interested in using the the recession to make social changes in order to pay for endless wars and world economic domination.

    Ultimately, it won’t work but ‘ultimately” can take a long and torturous time.

    • fred


      In my humble opinion, strict austerity is not the answer nor is unrestrained gov’t spending; the answer lies somewhere in between and combines the benefits from both.

      Prudence and frugality must be combined with effective management and technology usage to bring public service projects in on time and under budget.

      Our hard earned tax dollars should not be earmarked for job creation but for useful and necessary public service and public service projects. Job creation should be a by-product rather than an spending objective.

      Henry Blogett had a nice post today on our infrastructure spending needs, let’s look at the example of the ‘Big Dig’ up in Boston as to how NOT to manage a large public capital spending project or let’s look to the current state of public education in this country as an example of how NOT to design public educational system.

      I think those that promote austerity are not necessarily anti-government spending, they are against WASTEFUL and UNNECESSARY government spending.

      Let’s stop the partisan bickering and take the time to get it right! I see ‘these thankless times’ as a great opportunity to get this country back on track and become an effective role model for global leadership.

      If not now, when? If not us, who?

  • Huckleberry

    This is way late… but let’s get real.

    Expansionary austerity is as ridiculous a notion as the Laffer Curve.

    The evidence from Europe is simple: it is NOT working. It is not working in Ireland, nor is it working in Greece. Soon, it will not work in Spain. To blame Europe’s problem on social spending is to duck the issue and miss the point entirely.

    We do not need to “reassure” the markets. The markets ARE the problem: they are rigged, and on one with any sense trusts them.

    Private debt is a far larger problem for the US than the public debt. How will Simpson-Bowles reduce the private debt? How will it float those underwater on their homes? What will it do for aggregate demand? This notion of regulatory uncertainty is a canard, designed to hide a fundamental lack of demand.

    But the biggest problem is the quarter QUADRILLION in derivative bets, mostly on interest rate movement, that our bailed-out titans of Wall Street have placed (with free money from the Fed).

    This problem is so far beyond an economic debate between Milton Friedman and John Maynard Keynes. The social contract in the country is being shredded before our eyes.

    • LD

      Private debt is a far larger problem for the US than the public debt. How will Simpson-Bowles reduce the private debt? How will it float those underwater on their homes? What will it do for aggregate demand? This notion of regulatory uncertainty is a canard, designed to hide a fundamental lack of demand.

      Lower taxes on a broader base is a start to stimulating demand.

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