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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.

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