Here are 2 strikingly different views on the economy, plus of course my own 2 cents.
Nobel laureate Michael Spence on how major emerging economies are pulling the others along and why the rich world needs to make sacrifices. His view is there are no easy solutions and that North America will have to do what Greece and now Ireland, possibly others will have to do – severely cut back.
Nobel Prize winning economist and New York Time Columnist Paul Krugman, makes some interesting observations about debt:
In the current policy debate, debt is often invoked as a reason to dismiss calls for expansionary fiscal policy as a response to unemployment; you can’t solve a problem created by debt by running up even more debt, say the critics. Households borrowed too much, say many people; now you want the government to borrow even more?
What’s wrong with that argument? It assumes, implicitly, that debt is debt – that it doesn’t matter who owes the money. Yet that can’t be right; if it were, debt wouldn’t be a problem in the first place. After all, to a first approximation debt is money we owe to ourselves – yes, the US has debt to China etc., but that’s not at the heart of the problem. Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth – one person’s liability is another person’s asset.
It follows that the level of debt matters only because the distribution of that debt matters, because highly indebted players face different constraints from players with low debt. And this means that all debt isn’t created equal – which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past. This becomes very clear in our analysis. In the model, deficit-financed government spending can, at least in principle, allow the economy to avoid unemployment and deflation while highly indebted private-sector agents repair their balance sheets, and the government can pay down its debts once the deleveraging crisis is past.
In other words, there are many different players with different levels of indebtedness who behave differently. The media characterization of debt as homogeneous is a myth.
What to do
The US could raise taxes by 15% across the board and pay off their debt easily and have loads of cash to do all kinds of things. Or, they could eliminate most deductions and raise a trillion dollars. Not to mention withdrawing from 2 unfunded wars, and taxing millionaires and billionaires.
So the US, and to a lesser degree Canada are not like Ireland, the UK or Greece.
The other wild card, which the US and Canada also tend to rely on is the amazing ability to innovate which nobody else seems to be able to do.
Americans did invent the Internet, and Google and are miles ahead of Asia and Europe in e-commerce, Iphone apps and a whole host of key technology which generates billions.
Innovation is haphazard and unpredictable though, and while I think it will ultimately save us and our economies, the next Google isn’t something that can be put in the budget. But that doesn’t mean it won’t happen.