Sam Keller's TEC Blog

Thursday, August 25, 2011

Views on the Debt Crisis

The United States Debt Crisis continues to receive much attention in the press and on both cable and conventional news stations as well it should. In my opinion, we cannot truly escape from what is now commonly called the "Great Recession" until a real solution to the debt crisis is found. Yet Washington politics has made reaching a solution all the more difficult. Creating private sector jobs, real long term jobs, is the way out. Jobs are created as a natural part of wealth creation. That's how the US became the wealthiest country in the world. But job creation has become easier said than done.

When Standard & Poor's Rating Services lowered its long-term sovereign credit rating on the United States from AAA to AA+ it became a shot heard 'round the world. Stock markets plummeted, consumers' confidence and pocketbooks took another beating, and the blame game engulfed politicians and S&P itself. In a recent article in Working Knowledge from the Harvard Business School, four HBS faculty members give their views on the Debt Crisis.

First, in the view of Bo Becker, Assistant Professor of Business Administration, "the real story is about how unsustainable the massive US government deficits are, and how difficult they will be to close." S & P simply acted as a messenger. "Anger with S&P... is much like anger directed toward a referee who has made a difficult call—frustration with the result expressed as criticism of the messenger. "

"So rather than focus on whether S&P called the downgrade a little too soon, let's focus more on figuring out how to get the US fiscal house in order. "

Robert Kaplan, Professor of Management Practice agrees. "This downgrade was probably bound to happen." The question still remains "how can we deleverage our government and still foster growth in the economy?"

"For starters, I believe that the federal government must focus on entitlement reform, new revenues, and some new spending intended to foster growth. This new spending may involve continuation of the payroll tax holiday as well as improvements in this country's infrastructure. "

"This is an historic leadership moment. Can our leaders work together, face reality, engage in real debate and help solve our nation's problems?"

Bill Sahlman, Professor of Business Administration, continues. "I haven't felt so frustrated since Richard Nixon left office in the throes of the Watergate scandal in 1974. Our so-called political leaders have just completed a grand game of chicken, and the United States is the loser."

"One side argues that we can't raise revenues, while the other asserts we can't cut entitlements. Both sides are wrong. Entitlement costs, especially health care, will eat us alive. Without real reform of affordable health delivery, not just reform of access to health insurance, the US economy is doomed."

"On the revenue side, we will need to increase taxes, broaden the tax base, and reform the tax code or we are also doomed...You don't need a crystal ball to see that we have an unsustainable business model and no political process for change."

"What we need is simple—growth. Where does growth come from? The answer is equally simple. Business, especially new business, creates jobs and prosperity."

"Private action can overcome partisan haggling and incompetence. America is a great country, because it has citizens who constantly search for new ways to improve the world. We have willing investors. We view crises as opportunities. We, the non-politicians, need to accept responsibility for fixing the country and get on with it."

Matt Weinzierl, Assistant Professor of Business Administration, takes a different view.

"The fiscal stress on the United States is not imminent. Borrowing costs for the government are at historic lows. Bond markets, which...are S&P's customers, appear to have ignored the agency's opinion entirely."

"The US economy is not in a position to absorb fiscal austerity. The consequences of a second downturn could prove disastrous... Whether a new fiscal stimulus is merited or even possible is up for debate, but a fiscal retrenchment in the near term is likely to make things worse."

"The threat is real, the costs will be large, and we must act...What we must do is well understood: Reform entitlements and the tax code to spend less, raise more, or both. Fixing the long-term fiscal problem will require political courage. S&P may have meant their downgrade as an attempt to awaken that political will, but by issuing it during the heated debates over the debt ceiling and short-term policy, S&P risks prompting fiscal austerity over the wrong time horizon."

Click here for the full article.

We as business leaders can fix our Country's problem by growing our companies, creating wealth, which naturally results in creating jobs and increasing tax revenues. We need government to create a friendly tax and regulatory environment, then get out of the way and let us go to work. In today's political environment, this too may be easier said than done.