LL: Based on your analysis, how successful have countries in similar debt situations to the US been in turning around their debt load?
MM: Unfortunately, most countries fail to turn their debt problems around in time to avoid devastating economic and fiscal consequences.
In a study of nearly two dozen nations with a similar debt situation as the U.S., only 16% of those that attempted fiscal reforms to rein in their debt were successful. In the rest (84%), debt as a share of GDP was not stabilized and the countries experienced great economic hardship.
LL: The debate will start again on increasing revenues to help turnaround the US balance sheet. What has this study provided in terms of this hot topic?
MM: On this score, the data are relatively clear. In the instances in which fiscal reforms failed to lower debt-to-GDP ratios, the reforms had involved large revenue increases and only small spending reductions. However, in the instances in which reform worked, and debt was actually reined in, the reforms involved large spending reductions and—interestingly—modest revenue reductions.
LL: GDP growth has been anemic. Using history as your guide. When will the US start seeing stronger growth?
MM: The U.S. post-WWII experience has tended to be that deep recessions are followed by rapid growth spurts. So far, that hasn’t been the case in this recession. That may be because this was a different recession than most, involving a financial crisis. But the evidence also suggests that Washington has misdiagnosed this recession. Washington has been assuming that this is a “demand side” recession and that all that is needed is money in peoples’ pockets to get them spending again and demanding goods.
There is a lot of evidence that this recession has more to do with the supply-side of the economy. Too much of the production side of the economy is geared toward the wrong things: housing and finance. We can go deeper and deeper in debt, trying to put money in consumers’ pockets, but the fact is that consumers don’t want to buy the things that producers are geared-up to make.
So the real solution, I believe, is to deleverage ourselves, set ourselves on a sound financial course, and give the economy some time to reconfigure itself.
LL: Do you think the US will have a similar fate as Japan?
MM: I think it is too early to tell. During the 1990s, Japan tried ten different stimulus packages, totaling more than 100 trillion yen.
It didn’t work. Hopefully we won’t go down that road.
LL: Many will say we need to cut spending in the long term, but now is not the time for painful spending cuts. Do you agree?
MM: The problem is that uncertainty about our long-run fiscal problems may, in fact, be part of what is ailing this economy. The truth is that there is never a "good" time for austerity. But necessary cuts will only get larger and more painful the longer we put them off.
What we can do is learn from the experience of other countries. That experience suggests fiscal reforms ought to be heavily weighted toward spending reductions rather than revenue increases.
In the instances in which fiscal reform was followed by large and protracted recessions, the reforms had involved major revenue increases and only modest spending reductions. But in the instances in which fiscal reform was followed by robust economic growth, the reforms involved major spending cuts and only modest revenue increases.
But I do want to add a note of caution: austerity clearly isn’t a get-rich-quick scheme. It is about as likely to lead to significant growth as is...stimulus. That is to say, it’s not that likely to lead to rapid growth. But that’s not why we must do it. We do it to avert a fiscal and economic calamity.
LL: What is the biggest impediment to the US jobs market?
MM: It is hard to say. I think that the labor force is still trying to retrain after a decade of building up the wrong skill sets. That just takes time (and Washington policies that are still trying, desperately, to re-inflate the housing bubble aren’t helping). I also think that uncertainty surrounding policy is still a large problem.
Businesses are still trying to figure out how financial regulators are going to exercise their new-found powers. They are trying to figure out whether and how Washington is going to address its debt problem.
They are wondering how the states are going to address their fiscal problems. They are trying to figure out what is going on with our tax code, which has 141 “temporary” provisions. Finally, businesses are trying to figure out if, when, and how the Federal Reserve is going to begin to sell all of the assets it has acquired.
Washington can’t do much to deal with the first problem (making sure people’s skill sets are aligned with what consumers want), but it can do much to take care of the second by resolving the policy uncertainties it has introduced.
A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."
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