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Debt Problem or Employment Crisis?

Laura Schreier | Special to CNBC.com
Thursday, 15 Nov 2012 | 3:39 PM ET

Newton, Mass. — The MIT Sloan CFO Summit hosted two economics speakers during the course of the day: The first painted the state of U.S. debt levels as an appalling crisis that must be dealt with immediately — but the second begged to differ, offering an alternative set of priorities.

Source: Wikipedia

"We have an unemployment crisis, and a debt problem," said Peter Diamond, a Nobel Laureate and professor of the MIT Sloan School of Management. Unemployment is the real calamity, he said, because Americans are going to pay a significant cost long-term for not taking action right now.

That was in contrast to the earlier remarks of David Walker, founder and CEO of the Comeback America Initiative, a nonprofit dedicated to promoting government fiscal responsibility.

Walker spoke forcefully about making sensible, bipartisan efforts toward a "grand fiscal bargain" that would revise the tax code and cut needless spending. The U.S. government has grown too big, promised too much and gone too long without restructure, he said. Walker was confident that both parties would resolve the upcoming "fiscal cliff." That will be managed in the short-term, but the real problem — the long-term disease — is a fundamentally dysfunctional budget.

In his speech, Diamond presented his own set of dire facts to the crowd, this time concerning long-term unemployment and youth unemployment.

Long-term unemployment is off the scale compared to anything the U.S. has seen since the Great Depression, he said. The longer people are out of work, the rustier their skills become. Their old networking connections dissolve, and potential employers look at them more skeptically. That leads to a lot of people out there with "rotten opportunities" for a long time to come. That's bad for them, their families, and the economy as a whole, he said.

In addition, the nation should be more worried about its youth unemployment. Displaying a graph showing U.S. youth unemployment at 16.8 percent for summer 2012, Diamond explained that the post-college years are an essential time for members of the young workforce to develop professional skills, make vital work contacts, and mature as people. Research shows that entering the workforce during a recession — any recession — hurts earnings for years to come.

The government can take a few basic, immediate steps to alleviate the problem. The country's infrastructure is crumbling, with bridges and airports in an appalling state. Put people to work fixing these, and the nation helps solve two major problems. The country should ideally invest in education and research and development to spur the economy, although Diamond acknowledged that would be politically difficult to pull off.

Both Walker and Diamond criticized the federal government for a lack of progress on these issues. Among many other critiques, Walker said he was scandalized that congressmen and women work so little, showing up at the office three days a week and taking far more holidays than would ever be tolerated in private industry. The U.S. should hold its federal lawmakers to a "no deal, no break," ultimatum.

Walker also repeatedly emphasized that most Americans are fundamentally centrists, yet both political parties are run by people on the extremes.

"It's time to tell these people, 'It's enough,'" he said, and put heat on them to work from the center.

Diamond offered a few other suggestions. He noted that when making big decisions, Congress has embraced the idea of putting commissions together to make proposals. These have an up-or-down vote, with no amendments, and have had varying degrees of success — generally, the fewer congressmen on the committee, the more it accomplished.

A commission to decide on which military bases to close, for example, successfully made its report, which was carried out. It had zero congressmen. The Simpson-Bowles Commission, on the other hand, lacked the signatures to trigger congressional action — it included 12 members of Congress. The third example, a budget "supercommittee," was entirely made up of congressmen and didn't even make a report.

Congressmen will never take action on something of this magnitude as long as they're worried about the next election, Diamond said.

"People do something heroic, and don't get reelected," he said, which happened with some lawmakers who supported the much-needed bailouts of the fiscal crisis.

Keep congressmen off these committees, and use these groups to take on the budget a bit at a time, he said.