The Road to Economic Growth

The McKinsey Global Institute recently released a report assessing the efforts of the world’s ten largest mature economies (United States, Japan, Germany, France, United Kingdom, Italy, Canada, Spain, Australia, and South Korea) in deleveraging (essentially, reducing debt) in the aftermath of the great recession. While the analysis looks at both private and public sector debt, including all levels of  government (federal, state and local), there are some important lessons for those who are concerned with this country’s federal debt burden.

The report looks at the successful recoveries of Sweden and Finland during the 1990s for markers of success in those countries' deleveraging efforts and a return to strong economic growth. From that review, McKinsey identified six benchmarks associated with success:

• The financial sector is stabilized and lending is rising
• Structural reforms unleash private-sector growth
• Credible medium-term public deficit reduction plans are in place
• Exports are growing
• Private investment has resumed
• The housing market is stabilized and residential construction revives.

First, the good news. According to the analysis, out of the ten countries, the U.S. is most closely following the path of the two Nordic countries. At least in the private sector, the deleveraging process appears well underway, which is a necessary step to get the economy back to normal.

The bad news is that we don’t currently have a concrete medium to long-term deficit reduction plan in place, which is one of the keys to a successful recovery, and a path we have advocated repeatedly. McKinsey warns:

In contrast with the United Kingdom and Spain, the United States has not yet adopted a credible long-term deficit reduction plan. Its failed attempt to do so has had a very tangible result: the first credit rating downgrade of US Treasury debt ever, from AAA to AA+, in August 2011. While the US economy gained momentum in the second half of 2011, the lack of a credible long-term plan to bring down the deficit and head off the effects of rising costs of entitlement programs such as Medicare continue to hang over the US economy—affecting business and consumer confidence in the near term and raising questions about the sustainability of growth over the medium term.

As we have argued, we should put in place a plan now that begins to address our mounting debt over the medium and long term. This is a necessary step towards economic recovery, as the McKinsey report finds in its comparison. It is ideal to implement such a plan in a phased-in manner so that the still fragile recovery isn’t weakened, but implementing such a plan is a must do.