08/16/2011 11:20 am ET Updated Oct 16, 2011

The Debt-Growth Conundrum

The U.S. economy has slowed dramatically and more than half of the people surveyed by CNBC on Monday believe we are slipping back into recession. Perhaps.

But it just may be that we have misdiagnosed the problem. I am impressed by an explanation offered by Harvard economist Ken Rogoff who contends we are not actually in a standard business recession at all, but rather a financial crisis driven by excessive debt. If he is right, that is why stimulus spending and low interest rates have produced such meager results. Those are standard remedies for a recession, not a financial crisis. Rogoff contends recovery from such a financial crisis takes about seven years.

To further complicate the picture, it is not only our debt -- public and private -- that is weighing down the economy. As I said last week, virtually the entire developed world is caught up in a liquidity crisis driven by excessive debt. Financial markets today are global. If the European Union loses control of the situation -- say if Italy defaults on its debt -- the results will reverberate around the world. Even Germany, the EU's most reliable economic engine, is beginning to falter.

Debt is the problem and will take time to work itself out. We have to come to terms with this. The budget agreement that made possible a rise in the debt ceiling is really just a beginning. If everything works out as planned, Congress will cut spending by about $2 trillion over the next 10 years. That's better than nothing, but the Congressional Budget Office says we would need $7 trillion in savings over the decade just to keep the national debt at its current percentage of GDP. I cannot help but wonder if there is sufficient political will -- even among the Tea Party activists -- to make cuts of that magnitude. But there is no viable alternative.

The good news is we don't have to do it all at once. In the present environment, it is enough to start moving toward fiscal solvency with a determined commitment to do whatever it takes to get there. The conundrum is to embrace a long-term debt reduction strategy along with near-term policies to create growth and jobs -- a real tightrope walk.

We are going to be coping with weak economic growth and high unemployment for several years. We need to rank all tax and spending policies according to how they impact growth, and cut the ones that don't significantly help growth and jobs.

But perhaps our most immediate problem is a growing sense that no one is at the tiller. While President Obama and Congress fuss and fume at each other, reciting ideological mantras, the country is drifting. Both parties have contributed to this conundrum and there is more than enough to blame to go around, but it is the President's responsibility to use his bully pulpit to explain what is happening, bridge the ideological gap, lay out a credible plan and get the country moving in the right direction. We need leadership.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute.