ME. OK, Professor, I get the idea that many people are watching the Greek and Euro-debt stories and saying ah ha, too bad, it’s their own problem. They spent too much, and their government ought to put the hammer down by raising taxes, cutting spending, and forcing the financial institutions and people holding the debt to write it down 50 percent.

BF. Well they did over consume, borrow too much for too many years, and that is how you get into a debt problem. Everyone was living “too high on the hog” with expectations of higher growth. The mood of the Euro-finance and policy institutions is be poised to enforce austerity measures. The problem is that while much of the European Community attempts deal with the issue, it will also have probable consequences for the global economy. The European Community acts as a mass market somewhat similar to the United States. They are a major economic engine and international trade partner. Some of the debt is held by financial institutions and others in developed nations around the world. So there will be global consequences in the world’s financial markets.

ME. I don’t doubt that, but what can be done? It appears there are three options. Option 1 is to go into default which means all institutions, governments and people holding their debt take a major loss that may threaten their respective financial stability. Option 2 is to impose severe austerity measures which mean slow growth for the next decade or so. Option 3 is to redesign economic policies to stimulate jobs, business, and income growth while paying down the debt at levels that the resulting growth will sustain.

BF. Well, economists are not very good at predicting outcomes of when governments default on debt. Their models do a better job in predictions when outcomes from the economic shocks have been experienced before. Euro-defaults would be something new of a magnitude that has not been experienced before. In a past decade, when several developing nations defaulted on their debt, the World Bank along with governments and large financial institutions holding the debt took significant write-downs. This affected their bottom lines and returns. We had to re-capitalize the World Bank and austerity measures were imposed on the cluster of debtor nations. This informs the experience today. The difference in today’s case is that we are talking about several European nations and together they are a major economic engine for the global economy.

ME. I get an uneasy feeling that as we observe Europe we could be looking in the mirror at ourselves in a few years. While we have a pretty sound economy, we still have persistently high unemployment. Many middle-class families have taken a big hit on their retirement account funds and accumulated wealth. Most know someone who is now unemployed or who graduated from college unable to find a job. We still have not worked through all of the consequences of the housing bubble. A lot of people are still underwater on home mortgages. Financial institutions have been reluctant to accept write-downs to market value and they require more equity in making loan deals. Everyone went into the Great recession holding one set of expectations for the future. Everyone came out with reduced expectations that are being called the “New Normal.”

BF. You sound like the media pundits, who get paid to talk and sound good without saying much. Financial institutions and corporate America are in business to make money not to giveaway their balance sheet unless it is absolutely necessary. Most executives are patient and careful about not overshooting production relative to the demand for their products and services. Equity and earnings are “king” under the new financial underwriting standards since the global credit crisis. As long as most companies are still making profits, most are content to sit on the sidelines of investing in new plants or adding jobs until economic growth patterns become clearer.

ME. Talk about sounding good without saying much. You are simply saying that Europe and eventually the U.S. ought to impose the austerity measures meaning higher taxes and lower government spending, then learn to live with slow growth and high unemployment. You don’t provide much hope for the one in ten who are unemployed or those with eroding finances. My university center is co-hosting a Rural Young Entrepreneurs Summit this week, because many young people want more than status quo prospects for the future. Similarly, it is important to revise government policies and programs so those who create new enterprises—large and small—and those who invest capital—large and small—become the favored class for tax policy and regulatory purposes.

BF. So you are favoring the 999 plan? Are you forgetting that 70 percent of the economy is consumer demand? I can agree with the policy direction, but it will take more than policy to create economic growth. Consumers and business leaders need confidence that the directions in policy will make a difference. I am not sure whether this approach would make a difference in Greece—known for its tourism and shipping industries. In our country, I can see the benefits of strategies to ramp up all of our domestic sources of fuel and energy. There is a reason why Williston, North Dakota is doubling its population and making national news as a boom town magnet—and it is not the weather.

ME. My comments don’t constitute a political endorsement. Surprisingly, I agree with you about fuel and energy and I would add food. There is no question in my mind that our local and domestic economy benefits from higher economic multipliers by choosing to produce our own sources of food, fuel and energy relative to importing food, fuel and energy. Following the recent discussions from the World Food Prize, I would add that the same would be true for all nations, developing or otherwise around the world. Perhaps figuring out innovations and technologies—and policies—necessary to produce and consume more of our food, fuel and energy closer to home around the world creates more economic growth than adding extra costs to ship everything everywhere.

BF. You sound like an isolationist rather than a free trader.

ME. Not at all, trade is good when it is necessary, but unnecessary trade is inefficient.

* Edelman is a Professor of Economics at Iowa State University and Flinchbaugh is a Professor Emeritus of Agricultural Economics at Kansas State University.

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