I just read an insightful article about how to handle the debt crisis, and the problems ahead, whether we handle the debt crisis or not, and how to get ready for them as well.  Depending on what we do this year, and in (near-term) future years, we may get out of this debt eventually, fall into stagnation (become forever poor), or become the next Rome and die in a mountain of debt (Rome died because it stopped expanding {expanding = $}, but never cut back its lavish lifestyle when the money stopped.  Sound familiar?).

Here are the 10 things our Nation must do, according to economists: Daniel Stelter, Ralf Berger, Jendrik Odewald & Dirk Schilder (as presented by John Mauldin):

  1. Deal with the debt overhang—immediately

A combination of write-offs, austerity, higher taxes and sizable inflation will be necessary (Post Great Depression/WWII, taxes were as high as 90% for the rich and not much less for everyone else!).  The critical starting point is to accept the fact that many of today’s debts will never be repaid and to embrace debt restructuring and defaults.  Bite the bullet now, and we can avoid the “lost decade” that Japan experienced, and is still experiencing 20 years later.

  1. Reduce unfunded liabilities

Several things will be necessary:  Raise the retirement age (we have to – the original plan called for only a third of all workers to even reach retirement age); Reduce Social Security payouts (Did you know that Social Security was meant to be temporary back in the 1930s?  It is now one of our top expenses as a Nation); Make healthcare more efficient (other nations offer better healthcare for less than the US); drastically reduce welfare by creating “welfare jobs” (welfare was also meant to be temporary, and Roosevelt did a great job of creating jobs to build US infrastructure… which we should do again!).

  1. Increase the efficiency of government

A smaller government works better and costs less.  Start by simplifying welfare – it’s a bureaucratic nightmare, and then move on to other government jobs that can be done better and cheaper by a private workforce (a workforce that will also generate GDP instead of spending it).

  1. Prepare for labor scarcity

It seems strange, since there are currently so many jobless workers out there, but simple demographics shows that between now and 2050, we will experience a massive shortage of workers.  To combat this, the elderly will need to work longer, and we’ll have to increase immigration.

  1. Develop smart immigration policy

Even if developed countries do the first four things, it will still not be enough to reverse demographic trends. Therefore, these countries also need to become far more open and attractive to immigrants.  They will need to concentrate on higher education immigration.  In the US, currently, 18% of all entrepreneurial advances (via patents) come from immigrant entrepreneurs.  In Silicon Valley, 50% of start-ups are founded by Chinese entrepreneurs alone!  We need more educated immigrants.

  1. Invest in education

The US is really lagging in education, and is getting worse, not better.  Other nations, who are better than us, have shown that there are three very specific things that will improve education: Pay (highly qualified) teachers well and supply them with technology (this has proven to be more effective than more training/education); push science & engineering as careers; have specific programs/tracks for gifted students that pay their way through college and/or into entrepreneurialism.

  1. Reinvest in the asset base

Modernize public infrastructure, and get the private sector to invest in it (through tax breaks).  Also, make it more attractive for individuals to invest in the market, but make it more painful to take distributions (lower tax rates for long-term holding; higher taxes for short-term holding and for dividends).

  1. Increase raw-material efficiency

The age of cheap resources may have come to an end. Developed countries have to increase their efforts to decouple economic development from resource consumption.

Even with recent discoveries of more fossil fuel in the US, the supply is short-lived.  The key is to pursue and push alternative energy technologies now, and have the government fund it using innovative pilot projects which are short-term, but will have a long-term impact.

The age of cheap resources may have come to an end. Developed countries have to increase their efforts to decouple economic development from resource consumption.

  1. Cooperate on a global basis

Sure, every nation wants to increase exports and hire the best educated people in the world, but making trade barriers to change the import/export balance really hurts emerging economies, many of which owe money to developed economies.  To get that debt repaid, the stable economies must lower restrictions so the little guys can make a profit.  Conversely developed countries must try to balance trade with each other, or we’ll have a situation like China, which owns $1.2T in US Treasury bonds and about half as much in Euro debt.  China is cash rich because of a massive trade imbalance.

  1. Invest in entrepeneurs

The government needs to make it easier for engineers and technologists to innovate and for entrepreneurs to start new businesses.  Many government policies in the developed world are designed to protect traditional industries, which eventually decline and cost jobs and money, but also postpone future technologies and future industries in the process.  The net creators of jobs in the US are small businesses founded by entrepreneurs.  This is also where most of the technological advances come from.

Encourage risk taking. Innovation tends to appeal to the young. Some of the most innovative companies—Apple, Google, Facebook, and Microsoft—were all founded by university students in their early twenties. Therefore, it is important for societies to encourage risk taking at a younger age and to make entrepreneurship more attractive and rewarding than working in other functions in the economy.

Increase social acceptance of innovation. In many developed countries, especially in Europe, the public has grown skeptical of innovation and new technologies. The classic example is biotechnology and its application in food production and in some parts of health care research. In our view, this resistance to innovation is largely a function of the average age of a country’s population. The higher the average age, the more the population seems inclined to protect the status quo and be wary of the new. Leaders in these societies will have to persuade citizens that only increased innovation can help deal with the costs of demographic change if overall levels of wealth are to be preserved.