He correctly outlines that debt- consumer and sovereign- is the chief cause of our present trauma. Mendel then opines that only inflation or innovation can save us. In doing so he gives two of the four ways to cure the sickness, but leaves out two of the most sensible: working harder and replacing expenditures with debt payment.
Under Mendel's model existing debt is so burdensome that it not only stifles current growth, it is on track to exceed it. This concession, not new from Mendel but recently adopted by other mainstream economists who just a few years ago believed growing debt levels were merely a technical concern, is critical. Agreeing that the main problem in the global economy today is debt, not a lack of spending, is a step forward.
Mendel is also correct that one route to improve the situation is innovation. More precisely though the solution is growth in production, which can be a consequence of innovation. An increase in production is possible from more than just innovation though. Innovation is simply the most palatable of ways to promise increased production. It would be wonderful if we could simply invent novel new trinkets to pull the world out of recession, creating whizzing electronic devices which explode growth levels and bring us back to a time when money flowed and people clapped and houses were flipped at great profits. To hear Mendel say it, innovation comes about as a consequence of governmental and social cooperation. The USG gives money to HP to build a PC for you and me and voila, innovation spurs growth and we are all cured. Government does not spur cost effective innovation though, and there are other ways to increase production.
Inventiveness is not the only path to growth. There is another cure: hard work. We can increase production without innovation. Simply work more hours. For many Americans this is already a reality; indeed suggesting one merely work harder should be offensive to the many people who are already slaving away to survive in this miserable economy. Individuals working second jobs and long hours (when such opportunities are present) are already doing what they can to increase revenues at the familial level. The guilt should not be with them but with their political leaders. Since the major component of the nation's collective debt is governmental, maybe it is time to make the USG and all lower levels of government to work harder as well. Increase Washington, DC's existing work week 25% and in theory productivity would increase as well (well, in theory- one might also argue that the USG is inherently ineffective and costly- in some ways the less done there the better). Regardless, the lesson is simple. Work more, increase production, make more.
But increased revenues must be matched with decreases in spending, except for payments to decrease the debt. This too is simple. Spend less on nonessentials, more on paying down debt. Again, Americans across the country are already doing this. Studies show a marked decrease in consumer debt levels in the past four years. People are doing what the USG is not. They are working harder and paying off their bills. It is difficult, but it is necessary. The USG is headed the opposite direction. Federal spending is the highest it has been in recent history and the new programs keep coming. Even most Republicans are advising against cutting defense spending, entitlement spending, and their other sacred cows. Look closely at the supposed cuts the GOP recommends and they are merely decreases in proposed spending increases.
The USG does not do well with difficult decisions.
Perhaps knowing this Mendel turns to inflation, the other easy way out, as America's economic panacea. The idea of paying down a debt through devaluing the currency it was issued in has existed for centuries. So have the dangers. Hyper inflation is the most obvious, but Mendel's analysis leaves out another.
Inflating the value of the dollar would benefit those heavily in debt (many home owners, those with great credit card debt, virtually every government entity between Los Angeles and New York). But in doing so it would crucify anyone with their savings in US dollars. Sure this would avenge the little man by shafting the 1%. But it would also burn the tens of millions of decent people who saved money their entire lives and invested it in the nation's currency, or instruments denominated in US dollars. And if Mendel's goal is to encourage innovation, one nice way to do so is through inflation- if you want innovation in Singapore. Increased inflation in the US will drive smart minds away.
The two options Mendel presents, innovation and inflation, might be the politically sensitive choices, but they are certainly not the best. It would be far more preferable for debtors of both kinds- people and governments- to work harder and commit increased revenues to paying down existing debt. Americans know because they are already doing this. But it is time for government to join the crowd. Praying for an easy fix or putting the burden on the backs of those with the foresight to save resources rather than squander them, are both routes to continued economic pain.