FRIEDMAN: Lost in an economic house of mirrors

BERLIN

Over the past few weeks I've had a chance to speak with senior economic policymakers in America and Germany and I think I've figured out where we are. It's like this: Things are getting better, except where they aren't. The bailouts are working, except where they're not. Things will slowly get better, unless they slowly get worse. We should know soon, unless we don't.

It is no wonder that businesses are reluctant to hire with such "unusual uncertainty," as Fed chief Ben Bernanke put it. One reason it is so unusual is that we are not just trying to recover from a financial crisis triggered by crazy mortgage lending. We're also having to deal with three huge structural problems that built up over several decades and have reached a point of criticality at the same time.

And as Mohamed El-Erian, the CEO of Pimco, has been repeating, "Structural problems need structural solutions."

There are no quick fixes. In America and Europe, we are going to need some big structural fixes to get back on a sustained growth path — changes that will require a level of political consensus and sacrifice that has been sorely lacking in most countries up to now.

The first big structural problem is America's. We've just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines. Now our government owes more than ever and has more future obligations than ever — like expanded Medicare prescription drug benefits, expanded health care, an expanded war in Afghanistan and expanded Social Security payments (because the baby boomers are about to retire) — and less real growth to pay for it all.

America will probably need some added stimulus to kick-start employment, but any stimulus right now must be in growth-enabling investments that will yield more than their costs, or they just increase debt. That means investments in skill building and infrastructure plus tax incentives for starting new businesses and export promotion. To get a stimulus through Congress it must be paired with spending cuts and/or tax increases timed for when the economy improves.

Second, America's solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less skilled jobs that paid a decent wage at a faster pace than ever while spinning off more new skilled jobs that pay a decent wage

but require more education than ever.

There is only one way to deal with this challenge: more innovation to stimulate new industries and jobs that can pay workers $40 an hour, coupled with a huge initiative to train more Americans to win these jobs over their global competitors. There is no other way.

But the global economy needs a healthy Europe as well, and the third structural challenge we face is that the European Union, a huge market, is facing what former U.S. Ambassador to Germany John Kornblum calls its first "existential crisis." For the first time, he noted, the EU "saw the possibility of collapse." Germany has made clear that if the eurozone is to continue, it will be on the German work ethic not the Greek one. Will its euro-partners be able to raise their games? Uncertain.

Keeping up with Germany won't be easy. A decade ago Germany was the "sick man of Europe." No more. The Germans pulled together.

Labor gave up wage hikes and allowed businesses to improve competitiveness and worker flexibility, while the government subsidized firms to keep skilled workers on the job in the downturn. Germany is now on the rise, but also not free of structural challenges. Its growth depends on exports to China, and it is the biggest financier of Greece. Still, "Germany is no longer the country with the oldest students and youngest retirees," said Kornblum.

By contrast, America's two big parties still cling to their core religious beliefs as if nothing has changed. Republicans try to undermine the president at every turn and offer their nostrum of tax-cuts-will-solve-everything — without ever specifying what services they'll give up to pay for them. President Barack Obama gave us expanded health care before expanding the economic pie to sustain it.

You still don't sense our politicians are saying, "Wait a minute, stop everything, we have got to work together." Don't these people have 401(k) plans of their own and kids worried about jobs? The president needs to take America's labor, business and congressional leadership up to Camp David and not come back without a grand bargain for taxes, trade promotion, energy, stimulus and budget cutting that offers the market some certainty that we are moving together — not just on a bailout but on an economic rebirth for the 21st century.

"Fat chance," you say. Well then, I say get ready for a long phase of stubborn unemployment and anemic growth.

Thomas Friedman is a columnist for the New York Times.