It is said that any organization needs to understand and agree upon its problems, before it can develop solutions to them.

The developed world, its inhabitants - and particularly its governments and political leadership - are having a devil of a time understanding (to say nothing of agreeing upon) the unprecedented set of economic facts that are facing us.

Accordingly, the solutions proffered thus far have fallen far from being successful as we have been working at solving the wrong set of problems.

Here are our real problems in a nutshell (a patient reader will find the solutions towards the end of this essay): the developed nations of Western Europe, the U.S. and Japan are facing the aftereffects of having for decades pursued policies, and tolerated private sector activity, that has been nearly the opposite of how they should have responded to the tectonic shifts in the structure of the global economy.

We did not have a mere recession in 2007 and 2008, we experienced the beginning of the culmination of an era of ideologically-driven mismanagement occurring amidst, and partially in response to, one of the most massive changes in political economics in modern times.

The fundamental catalyst was the emergence, and integration into the global free market, of nations that are home to the roughly 3.5 billion people formerly near-irrelevant to trade within the modern capitalist world – during the period prior to 1989 when they remained under the yoke of totalitarian “socialism” and other dysfunctional regimes.

The word “emerging” to describe the newbie free market nations is, in itself, a bit euphemistic – this isn’t some debutante ball we are talking about after all. Rather, something along the lines of “newly competing” or “status quo challenging” would be more apt.

Don’t get me wrong, I’ve got nothing against our new trading partners – I wish them well in the pursuit of economic growth and wellbeing for their people. But I have no delusions about what their “emergence” has meant to the hubristic developed world.

The plain truth is that you cannot welcome 3.5 billion people (more than half of a world of 6.7 billion and a developed world numbering only about 660 million folks) into an already highly competitive global economy without rocking the boat – a lot. So much so that it threatens to capsize.

But there we were, back in 1989, with our deregulated, laissez-faire, trickle-down, financialized economic philosophy of the Reagan-Bush era, the “voodoo economics” that thrives only by inducing debt fueled overconsumption. Like tent evangelists, we were preaching globalization to the world and giving each other high fives and belly bumps over the defeat of socialism by the Shining City upon a Hill.

Back then, we were of course feeling the first failing of the economics of debt-dependent growth after the bubble of the 1980’s (a response to the first round of deindustrialization – at that time generated by the Japanese). No matter though, that was our chance to show the world how to restructure from irrational exuberance and move on – and that we did.

For a while, it felt good. We looked down at the Chinese with their political factions engaged in internecine struggles after Tiananmen. Had a good laugh about Yeltsin standing on a tank during the Moscow coup of 1991. And saw the India and Brazil as nations so hopelessly mired in unspeakable poverty that – a mere 20 years ago – to speak of them as dominant competitors would have had others questioning your sanity

Technology cut us a big break from 1995 through the very beginning of the new millennium. The impact of ever-faster, ever-smaller, computing and the revolution of internet technology not only brought us nearly seven years of ramped up productivity, government budget surpluses and strong domestic balance sheets (private and public), but it further united the world. If the advent of global news services such as CNN contributed towards bringing down isolationist regimes, then they internet certainly brought down the last remaining barrier to global, open trade: immediate communication.

By the beginning of last decade the die was cast.

We faced the most intense “supply shock” since the domestic over-investment that preceded the Great Depression – we didn’t know it yet, but really should have foreseen it.

After all, we woke up to the new century with (only) about $25 trillion of total debt outstanding in the U.S., and both household and government debt had diminished significantly. We were doing well. Incomes had risen in both nominal and real terms in the second half of the 1990’s.

Then, within months, we saw the collapse of the (not debt-fueled) internet bubble in the equity markets and 18 months later the horrors of September 11th. And what did we do? We fell right back under the spell of the supply-side voodoo we had suffered the ill results of only a decade before. Instead of tightening our belts in time of war, and reindustrializing at globally competitive wages, we went shopping on credit.

A mere eight years later, we had more than doubled the level of total debt outstanding in the U.S. to more than $52 trillion and more or less impoverished our households/consumers. Wages stagnated while assets inflated. We consumed massively more than we were producing – a supply-side nightmare as we were beset by exogenous forces that hadn’t even factored into the supply side equation. The asset inflation crashed back to earth, the debt remains and deleveraging is quite painful.

America is an intellectually challenging place. So many people of so many different ethnicities, regional backgrounds and perspectives trying to coalesce around a common point of view, or even a plurality view. A substantial number not wanting to be bothered thinking at all beyond the immediate issues of family, friends, Facebook and financial survival.

Reaching consensus on big issues in the U.S. has therefore never been easy – but I would daresay it hasn’t been this challenged since the decades leading to the Civil War.

Despite all the evidence to the contrary, there are still quite a few people – at all levels of influence – who believe we are in the process of recovering from a cyclical decline.

We are not.

We are, rather, fully experiencing the dislocations arising from the integration of the “status quo-challenging” nations. And up to this point, our policies have predominantly been targeted towards recovery from a conventional disruption in the business cycle – rather than what really ails us.

Our leaders in academia and political economic thought are finally beginning to see thing more clearly, and are beginning to offer solutions addressed to the right set of problems.

Our private business sector has spent the last few years praying that what I am suggesting are the real problems, are not. But business leaders, for the most part, get it. They see it every day manifested in demand, relative pricing power and the ineffectiveness of policy that would typically help under different circumstances. They may put on a brave face, but their hiring, investment and pricing actions make clear their fears.

The media is flummoxed. A good number of media people have long thought something was amiss, but they get paid to report on the zeitgeist not to make news. They are slowing beginning to write and speak the words that needed to be understood by their readers and audiences.

Our political leaders, and the general population, are unfortunately still rather clueless. And it is only the political class, with the support of those who put them in office, who can turn the ship of government policy in a direction in which it might stand a chance at attacking the forces arrayed against our economic wellbeing – underemployment and over-indebtedness.

Government leaders and the general population not only lack an appreciation of or problems, but lately have been pooh-poohing the entire study of economics in favor of mythic totems, such as small government, American exceptionalism and isolationism.

There is a three part policy solution to what we face. Some of it is unpleasant, but all of it is necessary:

We must have large-scale, government-backed direct and indirect employment program to reutilize idle labor resources and add to domestic demand. We need this not only to reinvigorate the economy when the private sector won’t (and, given its metrics, shouldn’t), but to partially offset a continuing decline in aggregate nominal wage and salary incomes. Obviously, the world doesn’t need more “stuff” at the moment – but our national infrastructure is in disrepair and it would make us far more competitive to repair it.

We need to compel the private sector to undertake broad debt restructuring, particularly of household mortgage and other debt, but of commercial real estate debt as well. This is the very painful part, because it will result in major hits to capital that are already baked into mortgage and other loans but have yet to be recognized.

Finally, we must cease policy aimed at attempting to reflate the price side of the economy, as wages in current circumstances will not and cannot inflate with prices – there is simply too much domestic and global labor relative to demand. Policy must rather be oriented towards providing buffers to the slow recalibration of domestic wages to the point of being competitive globally. As a result. prices of goods and services, and asset values, will also recalibrate accordingly. Unit sales will thus recover even as pricing power it lost. Reasonable operating margins will be maintained, saving will be rewarded and investment temporarily curtailed.

This challenge of global integration really amounts to waiting out the growth in emerging market demand to offset some of the excess supply. In the interim, we must do our part to generate demand – but, please, not through more household borrowing or over-stimulation of the private sector. We need to generate demand through higher aggregate income – and that means putting our people back to work via the only entity left to provide additional employment.