Recession Is Over; Jobs Aren't Trickling Down [1] reads the headline of the David Altman article. The graphs below [2] begin to give some insight into what may be happening. As productivity has been increasing payrolls have been decreasing, with the resulting demand not keeping up with productivity. Fewer people are needed to meet the demand and inflation is negligible. Unemployment is increasing. A vicious cycle ensues.

Therefore the problem the country is facing is that money from the productivity gains is not being used to fuel growth in GDP due to a lack of demand. The government’s response is

1.      increased defense spending;

2.      massive tax relief for the rich;

3.      low interest rates on loans; and

4.      high deficit spending.

1: Increased defense department spending is only having a modest effect keeping the economy from getting even worse. Massive spending to create stable long term countries out of Afghanistan and Iraq could be of great benefit to our economy, particularly if a large portion of that spending went to U.S. citizens. Attempting to continue rebuilding those countries on the cheap has little or no benefit. [3]

2: The massive tax relief for the rich is likely to have zero or negative impact. There is no need for the type of capital investment that such a tax cut would spur. Under current conditions the country has too much capacity. Further complicating the issue is that increased production capacity is likely to be built in foreign countries where operations are more cost effective.

3: Our historic low interest rates are keeping the housing industry from collapse. This includes both resale and new construction. Because rates cannot be made much lower, [4] [5] there is no longer much stimulation of the economy that might accrue from a further decrease in interest rates. This is primarily due to the lack of places to invest the money, again due to the lack of demand. The United States will soon be, if it is not already, in the same position as Japan has been for the past decade. But a good effect of low rates is to keep the deficit from ballooning even further.

4: The last policy - high deficit spending - is hurting the long term prospects of the economy in ways that can hardly be imagined. First, for reasons already stated the deficit is having no immediate benefit. Second, the deficit is worse than stated. There is roughly a trillion dollars owed by one part of the federal government to another. This is because social security has been running a huge surplus since the days of President Reagan. [6] Finally, the deficit is being used to cover day to day operations rather than for one-time charges that no longer accumulate. Once this is understood by those from whom the United States borrows money, the flow will start to drop and interest rates will have to be increased, making the problem worse.

The question becomes what policies should the federal government adopt to work our way out of this situation? The answer is to stimulate demand. The way to stimulate demand is complex and will be the subject of another article.