More “Lack of Demand” Nonsense

As the nation laments the dim prospects for its labor market on this Labor Day, we see another example of how the fundamental problem behind the bleak jobs picture fails to be understood, this story by Zachary Roth at The Lookout regurgitating what passes for conventional wisdom these days when it comes to root causes, citing a lack of consumer demand (irrespective of how the prior demand levels were attained) and providing more evidence that conventional wisdom is often wrong.

Right now, what’s holding back the economy is a lack of demand, in the form of consumer spending. And that lack of demand stems largely from the enormous loss of housing wealth that occurred in recent years. Until the housing sector picks up, the economy as a whole will struggle. And a successful mortgage modification program could have helped quite a lot.

But there’s something else worth keeping in mind: Economic shocks like the one we went through with the housing bust and the financial crisis take a long time to recover from. In a paper written last year for the Federal Reserve Bank of Kansas City, the economists Carmen and Vincent Reinhart, experts on the history of such crises, concluded that the effects typically linger for around a decade. “Income growth tends to slow and unemployment remains elevated for a very long time after a severe shock,” they wrote, predicting “a lengthy period of retrenchment.”

Until you start hearing policy makers and economics writers say, “Much of the economic growth we’ve seen in recent decades has been due to the unsustainable rise in asset prices and an unhealthy increase in debt at all levels – government, corporate, and personal. We must acknowledge these as the root causes and restructure the economy and financial markets accordingly before we can move forward in a meaningful way”, we’re not likely to make much progress in creating jobs or restoring the once robust levels of economic growth the U.S. has become accustomed to, if that’s even possible.