September 14, 2012

Demand-based recession, quantitative easing, and income inequality

Jared Bernstein has got my back.  His article discusses what I hit upon yesterday about lack of demand being a huge stalling factor for recovery.

It also causes me to be more pessimistic that the Fed's quantitative easing actions will work.  As I commented on Aegis of Cognition's post yesterday, the Fed's action will at least take a contingency plan out of Congress's back pocket and force their hand if they really wish to increase jobs or avoid sequestration.

The income inequality problem in America must be addressed to avoid similar recessions in the future.  As productivity has increased, the majority of profits have gone to the company executives, while the laborers have seen very little growth in wages; in many places, barely keeping pace with inflation.  This is another case of short-term profit-seekers shooting themselves in the foot.  In order to keep demand up for your and others' products, the laborers must share greatly in the profit growth, as they are the main engine for demand.  Productivity can increase by 100% every day, but if the demand does not increase at the same rate, the productivity gains have been wasted.  Unfortunately, the executives have yet to feel this pain, as they are benefiting from demand overseas.

In an ideal situation, these companies would stop chasing demand for short-term profits, and broaden the demand pool.  By keeping more jobs in America, increasing their wages, and continuing to sell to foreign markets, they would have a larger, more stable base of customers.

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