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Home Publications Blogs Beat the Press Doctors Remove Bullet from Victim's Head, Seek to Determine Cause of Death: David Leonhardt Edition

Doctors Remove Bullet from Victim's Head, Seek to Determine Cause of Death: David Leonhardt Edition

Saturday, 18 August 2012 07:19

David Leonhardt poses the bizarre question in the headline of a blog post today: "Is Simple Demography Behind Weak Economy?"

There is a simple answer to this simple question, "no."

The basic story, which is well-known to those who read the monthly employment numbers, or who are unemployed themselves, is a lack of jobs, not a lack of workers. Yes, population growth and therefore labor force growth has slowed. This would imply a lower growth rate of potential GDP. That means that once we have absorbed all the excess labor and the unemployment rate is back down to the 4-5 percent range, we would expect somewhat slower growth going forward.

However, there is no story that passes the laugh test that says that slower population growth explains our inability to employ the existing population. (Let's see, smaller supply of workers, therefore smaller demand for workers. I must have missed that lecture in my econ classes.)

The annoying part of this story is that it is really hard to understand the mystery that Leonhardt is trying to explain. The housing bubble was generating around $1.2 trillion in demand that disappeared when it collapsed. Half of this was in residential construction and half was in consumption driven by bubble generated home equity. (You can throw in another $100-$200 billion in state and local spending supported by housing bubble generated tax revenue and also the bubble in non-residential real estate.)

This demand is gone now. It cannot be replaced by magic. The budget deficit has filled part of the gap, but there is no mechanism in the private sector that allows it to easily fill this gap in demand. (Can Leonhardt or anyone else identify the missing mechanism?)

In short, this is an effort to create a mystery where there is none. It is annoying because it distracts from serious solutions (spend money, stupid) and it also helps to absolve the dingbats who wrecked the economy of their guilt. The people who failed to see the housing bubble should all be thrown out on their rears and forced to look for work. They messed up as badly as they possibly could and do not deserve to continue to get 6-figure salaries at a time when so many people are suffering from their ungodly incompetence. 

[Typos corrected 4:30 P.M. August 19.] 

Comments (3)Add Comment
written by fuller schmidt, August 18, 2012 7:54
Sadly human culture is still magic based. To me the biggest magic tricks currently are that patronage and lobbying can't be done away with, and that taxes can't be raised to pay down the debt.
To me ...
written by David, August 18, 2012 11:27
... the biggest magic trivk is that Congress can't find the will for a big enough stimulus plan.

You know how they put out a big fire on an oil well? With a much bigger fire/explosion. But magic wins out over physics with these Harvard and Chicago bozos.
written by RRN, August 19, 2012 12:32
Please fix typos. Words are left out and misspelled.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.