Nonmonetary Problems: Diagnosing and Treating the Slow Recovery
Neel Kashkari

In addition to these important issues, there is another fundamental question that we are trying to understand: Why has the economic recovery been so slow?

Well, at least you are trying, and realized that it is a combination of factors.

There are two things that need to be looked at separately. 1. What factors caused the GFC? 2. Why aren’t we growing?

What Caused the GFC?

Reagan's tax cuts. What tax cuts do to the economy is what sugar does to a 7 year old. Spike and Crash. With a 70% top tax rate firms had no reason to pay extravagant salaries because it would just go to uncle sam. Now there is a bidding up of talent that leads to over paid employees at the top and cuts in reinvestment and salaries at the bottom to balance out. The initial extra cash creates a spike but has long term destabilizing effects. Less reinvestment leads to less growth down the line and decreased real wages at the bottom, where there is less saving, leads to less purchasing and less growth. The payment in stock options hasn’t helped. Wage share has been on a steady decline since the 80's.

What took so long to hurt the economy? Debt. There were huge spikes in rate of private sector debt growth after the 1980’s. In the early 90’s people were getting skeptical about their debt and not taking out much more until Bill Clinton came along with GLBA and CFMA enabling the financial sector to grow out of control and offer more convoluted debt products to people and businesses. Which gave us another spike in debt fueled growth until the GFC.

Richard C. Koo does an excellent job explaining the scarring effects of debt during a crisis on the private sector in Japan.

Why aren’t we growing?

The scarring effects of debt are a big part. The financial sector keeps growing while adding nothing of value to the economy because its where the best and brightest go to make the big bucks trapping the productive part of the economy in debt while avoiding any consequences of bad behavior.

From my own personal experience; I took out $100k in federal and private student loans to get my Engineering degree from The University of Minnesota. When I graduated in 2008 it took me 4 miserable depressing years to get a job in my field. By the time I did get one I had dug myself into another $20k of credit card debt to afford my loan payments. When I finally did get a job I was making $15k a year less then I was expecting to when I signed up for the loans. 65% of my income went directly to making minimum payments on my debt. The Income based repayment options would have had me paying more for Federal loans then the graduated extended plan. I will never be able to afford marriage so I don’t even bother dating. A house, kids, and retirement are pipe dreams. I get so depressed about my financial situation it effects my work and I would rather jump off a bridge then go through the process of applying for jobs again.

So what should you do? increase the top tax rate on income to discourage wage increases for people that don’t need it. Close the carried interest loophole. Write off a significant amount of debt. None of which will happen because this economy works for some people and those people bought Clinton and Obama. Sanders losing the primary was this country losing its last chance at egalitarianism. Like always, Laissez-Faire leads to either egalitarianism or fascism.

The Fed could, and should, buy and write off some debt. It won’t though because you think that public sector debt and the deficit are bad things. If running a surplus is such a good idea how come every time any country that runs one without a trade surplus crashes their economy? Running a deficit is a good thing for the economy. The only thing bond purchases do is maintain the interest rate. The Philips curve and NAIRU are so clearly fiction at this point not targeting full employment is morally bankrupt and fiscally irresponsible. If you want a buffer stock have the fed finance an employer of last resort program. If people were sure they could have employment as long as they were ready willing and able 90% of the racism and xenophobia would disappear. People would also be confident that they would have an income source and be more inclined to spend. Business would expect customers to be able to afford their products and could expand.

None of that will happen though, because we live in an oligarchy that is content creating poverty as long as the upper class can make that extra dollar and propaganda has effectively brainwashed the electorate into thinking that the federal government which can print its own money is just like a family and needs to finance it self the same way.