August 18, 2012
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.]
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