Well, that was a letdown!
A lot of observers expected Federal Reserve Chairman Ben Bernanke to announce anther round of "quantitative easing" –QE3 – at the Fed's annual Jackson Hole conference. He didn't, and in combination with his previous indication that the Fed would keep interest rates at near-zero levels for the next two years, he passed the ball back to the politicians.
While I’m not sure more Fed easing would help much right now, I think that if underlying demand were stronger, I could help a lot. In other words, fiscal and monetary stimuli are partners right, but there’s a sequencing: first, fiscal needs to wake up the demand side of the economy, then easing could help amplify the impact of that demand.
Unfortunately, if the Fed is reluctant to ease now, they’d be even more so if some growth actually showed up on the scene.
The acronym YOYO occurs to me: "You're on your own." In Southern California, this means that we're going to have to grow our way out of 12 percent unemployment. Given the greatly reduced appetite for risk in the economy and our dire exposure to the housing downturn, it's going to be almost impossible without a government solution – aggressive Keynesian stimulus of the kind that we might kinda sorta get from Obama's jobs plan, but that will get the Republican opposition screaming about excessive spending and the growth of government.
Throughout our history, and that of other economies, while we were more productive, we also created more demand for goods, services, projects, trips, endeavors, energy, public infrastructure, moonshots, schools, music, knowledge…you name it. That was the intervening variable that soaked up, if you will, the faster productivity growth, and enabled us to keep adding jobs, even as we could produce more output per hour.
But since the 2000s...the US economy simply hasn’t been creating enough demand to absorb productivity’s growth. That been particularly acute and evident in the recession, of course, but it predates the downturn, especially, though not exclusively, for prime-age men.
And here is the teaser. We can do something about this. We can surely do something in the short run, as I hope and believe we’ll hear from President Obama in early September. But we can also do something about it in the longer term, if we have the will.
Demand is everything. And unless we subsidize it in California, the unemployment rate isn't likely to fall back to pre-recession levels.