A Couple of Ignorant Questions About the Economy

What I don’t know about economics could fill several libraries (and probably does). So, being a layman, I’m free to ask some ignorant economic questions without shame.

I heard Robert Reich, on the This Week panel last Sunday, say that we are an economy “on steroids.” Just offhand, that seems scary. I’ve always understood that we take steroids (unless we’re athletes … and this economy in no way resembles a high-performing athlete) only as a last resort.

Yes, the stimulus was a last resort, saving us before we careened headlong over the precipice into another Great Depression. Thank God that we’re merely in a Great Recession. We hope.

I think what Reich means is that we’re only limping along because of federal stimulus money. That makes sense. As I understand it, the hope is that the stimulus will stimulate the magic of the marketplace into a recovery. Not to be too crude about it, but eventually — when the economy is restored to health — it will stimulate itself.

When that happy day arrives, jobs will be plentiful, a thrifty employed working class — but not too thrifty, because we also need it to spend — will save, savings provides investment, investment provides capital to create more jobs. Yada yada yada.  Magic.

There are a couple of problems with this happy scenario.

Many economists believe that unemployment will stay high for a long time, where a long time is many years, and they also believe that some jobs will never come back, because of that other magic: globalization. There is evidence that during this Great Recession, corporate earnings have held up pretty well, even as employment continues to plummet. Hm. That makes sense. Outsourcing helps the corporate bottom line, even as it shrinks the jobs market here.

So, without a healthy employment rate, where does the money come from for the economy to stimulate itself (the federal government can’t do it forever, both for political reasons and for practical economic reasons).

Hey, well, what about another bubble? We had the Tech bubble. Then we had the housing bubble, allowing us to use our homes like ATM machines. But those bubbles are done forever. Many jobs are gone forever. The federal government can’t keep stimulating the economy forever. I hear rumors that other bubbles are in the works, and that — in fact — Wall Street is trying to reflate the last one. But will that work, with all those bad loans still unresolved on the books?

Soon, apparently, the demand-side will be hard to sustain. What happens then?

Can we hang on until the magic happens?

Some of us can, it seems. What if the great mass of those who can’t hold on … upset the political applecart?

My biggest question, then, is this: If we go into a semi-permanent state of high-unemployment, with nearly bankrupt federal and state budgets, from where will come the demand side of our economy?

Who will have money to spend? Where will it come from?

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