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PeakTrader:

There’s been some destruction of potential output, e.g. early forced retirements, easier to go on disability, unemployment benefit extensions, and other social programs.

Yet, there are still over 20 million Americans unemployed or underemployed. Job growth has increased a little faster than population growth and replaced some of the lost jobs from the recession. However, we haven’t even dug out of the last recession yet. We’re in a 21st century deep depression. Dollar hamburgers and dollar stores are the new soup lines.

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John, when the country is at or near full employment, or after a mild recession, job growth doesn’t have to be strong to reach full employment (also, full employment is 5% unemployment rate, because of frictional unemployment).

Given high household debt, millions of Americans want to work harder and longer, which adds to future growth. However, either Americans are being given compensation by the government for not working or cannot find decent jobs (i.e. have higher reservation wages, and when you lose a good job, in a severe recession, you may only be able to find a much lower paying job).

In the Reagan recovery, which was a strong recovery after a severe recession, some months created over one million jobs, and that was when the labor force was much smaller than today.

The following chart shows the huge output gap over three generations, since 1960:

http://www.advisorperspectives.com/dshort/charts/indicators/GDP-per-capita-overview.html?Real-GDP-per-capita-since-1960-log.gif

The huge downshift in real growth happened suddenly rather than slowly.

And, from the UCLA Anderson forecast last year:

“U.S. real GDP is now 15.4 percent below the normal 3 percent trend. To get back to that 3 percent trend, we would need 4 percent growth for 15 years, 5 percent growth for eight years, or 6 percent growth for five years, not the disappointing twos and threes we have been racking up recently, which are moving us farther from trend, not closer to it. It’s not a recovery. It’s not even normal growth. It’s bad.”

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Edward, you’d have to be a poor economist just to look at past data and ignore the trends in the data.

When more jobs are created, the labor force participation rate will rise and the unemployment rate will rise, because many discouraged Americans out of the labor force will come back in.

And, there will always be frictional unemployment. So, full employment will always be around the 5% unemployment rate.

What’s sad is Americans were willing to work harder and longer, to pay-down high levels of household debt and postpone retirements, if they had the opportunity, which would add to future economic growth.

What has changed over the past few years is some destruction of potential output. The output gap can be closed either by raising actual output or destroying potential output.

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Demographics, or the aging of the Baby-Boomers, destroys some potential output. However, the destruction was sharp and sudden, over just a few years.

I suspect, those Baby-Boomers, who live longer than their parents, want to work longer to pay for the overconsumption (low prices and interest rates induced demand), and strengthen their (household) balance sheets heading into retirement.

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The Baby-Boomers who kept their (good) jobs in the recession are working longer. However, many Baby-Boomers were forced out of the labor force, one way or another, while many young workers are waiting for older workers to retire for their jobs.

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Marko, it should be noted, since 1980, U.S. living standards improved much faster than U.S. GDP growth. For example, U.S. trade deficits became increasingly larger from 1980 to 2006, reaching $800 billion a year (or 6% of U.S. GDP). I stated before:

In the Keynesian consumption function (or identity), Y = C + I + G + NX; trade deficits, or negative net exports (NX), subtract from GDP growth, because consumption (C) is overstated.

For example, in a $10 trillion economy, a 5% one year increase in GDP expands the economy by $500 billion. Also, if imports are greater than exports, e.g. $1 trillion of imports and $600 billion of exports, then net imports are $400 billion in one year, which adds to our trading partners GDPs and subtracts from U.S. GDP. However, the total added to the U.S. economy is $900 billion ($500 billion from GDP growth in one year and $400 billion from net imports in one year), because the U.S. is consuming more than producing in the global economy.

It should be noted, with trade deficits, the U.S. exchanges dollars for foreign goods and foreigners exchange those dollars for U.S. Treasury bonds. However, the U.S. is able to maintain trade deficits in the long-run, mostly, because foreigners lose through changes or differences in inflation, interest rates, and currency exchange rates. For example, over the past few decades, the Japanese yen appreciated from 360 to 100 per dollar, which means Japan received fewer and fewer yen per dollar.

Also, to a lesser extent, many of those foreigners moved to the U.S., and foreign firms began producing in the U.S., because it’s better to use those dollars than exchange them for their currencies. Moreover, those foreigners can raise their standards of living by selling their assets, exchanging their currencies for dollars, and moving to the U.S., or attending a U.S. college, for example. Furthermore, tourism (by foreigners in the U.S.) adds to U.S. exports.

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Also, domestic growth cannot expand beyond potential output for a long period of time. However, the U.S. had one of the greatest eras of prosperity at the height of the Information Revolution, from 1982-07, because the U.S. economy moved much closer towards optimization, producing and consuming more output, in the global economy, with fewer inputs. The only way to move from one economic revolution into the next is through efficiencies.

Since the U.S. became more of an open economy around 1980, it became a Black Hole in the global economy, attracting imports and capital, and even attracting the owners of that capital themselves. Unfortunately, the U.S. federal government became a Black Hole in the U.S. economy, spending and squandering too much and building-up massive debt rather than refunding enough dollars for U.S. consumers in the form of tax cuts to continue the virtuous U.S. cycle of consumption-investment.

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The virtuous U.S. cycle of consumption-investment would’ve eventually slowed anyway, because of diminished marginal utility (or the opposite of pent-up demand), along with the aging of the Baby-Boomers. However, tax cuts would’ve lessened “deleveraging” and strengthened household balance sheets, which would’ve resulted in a milder recession or stronger recovery.

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In a competitive market, where firms rise and fall, succeed and fail, why would a firm give away “stuff,” unless it benefits the firm (e.g. lowering other production costs or raising productivity paying its workers more).

And, currently, there are massive idle resources, including capital and labor. It’s ridiculous to blame firms for those idle resources and for making rational choices.

If you want a socialist system, then everyone can make rational choices based on incentives and disincentives, to reduce everyone’s standard of living.

Using fewer inputs to produce more output free-up limited resources to allow the economy to expand.

Raising the minimum wage to $15 an hour would correct a market failure, level the playing field, reduce other production costs, and raise productivity.

Note, raising the minimum wage to $15 an hour raises hourly wages for every worker earning $7.25 to $15, and will likely raise wages somewhat for workers up to $25 an hour.

Income inequality is reduced, because real wages will rise more for low income workers than fall for high income workers, to increase low-wage purchasing power, and provide a net real income gain.

Also, the positive income and multiplier effects may be stronger than the negative employment effect, up to $15 an hour.

So, efficiencies in production increase and demand increases, which may be strong enough, even with the excessive anti-growth policies imposed by government, to generate a self-sustaining cycle of consumption-employment.

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It should be noted, it’s a U.S.-centric world. The U.S. has been the main engine of growth pulling the rest of the world’s economies.

When the U.S. sneezes the rest of the world catches a cold. The U.S. is the only country, or group of countries, strong enough to expand with huge negative net exports.

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