Hooray for the supply side! German labour market and demand

There is excellent news: In Germany, the employment rate has risen from 65% in 2003 to 75% presently, reports The Economist magazine in their April 25 issue. I guess they do not know about demographics in Germany.

My supply-side friends will be happy to know it was labor-rule changes that helped Germany obtain higher employment rates, though it should not be forgotten that the ECB, as currently configured, essentially funnels demand to Germany also.

In the United States, there are 12 million beneficiaries collecting “disability” payments from either the Social Security Administration or the Veterans Administration, let alone other labor-thwarting disincentives. What Germany can do, the U.S. can also do, and better—if there is political will. But we need the demand-side to also grow, as it has in Germany.

Productivity

The present idea that Americans cannot more rapidly increase productivity, or output per hour worked, is one of the more peculiar ailments of modern economists. As pointed out by Marcus Nunes in this space recently, there was a record-setting surge in U.S. productivity in that long-ago era of…1997-2004.

In 10 years, Americans have lost their ability to innovate? And what has happened since 2004? Well, we had the Great Recession, and very tight money, and excess capacity in nearly every industry. It has been a tough environment in which to justify investment in plant and equipment. Output per hour tends to sag in slow growth.

The answer to the productivity question is more demand. Not “Build it, and they will come,” but rather, “Demand it, and they will build it.”

Defeatism

Economic historians know that after every serious economic event—such as a prolonged recession, or sustained inflation—there are observers who pronounce a “new norm.”  After the double-digit inflation of the 1970s, some observers have been waiting for a reprise ever since—for them, inflation is the new norm, whether in fact or fear.

The good news is that we need not fear inflation, demographics or lower productivity. There is much to gain by demand-side (print more money) and, yes, supply-side reforms.

 

*Read the original post here.