Budget cuts and pain sharing

Catherine Rampell of The New York Times delivers a gloomy prediction:

If the economy falls back into recession, as many economists are now warning, the bloodletting could be a lot more painful than the last time around.

Given the tumult of the Great Recession, this may be hard to believe. But the economy is much weaker than it was at the outset of the last recession in December 2007, with most major measures of economic health — including jobs, incomes, output and industrial production — worse today than they were back then. And growth has been so weak that almost no ground has been recouped, even though a recovery technically started in June 2009.

After reciting the kinds of pain a demand constrained economy can impose on a people, Rampell goes on to note:

There is at least one factor, though, that could make a second downturn feel milder than the first: corporate profits. Corporate profits are at record highs and, adjusted for inflation, were 22 percent greater in the first quarter of this year than they were in the last quarter of 2007.

Nervous about the future of the economy, corporations are reluctant to make big investments like hiring. As a result, they are sitting on a lot of cash.

While this may not be much comfort to the nation’s 13.9 million unemployed workers, it may be to their employed counterparts.

Do you find it hopeful knowing that America’s corporations are sitting on a lot of cash, money they might use to retain part of their labor force? I do not. Eventually, the American economy will need to grow if it is to master the unemployment and private debt problems. Growth, however welcomed it would be, should not be expected from a stagnating demand constrained economy during a time of politically imposed austerity.

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