An overly-indebted private sector is not spending as it should as it pays down debt and worries about the future. Corporations are sitting on this savings rather than investing it, not because of a bad relationship with government but because they worry about the solvency of their customers and face a shortfall in demand for their goods.
Richard Koo explained this situation well when he discussed balance sheet recessions.
GDP = C + I + G + NX
With the C and I engines of GDP cavitating, G has to step up. Or we bring the jobs home to reduce a negative NX with a ban on offshoring and requirement for a 10 year plan to bring home the jobs.
The key is eliminating the private debt albatross. To get consumers spending, let's write down their debt. The Fed can print money or the Federal government can borrow money at very low rates to pay down $1 trillion in student loans and $3 trillion in mortgage debt.
Some wage driven inflation would help pay off debt in more plentiful dollars, as we did after WW2. If nominal wages are going up but debt is fixed, that is a good thing.
Removing the cap on the payroll tax should cover the Social Security shortfall; we can also make some minor retirement age and cost of living adjustments.
Letting the Bush income tax cuts expire for the wealthy now and others later would return us to Clinton tax rates, when the economy was fine.
Yes, some tax expenditure reduction is a good idea, provided it is done progressively.
Medicare is the big long-term concern and we'll need to go after the dozen or so cost drivers of private healthcare costs.
But most importantly, in the short-run, government should step up demand and debt reduction. Infrastructure, clean energy, education reimbursement, etc.
Globalization has benefitted low-wage countries and the elite at the expense of the middle and lower classes in high wage countries.
However, this more complex message is tough to get past the "free trade is good" nonsense we've been fed over the past 30 years.
Time to start rolling-back globalization. It finally collapsed the U.S. economy, as we now have a $650 billion goods trade deficit and can barely grow with even a $1 trillion annual national debt increase.
Free trade is great for the low-wage partner but lousy for the high wage partner, which sees its jobs go overseas and wages stagnate.
China and others should be paying quite a bit of money to the U.S. for fueling their economic growth with our imports.
How long can a country sustain a $650 billion goods trade deficit like the U.S. has? It is no coincidence that the trade deficit peaked relative to GDP around the same time as the housing bubble, as Paul Krugman explained here:
Well thought out, thank you. I wonder what it takes to convince folks to write down debt and print money to offset the hit to the banks rather than delay this drama further.
We have a debt crisis...ok, write down the debt!
For example, if government bonds are written down in the struggling countries by say 30-60%, and the ECB prints the money necessary to shore up the banks by allowing them to borrow at nearly 0% or by outright paying off some of their obligations, then why does this have to become a huge crisis?
Sure, the Euro will be devalued, but these countries are insolvent. Their people (in the case of private debt bubbles later transferred to sovereign debt) or their leaders (in the case of Greece) wrote checks their economies couldn't cash.
Plus, let's get everyone on a minimum retirement age of 67 and go from there. For those say under 40, a Social Security-like system across the entire Eurozone should be established in place of public pensions.