Aggregate demand is not attention-grabbing stuff. A decline in aggregate demand is, presumably, even less so. Inequality does little better. Decline in the share of wages - oh oh it's getting duller. Add the effects of economic globalisation, and it could well be all over for this post. Except they are at the roots of the Crisis.
In America where it all started, (and in US intellectual-poodle Brownlandbritain), the policy response to all of these was to attempt to meet their effects with freely and inappropriately available credit; which (not surprisingly to any market capitalist) instead of creating productive investment, created asset bubbles of remarkable size and pre-burst attractiveness. Not just once, but over and over again.
Economic globalisation and, to some degree technological change-induced productivity gains, produced a decline in the wage-share in advanced economies of ten full points - from 65% down to 55% of GDP (IMF). Which generated huge and growing levels of inequality, unacceptable falls in aggregate demand... .
This is the real root of the crisis, not its financial manifestation in 2007. And the answer to it should never have been bundling up liar loans granted to working and not working people inside better-looking loan packages, and spreading it all thinly about, eyes tight shut. And then beefing up your civilian control measures for the bubble-burst(s). This is the response of economic and political boobies, and inequality deniers. Without a shred of real moral or even political commitment to the intuitive political, decent-behaviour-in-life agendas of most citizens in advanced market-capitalist democracies.
So what should have been, and now must, be done?
First off all competition must be enhanced; thus raising employment, raising the share of wages without even having to raise wages, so that the gap between output and potential output narrows. One of the proper functions of government is to unleash competition. The sozialmarkt-Wirtschaft has this as a central tenet and it should have been, but was not, part of the New Labour agenda.
The burden of taxation must be reduced, particularly on wages, so as to raise the after-tax share of wages and enhance aggregate demand.
Participation in profits by employees, not just by shareholders and managers, must be promoted. The timid notion of stakeholding by employees under New Labour was diluted and redirected to other categories - suppliers, consumers, local administrations, the environment - insofar as it was not dropped all together.
Government expenditure must be switched from transfers to investment. Particularly public investment in infrastructures and research and development, including raising the population's life-skills.
Protectionism must be installed at the limits of state power. Our government should be protectionist when facing international competition made unfair by the export subsidies implicit in artificially devalued currencies; even convinced free-traders must respond with countervailing protectionism.
We must reject the pretence that there is global commonality of interest even while we accept increased global economic interaction.
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