Tyler asks,

If aggregate demand is so low, why are profits so high?

Garett Jones would say that labor is mostly overhead, and firms have shed a lot of overhead. They are sacrificing growth in future capabilities in order to shore up current profits. Minsky would say that they are shoring up current profits because we are at the “hedge finance” stage of the business cycle, in which firms are trying to reduce debt in order to be able to finance operations internally.

I know that some time around three months ago I predicted rapid growth in hiring, based on the improvement in profits. I still think we will get rapid hiring growth at some point.

In my view, the biggest problem with the economy right now is that everyone knows that the housing market and the mortgage market are artificial. The mortgage market is being propped by by Fannie, Freddie FHA, and the Fed. The housing market is being held in a state of suspended animation by government attempts to stave off foreclosures. This policy is keeping the foreclosure crisis in front of us rather than putting it behind us.

If it had been up to me, I would have put in place policies to accelerate getting people out of houses where they don’t belong. I would have given subsidies to underwater borrowers to move, and I would have given them bonuses for leaving houses in good condition. I think that if we had a housing market with a reasonable relationship between where people live and what they can afford, then the economy would be humming by now.