It Is the Aggregate Demand, Stupid

Paul Krugman:

It's Demand, Stupid: I’ve said this before, but Catherine Rampell has a very nice chart making the point: if you ask businesses — as opposed to their lobbyists — what their problem is, you find no hint of the stories the usual suspects are telling you about government interference, political uncertainty, etc.. Businesses aren’t hiring because of poor sales, period, end of story. And the best thing government could do to help business would be to spend more, increasing demand. The fact that it’s not going to happen doesn’t change the fact that it’s the simple truth.

And Karl Smith marvels at the trained incapacity of Arnold Kling:

The GDP Factory and the Small Business Survey: There are a lot of smart and clever things that can be said about patterns of sustainable specialization and trade. Arnold being clever and smart says many of them. However, the important question, the only question at the end of the day, is whether or not those smart things accord with cold physical reality.... Unemployment rises when small businesses think sales are the biggest problem and fall when they think everything else is a big problem. That is, of all the detriments to developing patterns of sustainable specialization and trade – and hence driving down unemployment – the ease at which businesses can sell stuff eats up most of the variance.

There are lots of clever ideas but the one that seems to accord with the data is pretty simple: business hire more workers when sales are good. They don’t when sales are bad.