For sure it over indebtedness from housing by which 30 to 50 year olds transferred to much wealth to certain older people who in turn transferred it to even older people who are spending it on healthcare in their retirement and offsetting their investment losses in the Great Recession.
Everyone lost by there being too much credit available for investment in housing and reducing the resulting debt is going to be a continuing drag on the economy. Instead of people in their 30's spending money on consumption and services, they are directing spare cash to debt reduction.
But it is not just mortgages, it is also student loans which pay for the cost of providing an education via increases in debt. Now, I know that for most of these people, the outstanding debt burden at graduation relative to income in that 1st job is not too much different then mine was when I graduated from business school.
What is different is the extensiveness and breadth of this student loan debt. Millions of graduates (20 to 30 year old's) now have debt and when you add that to the mortgage debt, millions of people are dedicating their financial life to debt repayment.
Previously most of the debt was concentrated in those who got professional degrees. People who got professional degrees could expect rapid increases in income 20-30 years ago. They used that increased income to repay the debt and then spend/save/invest. And the blue collar workers and college graduates who did not have debt had money from their jobs to spend/save/invest.
Now, the factory jobs are reduced in number because of globalization, the jobs that people with college degrees used to be able to attain now require Master's, which in turn requires debt. And many of these jobs today do not offer the same prospects for wage increases over time. So it will take longer to repay the debt and move into the spend/save/invest stage. And there are no defined benefit pension schemes anymore, so these people will also save more (hopefully) for their retirement. In short, they will not be adding to aggregate demand in the same way the baby boomers did.
My niece is going to attend one of the best programs in environmental management and it is going to cost her $50,000 (Tuition, room, books, food, health insurance, utilities) for the 1st year of a 2 year program. Hopefully, she will get a job paying her $35,000 or $40,000 a year when she is done.
$100,000 investment to get a job paying $40,000 a year. I know she is following her passion but something seems terribly wrong.
Why do so many jobs requires Master's degrees? What happened to on-the-job training? Why aren't colleges controlling costs better?
Speculating on an easy summary of those issues is probably a book. The only point I wanted to make is that no amount of tax cuts is going to create the aggregate demand necessary to create employment if the money is simply going to debt repayment. You need spending on useful things by the government (infrastructure) to increase aggregate demand, generate economic growth and increase the total amount of employment. That will increase wages and make the repayment of all this debt easier.
Trickle down economics does not work in a timely manner because the wealthy are neither numerous enough nor does their spending in the aggregate increase economic growth sufficiently to create a shortage of labor.
We are in for a very long period of slow growth due to inadequate aggregate demand.
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