Karl, I find your analysis interesting. However, lower capacity and lower utilization are the end result of collapsing demand. From 2000 – 2010 the U.S. has experienced two major economic (credit) bubbles. The first, was driven by the stock market and had a minor impact on the economy. The second was driven by real estate. This had a major impact on the economy. When the typical homeowner’s major wealth collapses, a major spending collapse follows.
As I understand it, the collapse in demand followed on the heels of the collapse of the collective value of real estate. As the commenter said, all that wealth just went up in smoke. People want to buy stuff, whether it's food, or little electronic gadgets, or a new lawnmower, or some trinket for the significant other. Demand is low not because people don't want to buy stuff. Demand is low because people don't have the money to buy stuff.
The various proposed solutions have been ineffective because the influx of money has not been adequate to replace the combined lost wealth from the collapse of the value of real estate. With the sudden concern over federal spending adding to the burden of decreased demand, we have the specter of what little stimulated demand may have resulted from earlier increased federal spending drying up. That is why Karl's rant about his frustration over questions such as economic stimulus and fiscal versus monetary solutions is misplaced. The whole idea behind the stimulus, as well as Pres. Obama's proposition to spend $50 billion on infrastructure projects, is to put money in people's pockets so they will say, "Hey, now I can afford that new toy for my child/replace my old car/fix the roof . . ." and people who make toys and cars and do construction will have jobs. Of course, both the initial stimulus - $800 billion - and the additional $50 billion are far too small to replace the wealth wiped out in the collapse of the mortgage bubble. Yet, the notion itself is sound.
That is why many are complaining that the sudden rise in concern over fiscal policy by Republicans (and some Democrats) is so frustrating. While it may be true that our operating budget is in the red for now, since the goal of this spending is to get people to spend stuff to put other people to work making stuff, thus getting paid, thus paying taxes, this isn't a structural deficit like the ones we had in the 1980's or under George W. Bush. Rather, they are temporary shortfalls of federal income to be offset (so goes the proposition) once the economy starts to move forward again.
So, what Karl calls "second order arguments" are central to understanding how we deal with the first order issue of idle workers unwed to idle productive capacity.
