THE MATERIAL WORLD--America's Exhausted Growth Paradigm (Thomas Palley)

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More fundamentally, it is unclear how growth can be restored.
Consumers won't be able to borrow their way out of this recession
as they have the past couple. Lower interest rates are likely to
be far less effective than before, with their effect similar to
pushing on a slack string. Previously households had unused
access to credit, which provided a launching pad for recovery.
Now many are in debt to the hilt, and banks
are far less willing to lend to risky borrowers anyway.

Mortgage refinancing is also likely to have weaker effects. First, the
pool of high-interest-rate mortgages has largely been refinanced in
prior recessions, leaving fewer mortgages worth refinancing. Second,
falling house prices will make banks less willing to refinance existing
mortgages, which may exceed house values.

The bottom line is that the post-1980 business cycle, which has relied
on a combination of asset price inflation and persistent increases in
borrowing, appears exhausted. Not only does the economy stand to lose
the economic octane that those processes provided, it could fall into a
downward spiral if asset prices decline and households shun further
debt. Under these conditions, the Federal Reserve is likely to be able
to do little to jump-start growth.

We need a new economic paradigm that restores the link between wages and
productivity growth, and again makes wage income the principal engine of
demand. Remedying the generation-long rupture of the wage-productivity
link will require the restoration of policies aimed at full employment.
Full employment will give workers bargaining power. That will encourage
wage increases, which will fuel spending, productivity, and investment.
Achieving full employment will require coordination of monetary, fiscal,
and exchange-rate policies toward that end.