Yellen lists four areas for research, but let’s look more closely at the first two groups of questions that she elevates.
The first is the influence of aggregate demand on aggregate supply. As Yellen notes, the traditional way of thinking about this relationship would be that demand, a short-run phenomenon, has no significant effect of aggregate supply, which determines long-run economic growth.
Demand is based on spending, which depends on income. Supply is based on investment, which is based on profit. and profit is based on sales. Sales constitute demand. The spending to saving ratio is much higher down the income curve.
Less affluent people spend more and save less out of necessity, their necessary expenditure being much higher than discretionary, which little to nothing left for saving. I was just reading that 70% of Americans have less than a #1000 dollar cushion!
Now what was so hard about that? Economists are just figuring this out — after Keynes explained it decades ago and Post Keynesians have elaborated? We are deep doo-doo.
Yellen's second point:
Yellen points to research that increasingly finds so called hysteresis effects in the macroeconomy. Hysteresis, a term borrowed from physics, is the idea that short-run shocks to the economy can alter its long-term trend. One example of hysteresis is workers who lose jobs in recessions and then aren’t drawn back into the labor market bur rather are permanently locked out, therefore increasing the long-run unemployment rate. Interesting new research argues that hysteresis may affect not just the labor supply but also the rate of productivity growth.If that is not a case for a job guarantee, I don't know what is.
Yellen poses important post-Great Recession macroeconomic questions