The Fundamental Asymmetry

At the micro-level, there are incentives to increase productivity and decrease unit labor costs, paying workers less for each unit of output. But the costs of this -- decreased incomes to purchase inventory, are spread around. The only "incentive" that the market has to offer is an overall decline in sales in the form of a demand-led recession. There is no individual incentive to raise unit labor costs.

With the introduction of debt-financing, if accompanied by falling interest rates, even that asymmetrical incentive can be delayed, ushering in long booms of high profits, low inflation (since unit labor costs are low), and a significant deterioration in wages and an explosion in household borrowing. The main mechanism of household borrowing is for housing, and to a lesser degree, education -- both things that seem like assets but do not have a directly observable return. Once borrowing for these ends, the economy finds itself in a free-fall as businesses can no longer clear inventory.

If government stimulus spending is oriented towards purchasing inventory -- being in effect the consumer of last resort, then the key issue -- low wages -- will not be addressed and the result can be increasing unemployment even as total sales increase. If government spending is oriented towards boosting wages, either with a payroll tax holiday or directly employing the unemployed at high wages, then unit labor costs can be raised and workers can get back into a situation in which inventory clears without the need for households to take on more debt.