How structurally sound is the real economy?

Reading this Yglesias post about civilian-to-military brain drain reminded me of a question that’s been nagging me for a while: once we fix all these dumb inefficiencies like government overinvestment in defense, will there be productive work out there to replace the jobs lost? Obviously the US economy has a lot of cyclical unemployment right now, but hopefully someday relatively soon things will be better on that front. But it of course won’t be good either if we make the existing economy more efficient without firms stepping in and actually growing it, creating new value. And with real wages trending flat at best, it’s hard for me to see that growth happening.

A similar case is that of the incarcerated population – in a sense, America takes a large number of people (mostly men) who would most likely be otherwise unemployed and sends them to prison instead of giving them proper social services and job training.  (And from what I recall they don’t show up in unemployment figures either.) We should have more enlightened policies on minor crimes, but then what? Will there be jobs for these people to pull them out of the hole they’re in?

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