Hearing echoes of effective demand
I see two articles this morning about how increasing inequality will lead to slower growth.
- How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide, by S&P Capital IQ.
- Comment on first article by ABC news, Wealth Gap is slowing US economic growth.
The articles are basically describing how an effective demand can limit the economic potential of output… something I have been seeing since early last year. Many know that I write about effective demand here on Angry Bear, but many may not know that I am the only economist writing about effective demand because I have a model for it and no one else seems to. Keynes wrote about it, but he did not nail down a model for it either.
But effective demand is the missing link in understanding macroeconomics.
The ABC news article points to education as the solution, but they do not understand effective demand. Productivity is already stalled against the effective demand limit, so increasing productivity with education in order to obtain higher incomes is futile. There is no guarantee that wages will rise. There still seems to be more internal pressure within firms to push real wages down further, which would neutralize any gains from education.
Barry Ritholtz asks today if the bull market is over. My reply is YES… Real GDP is finally reaching its effective demand limit by the end of the year, around $16.1 trillion (2009 $$). Now the market is topping out. And if you watch the video at Barry’s post, Christopher Verrone says something very important about the lack of euphoria in the market. Investors around the world have one foot out the door. People see the market topping out…
The signs are in front of our noses. The effective demand limit is biting down.
What should the ordinary worker expect once the market tops and effective demand bites down?
We’ve been living with supply side economics for 30 years along with zero economic growth (at least for 90%+ of us.) It’s good to hear that demand side economics is getting some kind of hearing.
Sd,
That is an important question… some thoughts…
First, capital will start to protect itself early. While labor may start over-extending themselves thinking the good times will continue. Labor becomes more vulnerable, especially if monetary policy tightens, but I think the Fed cannot react fast enough.
Second, there should be more wage gains, but there is still pressure to lower labor share even more.
Third, labor has a problem. We will go into the next contraction with low labor share, while capital has already filled its pockets to the brim.
Fourth, will expect the economy to keep growing, whereas they should expect the business cycle to end soon and protect themselves.
Fifth, labor should expect to fight even harder for wage gains, but we can expect labor to continue being powerless.
Sixth, the ordinary worker will not expect the business cycle to stop so suddenly when they are just starting to get back on their feet.
Seventh, We should expect a revolution of sorts by the young, if only they can gather their strength and maintain focus. Yet possibly years of video games and music videos have debilitated their real-life focus. But we shall see.
Re: your seventh bullet point…
Nick Hanauer is right… The Pitchforks Are Coming.
lambert
word is getting around. my daughter told me ‘some economists are saying “how can you have a growing economy if the people don’t have enough money to buy anything?” who knew?’
i am assuming you are saying all of this with the kind of detail and precision that compels attention. but given who runs the attention machine, you may still not get heard.
it’s just possible the powers that be don’t care about growing the economy. they’ve got theirs, and they think they know how to keep it whether “the economy” grows or not. hell, it worked for five thousand years in egypt, and most of 2 thousand years in europe.
HI Kevin,
I like Nick Hanauer.
Hi Coberly,
If the economy turns out to follow my predictions perfectly, even then, economists will probably not recognize the models I have developed. Maybe i am not part of the “in-crowd” and my models are not peer-reviewed, even though you would think that blog publishing allows for lots of peer review.
At this point, I just publish my models of effective demand. Let the economy show how accurate the models turn out to be. For example, David Beckworth has written about different methods to determine potential output. I showed him mine which arrives at a different level. If it turns out that I was right, he may recognize me. I trust David Beckworth to be fair and honest. However, Mark Thoma will not recognize me, and I think that is because he had some criticism when he did recognize me from a commenter or two on his blog.
And then of course there is Mark Sadowski who at every turn and blog has posted the same old attack upon my theory. I saw that someone here called it a form of character assassination. Even Nick Rowe does not understand how labor income is any different from capital income. I had many private emails back and forth with Nick.
I do not worry. If the economy follows the limits of effective demand, and everyone is taken by surprise, maybe they will try harder to understand my models.
The missing link to understand macroeconomics is effective demand. That is more than clear to me now.
Heiner Flassbeck and Michael Pettis understand this. There is hope for others, but i am not holding my breath with the economists that do not understand effective demand yet. They may never get it.
As long as there are no man made barriers to the movement of capital that mimic the results of the natural barriers to labor there will be no change.
To get the barriers created for capital movement the people of labor have to become a movement within society. But that is hard to have happen when even the people born in the 50’s to mid 60’s have been convinced away from what they lived growing up.
Daniel,
Well said…