Edward Lambert on Effective Demand, Labor Share, Capacity Utilization, and Growth
He’s only been blogging since March. His credentials? “Independent Researcher on the equation for Effective Demand.”
That may explain why, aside from a lonely Steve Randy Waldman link, I’ve seen no mention of his work out there. Just another internet econocrank?
I’m wildly unqualified to pass judgment, but Lambert’s built what strikes me as a very interesting, cogent, and coherent model of effective demand, labor share, unemployment, and capacity utilization in growing economies. And he’s extending it fast, including into optimal monetary policy. (Mark Sadowski has been challenging him on the model in comments here.)
I won’t try to summarize his modeling or poke holes — go look at it. I’ll just give you a picture and a few post titles to whet your appetite.
Here’s his UT (“Unused Total”) Index:
The regularity of its coincidence with recessions (especially the ends of recessions), at least, seems like it should raise eyebrows.
Here are some posts to peruse:
What Non-inclusive Growth Looks LIke
When Labor Share does not rise in the Growth Model
Effective Demand Monetary Policy: the z coefficient
AS-ED Model: Raising Labor Share of Income
Update on AS-ED model: The future has a problem
Given Scott Sumner’s recent reversion to labor share as the appropriate target for monetary policy, I’m thinking that Market Monetarists might find Lambert’s work as interesting as effective-demand-obsessed Keynesians will. MMTers and other Post-Keynesians? His results certainly comport with their political predilections.
Cross-posted at Asymptosis.
Given you have quite a few articles in this week so hopefully you will get a few visitors from downunder!
Steve:
Edward is not a bad read and understandable also. http://effectivedemand.typepad.com/ed/2013/05/fed-funds-rate-unemployment-effective-demand-rule.html
I started reading Lambert, but he has a lot there and I am not caught up yet. His results with respect to labor’s share decreasing being a drag on the economy fits with what I have been pondering lately.
I am not sure I understand why he is convinced nearing what seems should be an equilibrium will result in a downturn. It would be interesting to see his theory applied to Japan.
To Arne,
The equilibrium? Do you mean when aggregate supply nears the effective demand limit at the LRAS curve? That is not an equilibrium. It is a dynamic state where utilization rates of labor and capital are constrained in output.
The economy normally pushes prices higher along with higher unit labor costs to increase output at the effective demand limit.
Yet, when we reach the effective demand limit now, capacity utilization will still be below 80% and unemployment around 7%. We won’t have dynamics to create inflation.
Thus, the most likely result this time will be a contraction, either in prices or in output or both.
As for Japan, the effective demand model says their success ultimately depends on raising labor’s share of income.Many doubt that will happen. It is not happening yet.