Nick Rowe brings up an important issue and sends a warning. He says that New Keynesian economists are assuming full-employment. And it is foolish. Nick Rowe is correct.
Keynes himself talked about how effective demand could stop output before full-employment is reached. The cause is deficient effective demand. And through the research that I do, I have been saying that effective demand is about to cut off output growth from reaching potential output. I show graph after graph of how it happens.
The New Keynesians take the CBO projection of potential GDP as a given and in effect assume we are on our way to full-employment. It’s not going to happen.
Their assumption is foolish and would not be shared by Keynes himself who told what happens when there is deficient effective demand.
Thoma, Krugman, Delong, the Fed, Yellen and others are all assuming a return to full-employment at the CBO potential GDP. Nick Rowe is signalling a warning and others had better pay attention, because this is not a trivial issue.