Hearing echoes of effective demand

I see two articles this morning about how increasing inequality will lead to slower growth.

  1. How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide, by S&P Capital IQ.
  2. 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.