Brad DeLong is Soooo right about Labor Share & Effective Demand… YEAH!

Brad DeLong responds to Paul Krugman’s post on The Profits-Investment Disconnect. Why are profits high, but investment low?

Brad DeLong says…

“Profits are not high now because demand is high, throughput is high, and capacity is being fully used. Profits are high now because the labor share is unusually low. Firms almost surely, given the collapse in the labor share over the past fifteen years, operating with too much capital and too little labor along the isoquant to be profit maximizing.”

Did the Fed caused inequality? No… Like I wrote two days ago… (link)

“The real change that led to increased inequality is the conspicuous drop in labor share after the crisis. Record profits by firms were not being transmitted to labor. That was not the fault of the Fed.”

Paul Krugman does not see the impact of this drop in labor share, Brad DeLong does. Yeah for Brad DeLong!

Why are productive investments low? Like Keynes said with an insufficiency of effective demand… (link)

“… The propensity to consume and the rate of new investment determine between them the volume of employment, and the volume of employment is uniquely related to a given level of real wagesnot the other way round. If the propensity to consume and the rate of new investment result in a deficient effective demand, the actual level of employment will fall short of the supply of labour potentially available at the existing real wage, and the equilibrium real wage will be greater than the marginal disutility of the equilibrium level of employment.

“This analysis supplies us with an explanation of the paradox of poverty in the midst of plenty. For the mere existence of an insufficiency of effective demand may, and often will, bring the increase of employment to a standstill before a level of full employment has been reached.”

As for why Brad DeLong included a graph of the real GDP shortfall, Keynes says this about insufficient effective demand… (same link as above)

“Moreover the richer the community, the wider will tend to be the gap between its actual and its potential production… a wealthy community will have to discover much ampler opportunities for investment if the saving propensities of its wealthier members are to be compatible with the employment of its poorer members.”