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 wages — not 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.”
There is that magical word again “throughput.” So few people understand throughput in a manufacturing or processing sense. Robert pointed something out on Brad’s thread which is true:
“On the other hand, I think there is another obvious explanation for normal investment/GDP with high profits/GDP. The high profits are largely obtained by financial firms. There is only so much fixed capital investment they can do (computers and fancy headquarters buildings).
The ratio of profits of nonfinancial corporations to GDP still aren’t high (much lower than during the famous Carter boom which I don’t remember either). It is even more striking that the dramatic collapse in 2008 and the dramatic recovery since then was more than half due to financial corporations.”
A much larger percentage of GDP is the result of paper profits by the financial segments of our economy. How much Labor is needed to place a Bet on the failure or success of a particular investment? None. It still leaves the same dilemma, under utilization of Labor in the economy as more emphasis is placed on profits based on paper investments not needing Labor. It begs a question though if the economy goes into recession; how will the recession benefit Labor when the correction will be in the financial sector?
How will labor benefit from a recession?
Not by firms giving them more that is for sure.
The stage is set for a battle to take place. There are economists who now know that labor needs more support after a recession. And the Occupy is ready for Occupy II. Another recession with higher student debts, pressure to lower real wages even more and grinding unemployment will awaken a labor tiger…
I am working here and now DeLong too that labor share has to rise to save this economy and culture.
First Economists have to look at Labor as more than just an input and understand the composition of the input. Not all costs associated with Labor makes a product. A large portion of it is cost associated with operations within a country and not wages to Labor. When it is said Labor Wages have increased, it doe not necessarily mean Wages seen in a paycheck. Economists do not do Labor any favors when they conflate the issues.
I would suggest its’ the Fed that is the problem with QE forcing all saving into the market; not to forget it was the Fed that help kill the separation of banking and the financial markets. Then it was also the efforts of the Fed that made deregulation of the markets over the past 40 plus years possible.