Larry Summers wrote a post yesterday about the hollowing out of the middle class and how that has lowered consumption and led to secular stagnation. He says that this effect must be taken into account for policy.

Well I sit here after 4 years of building models of Effective Demand using labor share… My models have performed accurately.The drop in labor share reflects the hollowing out of the middle class. The data for labor share allows precise models to be built for secular stagnation. Larry Summers is absolutely right when he paints a basic picture of policy implications…

“What is the policy implication? Principally, it is the macroeconomic importance of supporting middle class incomes. This can be done in a range of ways from promoting workers right to collectively bargain to raising spending on infrastructure to making the tax system more progressive. These are hardly new ideas. And I supported them before seeing this new research. But there is now another powerful argument in terms of mitigating secular stagnation in their favor.”

Larry Summers sees new research, but I have seen 4 years of economists not understanding effective demand. So when I see Larry Summers’ post, I again see how far behind economics is in truly understanding the dynamics of effective demand. He notices a connection between labor income and economic potential, but has no model to define it yet. I have a models of effective demand that work and that can be built upon.

From my models, the effects and limits of effective demand are definable and forecastable in terms of labor and capital utilization and more such as interest rate policy. My models show that the effect on natural real rates from a drop in effective demand can be measured.

Larry Summers has not said it yet, but corporate after-tax profit rates will have to drop.

Also, my models show that the Fed missed a whole interest rate cycle and they do not even know it yet. They still think the cycle is just beginning. That shows how much an understanding of effective demand is lacking. It is a serious issue.

Larry Summers does not have precise models yet for effective demand, but he has opened the door to knowing.