Last week Krugman had a post praising Kalecki and then Edward Lambert at the Angry Bear Blog had a piece on Kalecki. Lambert argued that one thing that Krugman and other Keynesians of today don't get is what Kalecki was very aware of-'the effective demand limit.'
"I am here to say that the effective demand limit sits at a real GDP of $16.1 trillion (2009 dollars). That level is dependent upon an effective labor share close to 74%. By my calculations, at that level of real GDP, unemployment will come down to between 6.7% and 7.0%, which is not full-employment in the eyes of Krugman, Thoma and many others. They will want to push real GDP beyond $16.1 trillion with more injections… toward the CBO potential real GDP near $17 trillion. The result will be lower unemployment with inflation. Then everyone on the right in economics will accuse them of causing inflation just like “typical” Keynesians. The right will accuse them of taking the economy back to the 1960s. Hippie drugs and all."
"Even if there is no inflation from pushing real GDP over the effective demand limit, which is a possibility, the economy would still want to lower real GDP back down to the effective demand limit. There are mechanisms of the profit rate that make that happen. Kalecki and Keynes wrote about that. Thus to maintain the induced “high” of a higher real GDP, the injections would have to be maintained and probably even increased over time. At some point in time, the pressure to stop the injections would mount, the injections would decrease and the economy not being able to maintain the artificial “high” real GDP on its own, would fall into recession."
"Kalecki had an advantage over Krugman, Thoma and others. He was keenly focusing his awareness on the effective demand limit, even though he did not have a clear way to predict it. I work on an equation that can predict the effective demand limit. Krugman, Thoma and others need to be aware of the effective demand limit. Without this awareness, their policies will create a drug-induced high that will only lead to a harsher crash back to reality in the future."
"They really should be talking about ways to increase the effective demand limit to protect us from inflation and other problems. The only way to do this is to raise labor’s share of income. I don’t see them giving any ideas on this over the past 2 days."
"I am here to say that the effective demand limit sits at a real GDP of $16.1 trillion (2009 dollars). That level is dependent upon an effective labor share close to 74%. By my calculations, at that level of real GDP, unemployment will come down to between 6.7% and 7.0%, which is not full-employment in the eyes of Krugman, Thoma and many others. They will want to push real GDP beyond $16.1 trillion with more injections… toward the CBO potential real GDP near $17 trillion. The result will be lower unemployment with inflation. Then everyone on the right in economics will accuse them of causing inflation just like “typical” Keynesians. The right will accuse them of taking the economy back to the 1960s. Hippie drugs and all."
"Even if there is no inflation from pushing real GDP over the effective demand limit, which is a possibility, the economy would still want to lower real GDP back down to the effective demand limit. There are mechanisms of the profit rate that make that happen. Kalecki and Keynes wrote about that. Thus to maintain the induced “high” of a higher real GDP, the injections would have to be maintained and probably even increased over time. At some point in time, the pressure to stop the injections would mount, the injections would decrease and the economy not being able to maintain the artificial “high” real GDP on its own, would fall into recession."
"Kalecki had an advantage over Krugman, Thoma and others. He was keenly focusing his awareness on the effective demand limit, even though he did not have a clear way to predict it. I work on an equation that can predict the effective demand limit. Krugman, Thoma and others need to be aware of the effective demand limit. Without this awareness, their policies will create a drug-induced high that will only lead to a harsher crash back to reality in the future."
"They really should be talking about ways to increase the effective demand limit to protect us from inflation and other problems. The only way to do this is to raise labor’s share of income. I don’t see them giving any ideas on this over the past 2 days."
http://angrybearblog.com/2013/08/krugman-kalecki-injecting-to-escape-from-a-sub-optimal-reality.html
A few thoughts jump out at me in reading this. One, is that it is certainly very impressive if Lambert really can tell us exactly what the 'effecitve demand limit' is with such precision. According to him it's exactly $16.1 trillion dollars in 2009 dollars. I mean to be able to tell us what it is with such a precision certainly says a lot for his equation that he says can predict it-assuming it works anywhere near as well as advertised.
On the other hand, it strikes me a a pretty pessimistic conclusion. As I read it he's basically saying we can't grow any more than the modest 2.2% rate in GDP we've seen over the last 4 years. Indeed, Lambert kind of sounds like a left wing version of Tyler Cowen and his Great Stagnation Thesis.
I suggested this in the comments and a few commentators assure me they think I'm taking Lambert wrong. Don't get me wrong, I do agree that the share of GDP labor has been getting in recent years has been unacceptably low and a real source of concern. We certainly need to do what's necessary to change this.
However, to decide we can't grow the economy any faster than this certainly sounds very pessimistic to me and I certainly am not willing to accept this theory too easily. There's no question that Kalecki's theory is worth considering and analysing a lot more-he argued that as a class, capital doesn't like too much Keynesian demand stimulus as this takes away their social power and their ability to discipline labor by the threat of unemployment.
What high unemployment like today gives capital is power vs. labor to set the terms with a much more compliant negotiating partner then in the Golden Age of Keynesians where the unions were very strong and outspoken.
Mark Sadowski-who has a lot of interesting comments on the post-as he always does at The Money Illusion as well-commented that the peak of labor's share of income correlates very closely with the peak of inflation. Even if there is any causation there, surely we have come full circle and the current status quo where labor is now its lowest share in years is not preferable. It reminds me of the debate on student loans. Sure, when students could get out of the loans through bankruptcy the lenders were squeezed and had no real way to push borrowers to pay. However, it's hard to argue that as bad as things were at that extreme their worse now with the lenders having all the cards capable of holding borrowers in their thrall for the rest of their lives.
Again, let me make clear that I agree with raising labor's share of income. However, I think if we can't also increase the pie at the same time and only make it's division more equitable this will give us more problems politically than we've already had when the goal of increasing demand has been the preferred means of getting the economy back to where it should be.
However, a piece Sumner had about Japan got me to thinking-he lists 4 things going right there presently:
1. The yen is down to around 97/$, well below the 79/$ level of mid-November 2012, when rumors of Abenomics first hit the market.
2. RGDP growth was 4.1% in Q1 and 2.6% in Q2. Unfortunately I don’t have NGDP numbers, but I’d guess they are positive. (Trend NGDP growth in Japan is zero, so positive is good.
3. Inflation rates are slowly increasing. (Actually deflation is ebbing)
4. Unemployment is falling, down to 3.9% in July.
It strikes me that we think of Japan as being in stagnation for the last 20 years and yet their unemployment rate is almost half of ours. At 3.9% it's only slightly higher than our high-water mark back in the late 90s.
So here we have a very low GDP country with little growth than continues to be a pretty decent place to live if you're a worker. It does make you think.
P.S. Sumner again shows he's an austerity supporter as I have consistently claimed:
"Japan will be hit by an adverse supply shock next year (higher sales tax rates) which will boost inflation–making it look like they will hit their 2% target. Don’t be fooled. When the effects wear off Japanese inflation will slip back below 2%. Because of Japan’s fiscal situation, it has no good options. The sales tax increase will hurt the economy, but is needed. I used to think they should delay it, but now I think they should bite the bullet and do it."
"They got off to a good start, but need to do more. I suggest another round of yen depreciation combined with more QE. What they did helped a little – - – so do more!"
This supposed treacherous fiscal situation is because they have a high debt to GDP rate. To me it just shows again the folly of being too concerned with the debt to GDP ratio in the middle of a recession-or long term stagnation. It ought to be obvious that
1. The ratio has a denominator as well as a numerator and it's the denominator-very low trend growth the last 20 years-which is the main culprit for the high ratio.
2. There is nevertheless no 'debt crisis' as shown by looking at their record low bond yields. Why do austerity buffs like Sumner always want to fix a problem that the market isn't concerned about?
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