E Edward Lambert On Bond Demand, The Coming Recession, And New Normal


For more on the concept of Effective Demand, Dr Lambert has put together a Synopsis of Effective Demand on his blog. The effective demand limit has an equation that he created that can tell us that:

In 2015, capacity utilization fell while the utilization of labor increased (unemployment fell). The equation predicted this.

Dr Lambert's conclusion is that:

Unlike capital, labor never reaches its optimum utilization since it never reaches zero in the graph. Capital comes first in capitalism. And since the 1990's, the utilization of labor has been getting worse as seen by the plot steadily trending upward. The increasingly unmet potential of labor utilization coupled with lower labor share is a problem. The US is becoming over-capitalized in relation to the labor force. Supply-side economics can be partly blamed for this?

The chart he refers to is at the Synopsis. Dr Lambert went on to say in separate emails:

When labor share declines, so does the optimization level of capacity utilization.


In other words, profit rates increase, but the maximum utilization level of capital declines. As such potential GDP declines too.


When the decline in production due to lowered optimization of capital is not factored in, one cannot see that potential GDP has declined. My model saw that potential GDP declined in real time as the crisis appeared. The CBO and Fed have been very slow in realizing this. They still haven't. 

In essence, they missed the biz cycle. Real GDP has already gone positive and is now falling relative to potential.

and the definition of effective demand limit, a new economic concept:

It is a limit placed on the utilization of labor and capital by the percentage of labor share of income. It has always been there in every business cycle. It determines such things as potential GDP and the profit rate cycle. [Emphasis mine]
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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Gary Anderson 1 year ago Author's comment

I think you are right. Many people, George, seem to be interested in the next big innovation that would pull us out of our malaise, but if anything, some of our innovations will doom labor. We need innovations that do not doom the labor force.