Brad Delong Does Not See a Sign for Low Path of Potential GDP

Brad Delong wrote today…

“There are no signs in the pace of technological progress, in the level of investment, in the pace at which the American labor force educates itself, in measures of capacity utilization, in signs of upward wage pressure due to labor quality bottlenecks, or in surging commodity prices due to supply bottlenecks to suggest that the path of growth of U.S. sustainable potential GDP is materially lower today than was believed back in 2007.”

But there is a sign and I have showed this before on Angry Bear blog (and here too)… A lower labor share of income will result in a lower equilibrium level of GDP. It does not matter if the economy is functioning perfectly. A lower labor share of income will create a dynamic to lower the equilibrium level of GDP.

Brad Delong is completely missing this…

update ED recent

The potential GDP (maroon colored line) marks the center of the business cycle. When real GDP (yellow line) is above the maroon line, the business cycle is in the expansionary phase. It is unprecedented that potential GDP has dropped like this. But then again, it is unprecedented how labor share dropped at the same time.

The effective demand limit (blue line) is trending right on into $16.1 trillion and has been for 2 years.

The equation for the effective demand limit is simply…

Effective demand limit = real GDP * effective labor share/(employment rate * capital utilization)

Note: Effective labor share is not determined by multiplying the business sector: labor share by 0.7657.

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