I have written before that Paul Krugman is in a process of illumination about inequality. Today I see that he wrote about how inequality reduces growth. Jared Bernstein wrote about it too.
Paul Krugman wrote…
“There is, at this point, no reason to believe that comforting the comfortable and afflicting the afflicted is good for growth, and good reason to believe the opposite.”
Yet when one talks about inequality reducing potential growth, the correct term to use is Effective Demand. Keynes put a special place in his General Theory book for Effective Demand. He noted that there is a demand insufficiency that will block the economy from returning to full employment.
Paul Krugman and others should understand that Potential GDP is less because of increased inequality. I do not see that they have made that important determination yet. They still use the CBO potential GDP. They may not have a model to calculate how much potential GDP has fallen. I have one that I have posted before. (link)
So it is great to see the idea of Effective Demand prevailing in the econoblogosphere, but it would be even better if they used the correct term… Effective Demand.