Effective Demand Model did very well

Just to look back... My model of effective demand performed very well. The line bounced off of the "zero lower bound" of effective labor share.

Comments

[Gary Anderson]

Prof, I need your help. I don't quite understand the chart. So, the bouncing off means what? Is labor share increaasing, and can we see that in this chart?

[Edward Lambert]

HI Gary,
Labor share has actually been sliding downward for years. The result is that the combined utilization of labor and capital (labor employment * capacity utilization) has been going down.
View labor share as a ceiling. As labor share falls, combined utilization of labor and capital fall too by hitting the ceiling. Whenever the line in the graph hits zero, utilization of labor and capital hits the labor share limit which is calculated by a constant... (0.762 * labor share index).
Many good economists did not take this seriously back in 2013. Then the line bounced off the ceiling again like I predicted.

[Gary Anderson]

It is nice that Fred has this chart available to track this. So, utilization declines as the lines rise. Labor share continues to fall. With the little reflation I wonder where the line is now. Thanks for the explanation.

[Alan T]

Definitely an underappreciated soft landing in Q1 2016...do you anticipate model will return to the zero lower bound?

[Edward Lambert]

Alan, I do not anticipate a return to the lower zero bound. I foresee something like happened in the late 1990s with a bubble. The plot went sideways for a while.
The plot is going sideways now, but I do not see it lasting long since Trump and republican plans are losing credibility fast.

[JimH]

Edward,

I noted some very startling data today.
In 1939 the Avg GDP Growth Rate Over 10 Prior Years was 1.33%
In 2016 the "Avg GDP Growth Rate Over 10 Prior Years" was 1.33%

The Avg GDP Growth Rate Over 10 Prior Years for the year ending in 2007 was 3.05%, so the low 10 average GDP growth only began in 2007.

This is another indication that my comparison of the Great Recession to the Great Depression is valid. We would recognize a second Great Depression if there was no Social Security, Medicare, and Medicaid all pumping dollars into the economy and FDIC to protect the bank depositors.

This header is very messy but it is the best that I can do in a short time. There are 4 columns. I added the 4th column myself.

Year GDP Growth Rate Real GDP (trillions) Nominal GDP (trillions) Avg Growth Rate Over 10 Prior Years
1929 NA $1.06 $.105
1930 -8.50% $.967 $.092
1931 -6.40% $.905 $.077
1932 -12.90% $.788 $.060
1933 -1.30% $.778 $.057
1934 10.80% $.862 $.067
1935 8.90% $.939 $.074
1936 12.90% $1.06 $.085
1937 5.10% $1.12 $.093
1938 -3.30% $1.08 $.087
1939 8.00% $1.16 $.094 0.0133
1940 8.80% $1.27 $.103
1941 17.70% $1.49 $.129
1942 18.90% $1.77 $.166
1943 17.00% $2.07 $.203
1944 8.00% $2.24 $.225
1945 -1.00% $2.22 $.228
1946 -11.60% $1.96 $.228
1947 -1.10% $1.94 $.250
1948 4.10% $2.02 $.275
1949 -0.50% $2.01 $.273 0.0603
1950 8.70% $2.18 $.300
1951 8.10% $2.36 $.347
1952 4.10% $2.46 $.368
1953 4.70% $2.57 $.390
1954 -0.60% $2.56 $.391
1955 7.10% $2.74 $.426
1956 2.10% $2.80 $.450
1957 2.10% $2.86 $.475
1958 -0.70% $2.84 $.482
1959 6.90% $3.03 $.523 0.0425
1960 2.60% $3.11 $.543
1961 2.60% $3.19 $.563
1962 6.10% $3.38 $.605
1963 4.40% $3.53 $.639
1964 5.80% $3.73 $.686
1965 6.50% $3.98 $.744
1966 6.60% $4.24 $.815
1967 2.70% $4.36 $.862
1968 4.90% $4.57 $.943
1969 3.10% $4.71 $1.02 0.0453
1970 0.20% $4.72 $1.08
1971 3.30% $4.88 $1.17
1972 5.20% $5.13 $1.28
1973 5.60% $5.42 $1.43
1974 -0.50% $5.40 $1.55
1975 -0.20% $5.39 $1.69
1976 5.40% $5.68 $1.88
1977 4.60% $5.94 $2.09
1978 5.60% $6.27 $2.36
1979 3.20% $6.47 $2.63 0.0324
1980 -0.20% $6.45 $2.86
1981 2.60% $6.62 $3.21
1982 -1.90% $6.49 $3.35
1983 4.60% $6.79 $3.64
1984 7.30% $7.29 $4.04
1985 4.20% $7.59 $4.35
1986 3.50% $7.86 $4.59
1987 3.50% $8.13 $4.87
1988 4.20% $8.48 $5.25
1989 3.70% $8.79 $5.66 0.0315
1990 1.90% $8.96 $5.98
1991 -0.10% $8.95 $6.17
1992 3.60% $9.27 $6.54
1993 2.70% $9.52 $6.88
1994 4.00% $9.91 $7.31
1995 2.70% $10.18 $7.66
1996 3.80% $10.56 $8.10
1997 4.50% $11.04 $8.61
1998 4.50% $11.53 $9.09
1999 4.70% $12.07 $9.66 0.0323
2000 4.10% $12.56 $10.29
2001 1.00% $12.68 $10.62
2002 1.80% $12.91 $10.98
2003 2.80% $13.27 $11.51
2004 3.80% $13.77 $12.28
2005 3.30% $14.23 $13.09
2006 2.70% $14.61 $13.86
2007 1.80% $14.87 $14.48 0.0305
2008 -0.30% $14.83 $14.72
2009 -2.80% $14.42 $14.42
2010 2.50% $14.78 $14.96
2011 1.60% $15.02 $15.52
2012 2.20% $15.36 $16.16
2013 1.70% $15.61 $16.69
2014 2.40% $15.98 $17.39
2015 2.60% $16.40 $18.04
2016 1.60% $16.66 $18.57 0.0133

[JimH]

Edward,

Sorry for the table. As soon as I hit post the spaces in the table were removed!

[Edward Lambert]

JimH,
This is a serious time. There is trouble ahead. I have been saying in the second half of 2017 it will appear.

[JimH]

Edward,

There is serious trouble ahead.

The only way to explain unemployment rates of 4.4% and wages barely going up is that the traditional systems used to measure unemployment are not accurate in extreme economic downturns.

There are 57,794 homeless in Los Angeles county which is being blamed on the high cost of living. Apparently employers don't pay a living wage to a lot of people. That is a shocking number and does not count the people living with friends or relatives.
See: http://www.bbc.com/news/world-us-canada-40115541

Today I also noted that from 1930 to 1939 the average GDP growth rate over ten years was 1.33% and that from 2007 to 2016 the average GDP growth rate over ten years was also 1.33%. Quite a coincidence isn't it! NOT! In the ten years prior to 2007 the average over ten years was 3.05%, so that brackets the problem.
The raw data is from this website and then I calculated a ten year average GDP growth rate:
See: https://www.thebalance.com/us-gdp-by-year-3305543

Note the source of their data.

If the federal government was putting money into the economy with Social Security, Medicare, Medicaid, and Food stamps, we would recognize this as the second Great Depression.

[JimH]

Edward.

This: "If the federal government was putting money into the economy with Social Security"
Should read: "If the federal government was not putting money into the economy with Social Security"

[Edward Lambert]

Here is an article I wrote at talkmarkets.
http://www.talkmarkets.com/content/economics--politics/why-no-inflation-near-full-employment-keynes-said-it-is-not-necessary?post=137147

It is not necessary for wage inflation to happen at full employment. There are reasons to explain why it is not happening this time. Yet we are at full employment with easy monetary policy.

[JimH]

Edward,

I wrote: "The only way to explain unemployment rates of 4.4% and wages barely going up is that the traditional systems used to measure unemployment are not accurate in extreme economic downturns."

You responded with a link to that article. And you have forced me to rethink my earlier statement. :^)

We can have 'full employment' and aggregate wages barely going up if a lot of the new hiring has been at much lower paying jobs.

So employers seeking some skills are forced to pay higher wages but when unskilled employees lose a good paying job then they are forced into a much lower paying job. That would explain what we are seeing in the real world.

Combine that with a falling Labor Participation Rate and you get an situation where the unemployment rate can not be use to judge the economic health of consumers. And thus the economic heath of the economy.

As I have been saying "Consumers can not spend what they do not have and producers will not produce what they can not sell."

[run75441]

Edward:

Are you still posting???

Bill