E What Nobody Sees... Effective Demand

As markets look forward to Trump, nobody sees how close the economy is to the Effective Demand Limit.

Basically, the business cycle had already reached its end and was heading toward a recession slowly with low interest rates. Then the prospect of low corporate taxes, less regulation and strong fiscal stimulus has made it look like the business cycle is being brought back to life. Yet the effective demand limit is still sitting right in front of us.

What is the effective demand limit? It has been my research to determine an effective demand limit which forecasts the profit cycle and the level of real GDP where the economy will start toward a recession. My research points toward labor share... showing it sets a limit upon the optimal utilization of capital. As labor share rises, more capacity can be utilized optimally. However, we have seen labor share fall over the last decade plus. As such capacity utilization has not been able to return to previous levels. Capacity utilization is currently low at its lowest point since 2010.

Real GDP hit its effective demand limit at the end of 2014 at around $16.150 trillion. I had seen it coming for years. Here is the graph I had been tracking. The Effective demand limit lines kept pointing at that level of real GDP for 5 years. The profit cycle peaked at the same time.

Unless labor share starts to rise significantly now as it did at the end of the 1990's, the effective demand limit will resuscitate. Labor share is currently sitting at a low level where it was at the end of the 2008 recession. I do not see anything in the policies being formed by Trump that will lead to higher labor share. There is an army of supply-siders coming into the administration. I see the cost of capital falling to boost investment which will make the cost of labor fall in convergence. As has happened for decades, supply-side economics allows labor share to fall thinking that will extend the business cycle. In actuality, the business cycle is cut short in terms of capacity utilization... But corporations are fine with that because profit rates rise.

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Gary Anderson 3 years ago Contributor's comment

The only supply side that worked was Reagan, who cut taxes for the middle class and poor and Trump will not get money into the hands of labor.