I explained all this to Phil, and asked if he understood or had any questions. He said it was all perfectly clear. Then he immediately (literally, the very next sentence) demanded to know how the universe began… so… I am now tracking down a physicist… but at least you can pat yourself on the back for having covered it so satisfactorily for him. (Or bamboozled him into silence, which rates equally from my perspective.)

For a couple of decades now we’ve had stagnant middle-class incomes that were accompanied by growing aggregate consumption only by continously ramping debt ( public , private , and external ) , both nominally and as a fraction of incomes/GDP. That debt-ramp process accelerated – as do all Ponzi schemes near the end – during the housing bubble , and will now reverse , by necessity and because many of those burned are now “twice shy” ( I’m speaking from my own experience here , but there are historical precedents – the Depression and Japan’s bust , for example ). The “debt/GDP bubble” will almost certainly shrink considerably , but it will most definitely NOT grow again as it has for the past 30 years , at least not for a very long time. If this fact is not currently part of the discussion of potential gdp calculations , it should be , because stagnant ( if not falling ) middle-class incomes appear to be a durable feature of our economy.

Maybe economists should heretofore calculate two versions of potential GDP – the conventional version , and one that assumes income distributions reflecting a more just society. The second one will have a much stronger positive slope.