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Contradictions Coming Home to Roost? Income Distribution and the Return of the Aggregate Demand Problem

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  • Thomas I. Palley

    (AFL-CIO)

Abstract

It is widely believed that the current economic slowdown will be mild and temporary in nature, the result of a momentary wobble in the stock market. This paper argues that the slowdown stands to be more deep- seated, owing to contradictions in the existing process of aggregate demand generation. These contradictions are the result of deterioration in income distribution. They have been held at bay for almost two decades by a range of different demand compensation mechanisms: steadily rising consumer debt, a stock market boom, and rising profit rates. However, these mechanisms are now exhausted, confronting the U.S. economy with a serious aggregate demand generation problem. Fiscal policy adjustments may be the only way out of this impasse, but such adjustments should be accompanied by measures to rectify the structural imbalances at the root of the current impasse. Absent this, the problem of deficient demand will reassert itself, and the next time around public sector finances may not be in such a favorable position to deal with it.

Suggested Citation

  • Thomas I. Palley, 2001. "Contradictions Coming Home to Roost? Income Distribution and the Return of the Aggregate Demand Problem," Macroeconomics 0108002, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0108002 Note: Type of Document - Adobe Acrobat PDF; prepared on IBM PC; to print on PostScript; pages: 13; figures: included
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    References listed on IDEAS

    as
    1. Thomas I. Palley, 1994. "Debt, Aggregate Demand, and The Business Cycle: an Analysis in the Spirit of Kaldor and Minsky," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 16(3), pages 371-390, March.
    2. Bhaduri, Amit & Marglin, Stephen, 1990. "Unemployment and the Real Wage: The Economic Basis for Contesting Political Ideologies," Cambridge Journal of Economics, Oxford University Press, vol. 14(4), pages 375-393, December.
    3. Wynne Godley, "undated". "Drowning In Debt," Economics Policy Note Archive 00-6, Levy Economics Institute.
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    JEL classification:

    • E - Macroeconomics and Monetary Economics

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