Tuesday, June 11, 2024

THROWBACK: Part 1: Nixon for Context


Rule of thumb: If a first-term president's term ends with a good, strong economy, he gets a second term. 

 


In "How Richard Nixon Pressured Arthur Burns: Evidence From the Nixon Tapes" Burton A. Abrams writes: 

In Nixon’s 1962 book, Six Crises, he recounts that Arthur Burns called on him in March 1960 to warn him that the economy was likely to dip before the November election. Nixon writes that Burns “urged strongly that everything possible be done to avert this development. He urgently recommended that two steps be taken immediately...”

Their idea was to improve the economy enough that Vice President Nixon would win the election and take his turn as President when Eisenhower's second term was up. Today this would be called "election interference."

No steps were taken. Abrams continues:

Herbert Stein, who was a member of the Council of Economic Advisers from the start of Nixon’s [first] term and became chairman at the start of 1972, confirms that Nixon blamed a modest rise in the unemployment rate as one of the reasons he lost the 1960 election.

Thus our rule of thumb. Again, Abrams: 

Evidence from the Nixon tapes, now available to researchers, shows that President Richard Nixon pressured the chairman of the Federal Reserve, Arthur Burns, to engage in expansionary monetary policies in the run-up to the 1972 election.

Here, the election interference appears to be driven by Nixon. In their 1960 encounter, it seems to have been Burns's idea. At least, that's how Nixon remembered it for Six Crises.

In both cases, 1960 and 1972, the plan was to improve the economy enough to keep the incumbent (or his party) in power. There is something almost heartwarming about Nixon's interference, because in both cases the idea was to improve the economy. Both times, however, the interference was conceived as a way to assure the election (or re-election) of Nixon. Both times, Nixon was engaged in election interference intended to benefit Nixon.

 

From "Nixonomics: How the Game Plan Went Wrong" by Rowland Evans, Jr. and Robert D. Novak, in Atlantic Monthly, July 1971[1]:

During that difficult decade after his defeat in 1960, aides and close friends had heard Nixon say privately time after time that had President Eisenhower only taken his and Arthur Burns's advice early in 1960 and moved rapidly toward stimulating the economy, he -- not Jack Kennedy -- would have been elected President. The implication, not quite stated flatly, was that Richard Nixon, if he had the power, would never again go into a presidential election with the economy in a state of deflation.

Note 1: As reprinted in Stabilizing America's Economy (The Reference Shelf, Vol. 44 No. 2); edited by George A. Nikolaieff.

Evans and Novak show Nixon fully committed to election interference.

More dirt on Nixon, this from the "Federal Reserve Chairman" section of Wikipedia's article on Arthur Burns:

Nixon later blamed his defeat in 1960 in part on Fed policy and the resulting tight credit conditions and slow growth. After finally winning the presidential election of 1968, Nixon named Burns to the Fed Chair in 1970 with instructions to ensure easy access to credit when Nixon was running for reelection in 1972.

Later, when Burns resisted, negative press about him was planted in newspapers and, under the threat of legislation to dilute the Fed's influence, Burns and other Governors succumbed. Burns's relationship with Nixon was often rocky. Reflecting in his diary about a 1971 meeting attended by himself, Nixon, Treasury Secretary John Connally, the Chairman of the Council of Economic Advisors, and the Director of the Bureau of the Budget, Burns wrote:

The President looked wild; talked like a desperate man; fulminated with hatred against the press; took some of us to task – apparently meaning me or [chairman of the Council of Economic Advisors, Paul] McCracken or both – for not putting a gay and optimistic face on every piece of economic news, however discouraging; propounded the theory that confidence can be best generated by appearing confident and coloring, if need be, the news.


Wikipedia also includes a detail which seems to have been omitted from All the President's Men, the great Alan J. Pakula movie starring Robert Redford and Dustin Hoffman:

At the Watergate break-in of 1972, the burglars were found carrying $6300 of sequentially numbered $100 bills. The Fed lied to reporter Bob Woodward as to the source of the bills. Burns stonewalled Congressional investigations about them and issued a directive to all Fed offices prohibiting any discussion of the subject.

Watergate was just one more example of Nixon tampering with elections. That time, however, it did not include improving the economy. Watch the movie. Watch All the President's Men

Improving the economy as a form of election interference might seem by comparison a good idea. But when winning the election intrudes on economic policy, the economy will lose every time. And the incidental considerations, like lying to Bob Woodward, stonewalling Congress, and prohibiting discussion are but a Nixon Sampler of the damage created by such manipulations.

By the way, Richard Nixon and Donald Trump were pen pals.

 

 

In The Emerging Republican Majority (1969), Kevin P. Phillips identifies "the two principal architects" of the emerging Republican majority: Richard Nixon and John Mitchell. Among that emerged group, then, Nixon's sleazebag behavior is apparently seen as worthy of emulation.

 

 

From Wikipedia's "Arthur F. Burns" article:

Burns served as Fed Chairman from February 1970 until the end of January 1978. He has a reputation of having been overly influenced by political pressure in his monetary policy decisions during his time as Chairman[13]...

Footnote 13 reads:

Bartlett, Bruce (2004-04-28) "(More) Politics at the Fed?", National Review

There is this link:

http://www.nationalreview.com/articles/210446/more-politics-fed/bruce-bartlett

That link is broken. This one works:

https://www.nationalreview.com/2004/04/more-politics-fed-ridhancock/

The link turns up "(More) Politics At The Fed?" at National Review,  attributed to RIDHANCOCK. (Bruce Bartlett is acknowledged in a note below the article. I will refer to the article as the Bartlett article.)

The Bartlett article says:

Nixon wanted to keep monetary policy loose in order to make sure the economy was robust going into the election. This led to the imposition of wage and price controls in August 1971.

That paragraph concludes: 

While everyone knew they would not work for long, the controls reduced inflation enough to keep monetary policy expansive through November 1972, which was all that mattered.

Now, that sounds like Nixon: Getting elected was be-all and end-all.

 

The Bartlett article (dated April 28, 2004) opens with this paragraph:

Rising inflation and interest rates, although still low by historical standards, are starting to get the attention of economists. It is becoming harder and harder to find an economist who doesn’t think the Federal Reserve needs to tighten monetary policy soon. However, Fed officials continue to say that unemployment, low capacity utilization, and strong productivity growth argue against tightening at this time. They may be right. But one cannot help but suspect that politics is also playing a role.

Once you see election interference in Nixon, it is easy to see elsewhere.

The article concludes with these thoughts:

The reason this [Nixon/Burns] history is relevant today [2004] is because the Fed is under increasing pressure to tighten monetary policy. While there is no evidence of White House pressure to keep monetary policy easy, one can assume that it will not be displeased if the Fed avoids tightening before Election Day.

Fed Chairman Alan Greenspan is well respected and no one believes he would knowingly use monetary policy for political purposes. However, the longer he waits to tighten monetary policy, the more people are going to ask whether politics is playing a role.

Once you see it in Nixon, you see it everywhere.

Bartlett (or RIDHANCOCK) was aware of Nixon's willingness to use economic policy for political gain. Because of rising inflation and an unresponsive Fed, Bartlett grew concerned about election interference in the era of George W. Bush and Alan Greenspan. Not that there was evidence of interference. But inflation was rising, and interest rates were not. Bartlett saw the possibility of election interference, and he couldn't look away. 

I can respect that.

 

If you go looking, you can find tales of Nixon and Burns in many places. The other day I came upon three that I had not seen before. They broaden the picture substantially. Here is a quick look:

At AP News, 12 May 2022:

The chronically high inflation of the 1970s has been attributed, in part, to political pressure that led the Fed to forgo steep rate hikes under Presidents Lyndon Johnson and Richard Nixon.

At AP News, 31 May 2022:

In the early 1970s, President Richard Nixon pressured Fed chair Arthur Burns to lower interest rates to spur the economy before Nixon’s 1972 reelection campaign. Nixon’s interference is now widely seen as a key contributor to runaway inflation, which remained high until the early 1980s.

At Business Insider, 11 March 2024:

Richard Nixon pressured the Fed to keep interest rates low before his reelection, which helped cement the disastrous inflation of the 1970s. Ronald Reagan got the message to the central bank on his wants during his presidency, getting his chief of staff to tell then-Fed Chair Paul Volcker not to raise rates ahead of his reelection campaign. Volcker wasn't planning to raise rates anyway. In recent decades, however, most presidents shied away from saying much, until Trump.

Good article, that last. 


This all leaves me wondering about Donald Trump, Fed Chairman Jerome Powell, and the Biden inflation. 

I have no evidence that Trump and Powell talk the way Nixon and Burns talked. I have no evidence that Powell's March 2021 announcement (inflation is coming) was a coded message to administered-price setters to start raising prices. I have no evidence that the Fed's year-long delay before raising interest rates (March 2021 to March 2022) was somehow part of a Republican plan to take Biden down. I have no evidence. That doesn't mean it didn't happen.

Was the post-pandemic inflation created, weaponized, and used by Republicans in an attempt to defeat Joe Biden? Even if this question is spread only by rumor and innuendo, it could still have powerful consequences for the November election: The rumor shows the 2021-2024 inflation to be Trump's fault rather than Biden's. And the inflation has hit Trump supporters -- has hit us all, really -- hard in the pocketbook.

Friday, June 7, 2024

"Will Prices Drop?" -- 2½ pages from Irving Fisher

From Google Books, "Read free of charge". (I looked up temporary inflation.)

If it doesn't show up, click your "reload" button.

 

 


 

 

 



Saturday, May 18, 2024

Argument from authority

From Wikipedia:

Scientific knowledge is best established by evidence and experiment rather than argued through authority as authority has no place in science. Carl Sagan wrote of arguments from authority: "One of the great commandments of science is, 'Mistrust arguments from authority.' ... Too many such arguments have proved too painfully wrong. Authorities must prove their contentions like everybody else." Conversely, it has been argued that science is fundamentally dependent on arguments from authority to progress as "they allow science to avoid forever revisiting the same ground".

One example of the use of the appeal to authority in science dates to 1923, when leading American zoologist Theophilus Painter declared, based on poor data and conflicting observations he had made, that humans had 24 pairs of chromosomes. From the 1920s until 1956, scientists propagated this "fact" based on Painter's authority, despite subsequent counts totaling the correct number of 23. Even textbooks with photos showing 23 pairs incorrectly declared the number to be 24 based on the authority of the then-consensus of 24 pairs.

This seemingly established number generated confirmation bias among researchers, and "most cytologists, expecting to detect Painter's number, virtually always did so". Painter's "influence was so great that many scientists preferred to believe his count over the actual evidence", and scientists who obtained the accurate number modified or discarded their data to agree with Painter's count.

Economics is a minefield of Theophilus Painters. By comparison, the 30-odd years of Painter's dominance in zoology was a golden age.

Sunday, May 5, 2024

The "fall of Rome" begins with Caesar

What our economy needs is Solon and the Great Debt Forgiveness. What our world is getting is Caesar and the Grand Political Reorganization. Rather than turning from financialization we turn toward it.

Sunday, March 31, 2024

Wages were squeezed in the "good" years

Between 1948 and 1981, compensation of employees fell from 25% of corporate business spending to 20%, while interest cost increased from 1% to 7%. Consumption was constrained, and production with it. Finance grew and blossomed.

I'm using corporate tax deductions as an estimate of corporate spending. I'm looking at employee compensation as a percent of corporate spending, to see how wage cost has changed since 1948. The most recent data I find at the IRS is for 2020.

A lot of "interesting" stuff has happened in our economy since 2020, but it won't show up on my graph for a couple years yet. Most people, I think, are interested in the recent events. I'm interested, too, but I don't dwell on the recent crap, because it is crap. If we pick a date (2008, say, the date of the financial crisis) we can say everything that happened since then is crap. Okay, not crap, but results. The economy went bad in 2008 and everything since that time is results: attempts to fix the problem after policymakers were caught by surprise.

I don't focus on results. I focus on causes. If you don't understand the causes, you don't get good results. I care about the causes of the 2008 crisis, the causes of the 1965-1984 inflation, the causes of the productivity slowdown of the 1970s that lasted 20 years. I care about the causes of the so-called "new economy" of the latter 1990s, which was really just a brief remission in the productivity slowdown. I care about all of it. I find that stuff fascinating.

I care about causes: why things were good, and how things went bad. You have to know how things went bad, or you can't fix them. And you have to look at times when the economy was good so you can see how things went bad.

That is the stuff that interests me. So I'm looking at employee compensation, the annual total paid by corporate business, as a percent of corporate business tax deductions. (I don't have the spending data, so I'm using the deductions as an estimate of spending.) Employee compensation started in 1948 at 25% of corporate deductions. By 1974 it was down around 20%. So our paychecks, those of us who worked for corporate business, our paychecks did not keep up with corporate spending. Our paychecks fell behind by five percentage points.

A lot of people got a lot of raises between 1948 and 1974, but all those raises together didn't keep up with corporate spending. To keep up, every $20 we earned in 1974 should have been $25. Every $100 should have been $125. Every thousand should have been $1250. But it was not, because our paychecks didn't keep up with corporate spending.

I dunno what they spent the money on. They spent it on many different things. I don't care about all that. I have a focus. I think the problem with our economy is debt. Now, before you say yeah, that damn federal debt... -- before you say that, let me say this: We've been trying to slow the growth of federal debt for half a century now, with no success. We've reached the point where Congress is getting crotchety about it. They're putting up stiff resistance to government spending. 

They're doing what Milton Friedman said. Friedman said

The problem is not one of knowing what to do.... The problem is to have the political will to take the necessary measures.

That's in chapter 8 of Money Mischief, page 213 in my paperback. Of course, Friedman was talking about inflation. But whatever we want to change about government will only change if we have the political will to make it change. At least, that's what Martin Gross was saying in A Call for Revolution.

And those crotchety congressmen, they do have the will to change things. That's why they're in the news all the time. And it's why they seem so crotchety.

Ironically, Friedman in the same chapter said government borrowing DOES NOT cause inflation:

Higher government spending will not lead to more rapid monetary growth and inflation if the additional spending is financed either by taxes or by borrowing from the public.

So there is a flaw in the solution that focuses on cutting government spending and government debt. To my eye, this flaw extends to the complaints of our crotchety congressmen. Their solution won't work. It hasn't worked in 50 years. Will it work now that they've developed an attitude? I don't think so. The fifty years of failure is not due to a lack of political will. The failure is because the solution we've been trying for fifty years is the wrong solution. The crotchety guys have the wrong solution. If you don't understand the causes, you can't get good results.


As I see it, when we say we want better economic growth, we mean growth of the private sector, not growth of government. That shouldn't have to be said, but it doesn't hurt to say it. The private sector is the economy. And by the way, it is private-sector debt that does harm to the private-sector economy. Business loans are repaid out of the prices businesses charge for their products, so an increase in business debt will push prices up. And household debt service, more and more, eats into consumer income, reducing our purchasing power. Between higher prices and lower purchasing power, business and consumer debt is destroying our economy. Private-sector debt is destroying our economy.

Federal debt? Most of the time, they don't even pay it off. They just roll it over. In "Does the National Debt Matter?" David Andolfatto of the St. Louis Fed said:

Yes, debt has to be repaid when it comes due. But maturing debt can be replaced with newly issued debt. Rolling over the debt in this manner means that it need never be “paid back.”

According to The Atlantic, rolling debt over has been the strategy for a long time:

Unlike after World War I, the US never really tried to pay down much of the debt it incurred during World War II. Still the debt shrank in significance as the US economy grew.

Our massive debt from World War Two -- even that debt, so long ago -- we never really tried to pay it down. But as The Atlantic points out, that massive federal debt did not hinder economic growth. (By the way, private-sector debt was relatively low in those good years after WWII. Private-sector debt back then wasn't a problem for the economy. Today it is.)

The Atlantic says the government doesn't even try to pay down the federal debt. Time magazine, December 31, 1965, said that economists

no longer think that deficit spending is immoral. Nor, in perhaps the greatest change of all, do they believe that Government will ever fully pay off its debt, any more than General Motors or IBM find it advisable to pay off their long-term obligations; instead of demanding payment, creditors would rather continue collecting interest.

Yes, Time's article was about Keynes, the much despised, much loved economist. He was an awesome writer, an awesome thinker. And by the way, it wasn't Keynes's idea to accumulate government debt forever. That idea was from economists of the 1960s -- two decades after the death of Keynes -- who proudly but mistakenly called themselves "Keynesian".

Love Keynes or hate him, it is still evidently true today that creditors would rather collect the interest, as in 1965. And it is still evidently true that the federal government doesn't really try to pay down its debt. That's why the federal debt is so big: We don't pay it down; we just roll it over and pay off the interest.

Speaking of paying the interest on the federal debt, the Peterson Foundation makes an interesting observation:

Even without accounting for interest payments, federal spending has frequently outpaced revenues — causing the government to run primary deficits. Over the past 50 years, annual federal revenues have equaled or exceeded non-interest expenditures only 12 times. 

Only 12 years in 50, according to Peterson, was federal revenue sufficient to pay the annual federal spending other than interest. In the other 38 years, the federal government had to borrow to pay for non-interest expenditures, and borrow more to pay the whole of the interest expense. And even in the 12 years, or most of the 12, it is almost certain the government had to borrow to pay at least some of the interest expense.

In only 12 years out of 50 -- less than a quarter of the time -- did any taxpayer dollars go to pay interest on the federal debt. The federal government doesn't pay down its debt, and three quarters of the time it borrows the money it needs to make the interest payment. Three quarters of the time, taxpayers don't foot the bill at all

Federal debt is not the problem. Private-sector debt is the problem. Cutting government spending will not solve the problem. Reducing government debt will not solve the problem.


Hey, I don't like the way the federal government handles its debt. But I don't complain about the federal debt. I see the debt as a consequence -- a consequence of something in our economy that has gone very wrong, something other than federal spending. It is true, no doubt, that if the government spends more money than it brings in it creates a deficit and adds to the debt. But that's not economics. That is arithmetic. Arithmetic is not the cause of deficits. Arithmetic is not the cause of debt. If you want to understand the cause, you have to go to the economics.

The cost of debt is the problem. But the federal debt is mostly just rolled over, not repaid, so this debt is a low-cost item. And the interest on the federal debt is mostly paid by borrowing the money to pay it, which adds to the low-cost federal debt. The cost of debt is a problem, but the cost of federal debt is not. 

Private-sector debt is the problem. The cost of private-sector debt hits the private sector directly and with full force. The solution is to reduce private-sector debt. Reduce private-sector debt first, so that our economy can improve. And as our economy improves we can balance the federal budget and start paying down the federal debt. 

I don't know why the crotchety guys oppose the growth of federal debt. I oppose it because the federal debt reinforces and supports the financialization of our economy. Financialization is a bad thing.

By the way, as our economy improves, we will need less and less of the things the government spends more and more money on. We will need less and less of that spending. In that environment, federal spending can be reduced painlessly, without crotchety curmudgeons in Congress.

In the meanwhile I would ask you to remember that the Keynesian idea was to use government debt to improve economic conditions -- for example, to make recessions short and to restore vigor and prosperity to the economy. That plan doesn't work anymore because the excessive level of private-sector debt does so much harm to the economy. But it is important to recognize that the federal debt is incredibly large. And it is important to see that the immense size of the federal debt is simply a reflection of the immense size of the economic problem in the private sector.

It is not federal debt that is destroying our economy. Private sector debt is destroying our economy. Our debt. But I don't blame us. I blame economic policy. Policy is the cause. Policymakers think using credit is always good for economic growth, and they think that accumulating debt is never harmful. That thinking has to change.


My graph today shows the "compensation of employees" paid by corporate business, as a percent of corporate business spending. (Again, I am using total corporate business tax deductions as a measure of corporate business spending.) The graph also shows the cost of interest paid by corporate business, as a percent of corporate business spending.

In the early years of the graph, 1948 to 1981, the graph shows a fall in employee compensation and an increase in the cost of interest:

Graph #1: Compensation of Employees and Monetary Interest Paid
as Percent of Corporate Business Spending

I use the 1981 date because that was the peak of interest rates. Rates rose before 1981, and fell after. I use the 2008 date because that was the time of the financial crisis.

Employee compensation fell five percentage points, from 25% of corporate business spending in 1948, to 20% by 1974. It stayed near the 20% level for 40 years, and only shows uptrend since around 2012.

Interest cost rose from 1% in 1948 to near 5% in 1974 and reached 7.4% in 1981. Interest cost averaged 7.0% for the 1981-2008 period; employee compensation averaged 19.9% for that same period.

From the 1948 start-of-data to the 1981-2008 period average, interest cost gained 6 percentage points while employee compensation lost 5 percentage points.

If the cost of interest falls by a dollar and corporate spending on employee compensation increases by a dollar, the total corporate cost is unchanged.

If the interest cost business pays is substantially reduced, a substantial amount of revenue will be freed up for other uses like better pay and better profit. Reducing interest cost is a simple matter of policy. Existing policy is built upon excessive reliance on credit and on the wrong-headed notion that excessive debt is only a problem when it is government debt. Unfortunately, wrong-headed notions cannot fix our economic problems.

In 30-odd years after 1948, employee compensation drops 5 points, from 25% to 20%. Interest cost increases 6 points, from 1% to 7%. If interest cost had remained at the low 1% level, employee compensation could have remained at the high 25% level, and corporate profits would have increased by one percent of corporate spending.

Economic policy increased interest rates in the 1948-1981 period. And economic policy encouraged the availability and use of credit. In other words, policy encouraged the growth and increased the cost of private-sector debt. The graph shows the result: interest costs went up, and compensation of employees went down. That's a bad policy, if ever there was one. But it's not too late to fix it.

Saturday, March 30, 2024

Wages, Profit, and the Cost of Interest

The first graph below compares employee compensation paid by corporate business to the interest cost paid by corporate business. Employee compensation was more than 25 times as much as interest cost in the late 1940s. 

There was little business debt back then, and interest rates were low. But corporate business debt was growing, and interest rates were rising, so interest cost grew faster than labor cost. Much faster. Relative to the cost of interest, the cost of labor fell markedly. That's what the graph shows in the early post-WWII decades.

Graph #1: Employee Compensation versus the Cost of Interest for Corporate Business

The growing cost of interest drained revenue from corporate coffers. Business found wage increases less and less affordable. That's the economics of those early decades.

By 1981 when interest rates stopped rising, employee compensation was only 2.4 times the cost of interest. Rates started coming down, then, but corporate business debt was still growing. The growth of business interest cost slowed to about the same rate as the growth of employee compensation, so on the graph the ratio remained low and fairly stable through the 1980s and '90s and up to the 2008 financial crisis. 

Since the financial crisis, employee compensation has been gaining on interest cost, but not because our paychecks have been swelling. It's because interest rates went low.


Here's a similar graph showing a similar pattern. This time the graph compares corporate business profit to the interest cost paid by corporate business:

Graph #2: Profit versus the Cost of Interest

The patterns are similar mostly because the growth of interest cost is the same on both graphs. Not so much because profits are similar to wages. As you can see, the second graph starts in the 1940s at about $10, profit about ten times the size of interest cost in the late 1940s. For the first graph it was over $25, employee cost more than 25 times the size of interest cost. So employee cost must have been about 2½ times the size of corporate business profit in those early years.

But if you really want to compare employee cost and corporate profit, we need one more graph. I put the compensation-to-interest-cost line and the profit-to-interest-cost line together on this new graph, and indexed them so they both start at the same level in 1947:

Graph #3: A Comparison of Corporate Business Costs
Employee Compensation relative to Interest Cost (blue)
and Business Profit relative to Interest Cost (red)

The indexing gives both lines the same value in 1947, so we can see how they differ in later years. They run close together, start to finish, because the patterns are similar. Because of the indexing, we don't see the one being 2½ times the other. But we can verify the pattern similarity. And we can see that profit runs lower than compensation for almost all the years, even though they start at the same level on this graph.

It also appears that profit has been rising faster than compensation since around the time of the post-covid inflation. 


Profit is what remains after the costs called "deductions" are subtracted from business receipts. If interest cost is reduced by a dollar, other things equal, profit increases by a dollar. 

Of course, if the cost of interest falls by a dollar and corporate spending on employee compensation increases by a dollar, corporate costs are unchanged. But that would violate our "other things equal" assumption. 

My point of course is that if the interest cost business pays is substantially reduced, a substantial amount of revenue will be freed up for other uses like better pay and better profit. Reducing interest cost is a simple matter of policy. Existing policy is built upon excessive reliance on credit and the wrong-headed notion that excessive debt is never a problem (unless it is government debt). Unfortunately, wrong-headed notions cannot fix our economic problems.