Thursday, December 31, 2020

An end-of-year pause

Lately much of my writing has focused on the cost pressure arising from our increasing reliance on credit and the growth of finance. For me, "financial cost" explains what happened to our economy between the end of the second World War and the disruption of 2007-2010. But the story of what happens in the years ahead may be different.

At the time of the disruption and the first Quantitative Easing, there was much concern about inflation; this concern lasted several years but then, like Q.E. itself, abated. There has been little such talk since that time. Instead, inflation talk has been chiefly about the difficulty of reaching the target of two percent inflation, or about raising that target.

Recently, in response to covid, there has been renewed increase in money printing. But apparently those who warned of inflation from Q.E. were stung by the failure of that inflation to appear, for there seems to be no renewed increase of inflation warnings. People learned their lesson, and we no longer rattle the bars of the ape cage with warnings of inflation. 

Not talking about the threat of demand-pull is dangerous.


In Inflation is not a cost-push phenomenon, Dr. Pirie writes:

... if people pay less for essentials because falling input costs allow lower prices, they will have money left to spend elsewhere, with the increased demand leading to higher prices in other sectors. The significance of this is that for over a decade cheap imports from China meant lower prices in developed countries for many household goods. The result was downward pressure on the consumer price index, leading central banks to keep interest rates low, with easy credit and cheap money.

And then, this:

The fall in prices was mostly in goods which show in the various price indices. It left people with money to spare elsewhere, some of which found its way into asset bubbles, including housing. Some of the goods which saw increased demand and higher prices did not feature in price indices, and therefore did not undermine the visible fall in prices. The choice of some items and not others to feature in price indices means that some price rises are effectively hidden from consideration.

When I read those two paragraphs I dismissed them impatiently because I was focused on cost pressure and on Pirie's analysis of cost-push in terms of "essential" and "non-essential" purchases.

But I was awakened in the middle of the night by the thought that some price rises are effectively hidden from consideration. It's true, you know.

This is not a story I would ordinarily tell. But it woke me up, so I had to tell it.


Happy New Year.

Wednesday, December 30, 2020

Two points in time

1973 and 2016:

Graph #1: Monetary Interest Paid as a percent of GDP (annual values)

In 1973 the money we paid out as interest added up to just about 15% of GDP.
In 2016 it was a little less, about 14.3% of GDP.

So interest rates were probably similar 1973 and 2016, right?

Let's see. Here's the policy rate of interest, set by the Federal Reserve:

Graph #2: The Federal Funds Rate (annual values)

In 1973, more than 8 percent. That's unusually high.
In 2016, less than half a percent. That's unusually low.

You and I couldn't borrow at those rates; I think the Federal Funds Rate is for loans of what Milton Friedman called "high powered money". We would have had to pay higher rates. But different interest rates tend to move together. The Fed tweaks the Fed Funds Rate in order to get other interest rates to move. Or as some people might say, the Fed Tweaks the Fed Funds Rate so that it moves with other interest rates. Either way, the different interest rates tend to move together.

In 1973 the Fed Funds Rate was more than 20 times its 2016 value. That's a big difference. But in 1973 the interest we paid (as a percent of GDP) was only a little bit more than what we paid in 2016: 14.98% of GDP in 1973, versus 14.3% in 2016, from the first graph.

I show interest relative to GDP because GDP is a measure of income. I'm looking at the cost of interest in comparison to the money we earned. As a bite out of income, the money we paid as interest was almost the same in 2016 as in 1973: between 14 and 15 percent.

The portion of income that went to pay interest was almost the same, even though the interest rate was a lot higher in 1973. How come? Because the interest rate is only one of the factors that determines how much interest we pay. The other factor is the size of our debt. But you knew that:

Graph #3: Debt of All Sectors: Government and Other (annual values)

In 1973, debt of all sectors was something over $2000 billion.
In 2016, something over $66000 billion.

By calculator, our debt in 2016 was 29.7 times the size of our debt in 1973.


Interest rates were high in 1973 and low in 2016. Debt was low in 1973 and high in 2016. The cost of interest was just about the same percentage of income in 2016 as in 1973.

It's not a coincidence that the cost numbers are similar. That's what I started with. I picked years where the interest cost was between 14% and 15% of GDP. Then I looked at interest rates and accumulated debt for those years. Tricky, huh.

Anyway, when you think about the cost of interest, you have to figure both the rate of interest and the amount of debt on which interest is paid.

Most people that talk about interest rates ignore the level of debt. The other way around, too: Most people that fret about debt don't talk much about the interest rate. Both views are incomplete.

Tuesday, December 29, 2020

Spinach, anchovies, and covid

Marguerite Rigoglioso:

In 2006, spinach producers were hit by an outbreak of E. coli contamination that ground the industry to a halt as all spinach-based food products were yanked from the U.S. market. This nightmare scenario is a particularly dramatic example of the kind of temporary shock that can affect a company's fortunes overnight.

I like this example: spinach instead of oil and wages.




I remember reading in an economics textbook of the example of anchovy fishing off the coast of Portugal. Apparently, anchovies are not just for pizza. They are also a major part of cattle feed. One year, for some reason the anchovies didn’t show up in their usual places and so the harvest was very light. Since there had not been a change in the demand for the tiny, salty fish, this caused a rise in price. It cost cattle-feed manufacturers more to produce cattle feed, meaning that ranchers had to pay more, too, and on down the line. The fact that the anchovies didn’t show up caused inflation, which affected the incomes of those involved... Again, however, this is what the market is supposed to do.



While the Federal Reserve and congressional responses to the crisis is well-intentioned and probably necessary, it has also increased demand-pull inflation risk over the next 24 months. Here’s an example of how that might work: Once restaurants reopen for indoor service, they likely will not have the same capacity as they did before. If a restaurant had 150 seats before the crisis, it may only have 75 seats due to social distancing requirements. Restaurants may need to increase prices to “make up” for the lost revenue. The same holds true for movie theaters, basketball arenas, football stadiums, water parks, theme parks, etc. My suspicion is that demand for most goods and services will likely come back at a faster rate than supply, resulting in some demand-pull inflation.

Monday, December 28, 2020

Tight money

Picking up where I left off yesterday: Tight money depresses output and increases costs. 

That is exactly what happens with cost-push inflation, too. First, cost pressure creates the need for more money; and second, the refusal to satisfy the need for more money keeps money tight and keeps depressing output.

But how do you even know if money is tight?

John Quiggin compares the interest rate to its "long run average" value to determine whether money is easy or tight. Scott Sumner rejects this, and compares NGDP growth to its long run average value to make that determination. Sumner is clear:
Woodford and Bernanke are right; the stance of monetary policy depends on outcomes like NGDP growth and inflation, not interest rates and the money supply.

Sumner makes the monumental mistake of applying "other things equal" to the real world: He assumes that nothing else has changed that could possibly be depressing growth, so that if NGDP growth is slow it must be because money is tight. And yet if there is some other factor causing slow growth -- or if there could be such a factor -- then Sumner's evaluation cannot tell us whether money is easy or tight.

But what has changed? What could possibly be responsible for slow growth? In 2020, covid. But for decades before 2020? Debt and debt service: The cost of accumulated private debt. And with excessive debt slowing the economy, you cannot use NGDP growth as a yardstick to determine if money is easy or tight.


Scott Sumner says the economy's bad because money's tight. He's right about that, but he doesn't know how to show tight money. To see tight money, look at circulating money relative to accumulated private debt, or relative to total debt, public and private. Or look at narrow money relative to broad. 

Or just look at the bills that come due, relative to the money available to make the payments. That's how we know for sure money is tight.

Sunday, December 27, 2020

Eduardo Loyo on higher interest rates as a cause of inflation


From the Abstract:

Higher interest rates cause the outside financial wealth of private agents to grow faster in nominal terms, which in fiscalist models calls for higher inflation. If the monetary authority responds to higher inflation with sufficiently higher nominal interest rates, a vicious circle is formed.

Loyo is clear:

In a fiscalist world, prices are driven not by liquidity, but by the outside wealth of private agents. 

Here, let me give you two whole paragraphs:

Adopting the fiscalist approach to price determination advocated by Eric M. Leeper(1991), Christopher A. Sims (1994) and Michael Woodford (1994, 1995), one can turn that monetarist story right on its head. In a fiscalist world, prices are driven not by liquidity, but by the outside wealth of private agents. Budget deficits, under a fiscal policy regime that causes a breakdown of Ricardian equivalence, add to that wealth stock. Inflation is none other than a symptom of ‘too much nominal wealth chasing too few goods’: it serves to corrode the real value of financial wealth, thus bringing demand back in line with supply. Inflation becomes essentially a fiscal phenomenon.

Just as inflation may have deep fiscal roots even in a monetarist account, so can monetary factors be blamed for inflation in a fiscalist account. That is because monetary policy, changing both the share of government liabilities that bears interest and the interest rate itself, affects the nominal growth of private net worth. But then a ‘tight money paradox’ arises: given the primary budget deficits, tighter money leads to faster growth of outside wealth, and to more rather than less inflation.

His next sentence shows that this analysis does not only apply to hyperinflation:

The reversion comes full circle with regard to explosive inflation, the subject of this paper.


It's a bit of a twist: Loyo says budget deficits add to private financial wealth, and higher interest rates cause that wealth to grow faster. Both sides of this positive feedback loop support the demand-pull, quantity-of-money story of inflation.

My concern is cost-push: the cost of the money we use to buy the things we ordinarily buy, like food, gasoline, socks, and the occasional puppy. The cost of this money increases with the rate of interest and, more consequentially, with the accumulation of debt. Loyo takes the other side, where debt is an asset rather than a liability.

Both sides, I would argue, may be true: what creates inflationary cost pressure for me can also boost my creditor's wealth, creating the risk of demand-pull inflation if he takes some of his financial income and spends it. But money that's in finance likes to stay in finance. So I don't know.


One more paragraph from Loyo, and its footnote. On the topic of hyperinflation and modeling it, and the reason for doing so, Loyo writes:

Empirical motivation for such theoretical exercise can be found in the Brazilian experience in the late 1970s and early 1980s. Brazil boasted a thriving market for domestically denominated government debt, an ingredient that enhances the fiscalist departure from conventional results. In 1980, the country underwent a notorious change in monetary policy regime, upon which a fiscalist model would have predicted exactly what came to pass: a switch from stability of inflation rates to persistent inflation acceleration. Conventional explanations for the episode are unsatisfactory, and signs of a tight money paradox have not been lost on a number of observers.2

And footnote 2:

Thomas J. Sargent (1986) hinted at the possibility of a tight money paradox explained by the ‘unpleasant monetarist arithmetic’ of Sargent and Neil Wallace (1981). High interest rates were most frequently mentioned as a cost-push inflationary factor, counting interest on working capital among the costs of production (as in Albert Fishlow, 1971, or in Domingo Felipe Cavallo, 1977). As far as physical inventories are concerned, only movements in the real interest rate should matter; but the nominal interest rate remains the relevant opportunity cost of transactions balances held by firms. Variants of the cost-push argument based on credit rationing, either due to direct government intervention or to market imperfections (as in Alan S. Blinder, 1987) were also very frequent in the structuralist literature (see Samuel A. Morley,1971). Others still echoed Fishlow (1971) with the claim that tight money fueled inflation because it depressed output and increased unit costs of production. Finally, the liquidity services of government debt soon became a prominent theme: if the relevant monetary aggregate is as broad as to include public debt,‘money’ grows faster with higher interest rates. That channel was explored by Carlos Ivan Simonsen Leal and Sérgio Ribeiro da Costa Werlang (1990, 1995), and reviewed in Deepak Lal (1990).

I won't copy the relevant references, but there's a lot of em listed in the PDF. 

Note this sentence right here:

Others still echoed Fishlow (1971) with the claim that tight money fueled inflation because it depressed output and increased unit costs of production. 

Tight money depresses output and increases costs. This is precisely what happens with cost-push inflation. First, the cost pressure creates the need for more money; and second, the refusal to accommodate the need for more money assures that money stays tight.

Saturday, December 26, 2020

Time for an update

The graph shows "current expenditure" of the Federal government (blue) through the end of 2019, compared to interest paid (red) by all sectors of the US economy.

Graph #1

Conclusion: If you think the Federal government spends a lot of money, then you also have to think that we, the people who live and work and do business in the USA, spend a lot just to pay the interest on what we owe.

Friday, December 25, 2020

Muth on expectations

This is all you need to know:

... expectations are influenced by the actual course of events.


A slightly less abridged version? No problem:
... the character of dynamic [economic] processes is typically very sensitive to the way expectations are influenced by the actual course of events.

The way the economy works, Muth says, is "typically" (meaning always or almost always) sensitive, no, very sensitive to the way expectations are formed, and, by the way, expectations are formed in response to the actual course of events.


The whole sentence? You sure you're up for it? Okay:

What kind of information is used and how it is put together to frame an estimate of future conditions is important to understand because the character of dynamic processes is typically very sensitive to the way expectations are influenced by the actual course of events.

We can shorten it without losing meaning by eliminating the middle part:

What kind of information is used and how it is put together to frame an estimate of future conditions is important to understand because ... expectations are influenced by the actual course of events.

It helps to know that Muth is talking about economic processes, and that he says expectations are very sensitive to events. But the shortened version is sound.

And then, the first part of it -- "What kind of information is used and how it is put together to frame an estimate of future conditions is important to understand" -- is why he wrote the paper.

And the last part of it -- "expectations are influenced by the actual course of events" -- is the foundation upon which Muth builds his argument. And this brings us back to where we started. 

Merry Christmas.

Thursday, December 24, 2020

Productivity decline as a source of cost-push pressure

On or about 13 November I went looking for the quoted search term "cost-push" at some 30 blogs I've been to many times over the years. Made some notes and did nothing with them, just gathered em up.

On or about 20 December I noticed, new from Dietrich Vollrath, When did productivity growth slow down? Vollrath is usually a good read. 

Some questionable stuff in his post, such as 

The received wisdom is that we are living through a period of slow TFP growth, and that this slowdown in TFP growth kicked in around the early 2000s. But I’m not sure that’s the whole story.

Not sure??

And there's some unquestionable stuff in there, like

When you zoom out further you’ll find that if there was a slowdown in productivity growth it started in the late 1960s or early 1970s and has continued through today.


If we’re having a discussion about what went “wrong”, then we need to look way earlier than the early 2000s to figure it out.

I always want to look earlier, so definitely yes to that. And I've known since forever that the productivity slowdown started mid-70s but more recently I question that date, and Vollrath's "late 1960s" is the kind of earlier that I like to look at.


On or about today, I was looking thru my "cost-push" notes of the 13th and found this excerpt from :

A change occurred in the late 1960s / early 1970s, however, as labor productivity slowed. Under the then-current regime, labor income continued to grow in line with the economy, maintaining its share of total income. Because productivity was no longer rising as much as previously, though, the return on capital consistent with a constant share of total income could not deliver an adequate rate of return – a profit squeeze ensued. This drove firms to increase prices, leading to larger wage demands and cost-push inflation.

from Postings from along the Trail... by hmg, Jr.

In my notes there was only the excerpt, no evaluation. Maybe I gave it a little extra attention today because of the "late 1960s" thing coming on the heels of Vollrath's "late 1960s" thing. Whatever the reason, this hit me hard today:

  • labor productivity slowed
  • labor income continued to grow
  • a profit squeeze ensued
  • and cost-push inflation.

Usually, when you look up cost-push inflation, you find something like

rising costs push up prices.
Usually the rising costs are wages and oil. If you are as unimaginative as I am, and you read article after article after article looking for something more, you get nothing but tired of reading the same story over and over again.

That's why my "financial cost-push" theory strikes me as such a big deal, and why hmg Jr's

productivity decline as the source of cost-push pressure

concept is such a thrilling thought. With cost-push, you only need something to get it started. After that, the solution to the problem of rising costs creates more rising costs, and you've got a spiral. With hmg Jr's explanation and my own, I now have two explanations of how cost-push got started.


hmg, Jr puts the start of the productivity slowdown at 1965, right where Allan Meltzer puts the start of the Great Inflation.


So we start with high productivity in the post-WWII period, and a rule that says wages should increase with productivity. It's a nice rule because it means we can afford to buy the output we produce. Equilibrium is satisfied, and economists are happy.

But then productivity drops off, and before you know it wages have gone up more than the rule allows. A high wage share means a low profit share, and that is a problem. The problem is solved by suppressing wages and restoring profit share.


I'm not sure how this all works, with productivity and growth complicating things. Let me imagine an economy where productivity -- output per hour -- grows 3% per year, and everything else is ceteris paribus fixed.

So output grows at 3%, labor gets two-thirds, capital gets one-third, and I don't know why it works but I think that is the story. And everything is fine for a while. And then productivity falls by half.

So now output grows at 1.5%. If labor still gets two-thirds and capital still gets one-third, everybody gets half what they got before. (So I could see right away that cost pressure rises, because everyone wants as big a piece of the pie as they got before. That part I got.)

For some reason it is not okay if capital has to take a cut, but it is okay if labor has to take a cut. I don't know whether the reason is economic or political, but capital still has to get 1%. Before, when they got 1%, there was 2% left over for labor. Now there is only half a percent left over for labor.

And that's pretty much the story hmg, Jr. tells.


There are still a lot of loose ends between my ears, but I think I have the general picture. It's just the increase that gets reduced, not the whole amount, assuming I understand the process.

In the time of 3% productivity, if we got 100 last year then this year we get 103%. In the time of 1.5% productivity, if we got 100 last year then this year we get 101.5%. The 100 doesn't go down, just the addition gets smaller. And labor's share of the addition gets smaller.

In the Economic Forecast post, however, hmg, Jr. foresees further decline due to the retirement of the baby boomers and the consequent fall in the size of the labor force:

Whereas from the 1970s until the advent of the baby boom's retirement, reduced productivity growth allowed for either rising real wages and constant real profits (a falling return to investment), or rising real profits (a constant return to investment) and constant real wages, it is unlikely that this will continue. For real profits to continue to increase, delivering a constant return to investment, real wages must now fall. The “game” has changed from one approximated by zero sums, to a closer approximation by negative sums.

If productivity goes below 1%, then for capital to get its 1%, labor has to give up its productivity gain entirely, and more besides. (Except now it's not productivity falling. It's labor force size.)


I don't see hmg, Jr. addressing the question of why productivity fell. Maybe I missed it. I've heard it said, though, that productivity fell because baby boomers brought to the labor force their inexperience in quantity sufficient to cause that decline in productivity.

Nice, right? I'm a baby boomer. When I started working, I made productivity fall. And then by retiring, I made things worse again. I just can't win.


Meanwhile, hmg Jr. lays out a clear picture:

Measuring a real standard of living by real output per capita as “Y/N”, labor productivity as “Y/L”, and labor per capita as “L/N” – where “Y” is real aggregate output, “L” is aggregate hours worked, and “N” is the level of population – the following equation relates them: Y/N = Y/L * L/N.

 The equation Y/N = Y/L * L/N is a version of growth accounting. Dan Sichel:

The speed at which the economy can grow over a longer horizon is determined by changes in two main factors: the total amount people are working — which involves both the number of workers in the labor force and the hours they work — and the efficiency with which they produce goods and services.

 Let me repeat what I said the other day:

I have no trouble accepting the idea that an increase in the labor force or an increase in productivity can boost economic output. But I cannot accept the ridiculous notion that nothing else plays a role in boosting output.

I think we have to go back to why productivity fell. I think it has to do with cost.

hmg, Jr. on the relation between the economy and society

 From hmg, Jr., 4 June 2013:

This stylized “fact” – the US economy becoming better approximated by a negative-sum game – has serious consequences for society. Everyone will feel pressure to engage in “begging their neighbor”, because without gains made at someone else's expense, the state of inertia is a (near-) falling real standard of living. Society will thereby become more fractured, and political agreement increasingly difficult.

Tuesday, December 22, 2020

Grunt work

 Labor Compensation.

Personal income includes lots of income that isn't for doing work. How much of personal income goes to the people who are actually doing the work? I often wondered. Today I had a thought.

FRED offers Share of Labour Compensation in GDP at Current National Prices for United States. Annual, 1950-2017. It is given as a ratio, so, like percent but not times 100. I'm thinking the ratio is "Labor compensation relative to GDP". If I multiply by GDP I get Labor Compensation. That was my thought.

Graph #1: Labor Compensation in billions

Red is personal income. Blue is labor compensation.

Green is Labor Compensation as a percent of Personal Income. It looks a lot like "Labor share" doesn't it? It should.

Labor compensation falls from 80.6% of Personal Income in 1950 to 68.8% in 2017. What does that tell us? It tells us that non-labor income, including for example income to finance, rose from 19.4% of Personal Income to 31.2% during that time.

What else do we learn? Labor compensation fell 11.8 percentage points in 67 years. That's a decline of 0.176 percentage points per year. At that rate, in 391 years labor compensation will reach zero and, best case, we'll all be serfs.

But don't worry, finance will be doing great!

Sunday, December 20, 2020

US Consumption of Petroleum Products versus the Cost of Finance

 The cost of finance in 2019 was four times the cost of petroleum consumed:

Graph #1: The Cost of Petroleum (blue) and Finance (red)

The blue line shows the number of barrels of petroleum consumed in the US each year, multiplied by that year's average price per barrel. The red line shows the cost of finance attributable to financial corporate business, as measured by GVA. (GVA measures GDP by industry.)

The cost of corporate finance is always more than the cost of petroleum, except for six years between 1973 and 1983.

Graph #2: The Cost of Finance as compared to the Cost of Petroleum

The blue line shows the Finance/Petroleum ratio, based on the data from Graph #1. 

At the 1.0 level on the graph, the cost of finance and the cost of petroleum are equal. When the blue line goes below the 1.0 level, the cost of finance is below the cost of petroleum. At the 2.0 level, the cost of finance is twice the cost of petroleum. At the 6.0 level, the cost of finance is six times the cost of petroleum.

GVA of financial corporate business is only one way to measure the size of finance. There are others. On the graph below I show the cost of interest paid, along with the finance and petroleum data from Graph #1:

Graph #3: Petroleum (blue) and Finance (red) from Graph #1
and Monetary Interest Paid (green)

As noted above, the cost of corporate finance in 2019 was four times the cost of petroleum consumed. The cost of interest alone, if you count it all, was twice the cost of GVA finance, and 8 times the cost of oil.

Sometimes people point out that every dollar of interest cost we pay is income to somebody. Sure. And every dollar we paid for gasoline and oil and petroleum in the 1970s was income to somebody. Yet the cost of oil created problems for us and for our economy. 

So does the cost of finance.



For petroleum prices I used FRED's Spot Crude Oil Price: West Texas Intermediate

For petroleum quantities, the U.S. Energy Information Administration's "Petroleum & Other Liquids" Data tab, in the +Summary section, under Petroleum Overview, the XLS download, the Annual Data.

Their spreadsheet provides several columns of data. I used the rightmost column, "Petroleum Products Supplied". Their data units are "1000 barrels per day". FRED's prices are "dollars per barrel". I went with 365 days in a year and "billions of dollars per year".

For the "Finance" comparison I used FRED's Gross value added of financial corporate business.

For "The Cost of Interest" I used FRED's Monetary interest paid.

Note: "EIA uses product supplied to represent U.S. petroleum consumption."

Saturday, December 19, 2020

"We are all Keynesians now"

In a letter to Time magazine, 4 Feb 1966, Milton Friedman wrote:

Sir: You quote me [Dec. 31] as saying: "We are all Keynesians now." The quotation is correct, but taken out of context...

That is the source for the title of my previous post, in case you were wondering.

Sunday, December 13, 2020

We are all borrowers now

Consider the possibility that we live in a world of cost-push pressure driven by the cost of finance.

Nuh-no, I said consider the possibility, not reject it. :)

Yes, I do know that we don't live in a world of inflation. Since Volcker chaired the Fed, people have known Milton Friedman was right: Inflation is always and everywhere a monetary phenomenon. Since that time, inflation has been kept under control.

That is my main concern, and here's why: If inflation is driven by cost-push pressure and policy restrains the inflation, the cost pressure will find release by reducing economic growth.

Slow growth in our time (covid aside), slow growth since the 1980s, and slow growth possibly as far back as the 1950s may be a result of cost-push pressure prevented from creating inflation by  a policy of tight money. When policy does not allow inflation to relieve the cost pressure, the pressure finds release by slowing economic growth.

In the time of Carter and Reagan and Volcker, we thought inflation was the problem that had to be stopped. We stopped it. But nothing was done about the cost pressure that led to the inflation. (Wage growth was reduced. But economic growth continued to decline, suggesting that the source of the cost pressure was not wages.)  Since that time, our economy has become less vigorous. We created policies to boost growth, and they helped. But the economy slowed anyway. And no one seems to know why.

It is time to consider the possibility that we live in a post-Volcker world of cost-push pressure, and that this pressure is the cause of our slowing economic growth.


When we think of cost-push, we think of oil in the 1970s and the "shock" of a sudden, large price increase. But cost-push doesn't have to arrive as a sudden shock. It can arise gradually. And the cost doesn't have to be due to a large price increase. The cost can grow naturally, stride for stride with a high-growth industry like finance.

Graph #1: GVA Finance as Percent of GDP

The price of oil increased fourfold between October 1973 and March 1974. That was a sudden shock.

The Gross Value Added of financial corporate business increased fourfold between 1945 and 2019. The increase created long-term, gradual, continuing cost pressure. The increase -- double, and double again -- was as large for finance as it was for the price of oil. And the graph shows only part of finance, the part that is counted in GDP.

The graph shows a pause in the growth of finance between 1961 and 1966. This intermission in the growth of finance (and financial cost) reduced the cost pressure. It is no coincidence that inflation during those years reached and temporarily maintained a low level. Inflation was low and stable from 1961 to 1965, almost the whole time of the pause shown on the graph.

The other pause, the one after 1983, contributed to the disinflation of the 1980s.

Could these coincidences be evidence that the inflation was cost-push, driven at least in part by the cost of finance? Consider the possibility.


So far I have brought to your attention two key points:

  • If cost-push pressure exists and policy prevents inflation, the pressure will find release by creating a slowdown of economic growth.
  • Cost-push pressure can arise from the sudden shock of a price increase, or it can be the result of a gradual change such as the growth of finance. Even if there is no price increase, the natural growth of finance must eventually push cost up as surely as a significant price increase would do.

I must point out, though, that the growth of finance since the Second World War was not entirely "natural". It was encouraged and induced by economic policy. Such encouragement is at least part of the reason for the growth of finance and the increase in financial cost. 

And wouldn't the irony be profound if the long-term slowdown of US economic growth arose from policies designed to boost economic growth by encouraging the growth of finance!


One more point must be made. It has to do with the nature of the cost that creates cost-push pressure: The cost is widespread, but the income it generates is concentrated in one industry or one sector.

The oil crises of the 1970s affected everyone. We waited on long lines for gasoline and paid outrageous prices. But the windfall went only to the oil industry, not to everyone.

With wage-push, the windfall (you would think) went to labor. I don't think it ever was wage-push, except possibly for a brief time. But then, during that time the windfall went (or would have gone) to labor.

The cost is widespread, but the income gain is concentrated: The same is true of finance. We are all borrowers now, but the cost associated with borrowing becomes income only to finance.

This kind of imbalance, with widespread rising cost and narrowspread rising income, is typical of cost-push inflation. Demand-pull is different, as both rising cost and rising income are widespread. Because of this difference, demand-pull tends to boost the growth of output and income, while cost-push tends to reduce the growth of output and income except in the sector of concentrated income gains.


This is a simple idea, Occam simple.

In the United States, and elsewhere that finance has grown, long-term economic decline develops along with finance when finance creates cost-push pressure and policy reduces the resulting inflation.

If finance is the source of cost-push pressure, and policy has induced the growth of finance, then it should be obvious what must be done to solve the problem of declining economic growth: Reduce the cost pressure by eliminating or reversing the policies that induced the excessive growth of finance. 

When we gather the evidence showing that finance is indeed the source of the cost pressure, we will observe that

  • excessive finance, not a decent wage, is the root of our economic troubles.
  • before Volcker, finance created continuing cost pressure that led to the Great Inflation.
  • since Volcker, continuing cost pressure has driven the decline of economic vigor.

That's just for starters. But the problem is not Volcker or the battle against inflation. The problem is the cost of finance, the incessant growth of finance, and the policymakers' mindset that says the incessant growth of finance is a good thing.

Finally, consider the possibility that there are sound economic reasons to restrain the growth of finance, reasons like preventing the cost pressure that leads to economic decline when policy takes action against inflation.

Saturday, December 12, 2020

Bill Mitchell: It's not inflation, not yet ..... Not yet ...

I'm gonna quote Bill Mitchell on inflation here, from 2011, from his blog.

Mitchell quotes from the UK Guardian article of 5 Jan 2011, Inflation threat divides economists:

Some economists argue we must forget about raising interest rates and live with higher inflation imported from China and the east. If UK inflation were the result of excess demand in the UK then higher base rates could usefully dampen consumption and moderate inflation. If inflationary prices are driven by excess demand in the east or shortages in Australian wheat – factors beyond the control of UK policymakers – then why choke off our nascent economic revival with higher rates, they say.

Mitchell found that interesting, and wrote:

So the tension in the policy debate is whether to deal with a supply-side price surge (if it turns out to be significant) via demand-side policies (tightening interest rates and fiscal austerity).

I agree with Mitchell: Using tight money to fight supply-side inflation is just wrong.

  • Peter Cooper agrees:
    Money creation can enable cost-push inflation, but the real source of the problem will be the cost pressures themselves.
  • Abba Lerner (quoted by James Forder) agrees:
    ... if restrictive monetary or fiscal policy is used against sellers' inflation, spending is reduced when it is not excessive, so that we get a deficiency of demand, depression and unemployment...
  • Even Scott Sumner agrees:
    ... there's different kinds of inflation. There's supply side inflation, which is created by shocks like sudden increases in oil prices, and then demand side inflation caused by overspending in the economy. It's really demand side inflation that the Fed is concerned about. There's not much they can do about supply side inflation.

For starters, to fight supply-side ("cost-push") inflation you need to know the original source of the cost pressure.


Mitchell explains what happens with cost-push:

So we get a “battle of the mark-ups” operating – workers try to get more real output for themselves by pushing for higher money wages and firms then resist the squeeze on their profits by passing on the rising cost – that is, increasing prices with the mark-up constant.

At that point there is no inflation – just a once-off rise in prices and no change to the distribution of national income in real terms.

However, if the economy is working at high pressure, workers may resist the attempt by capital to keep their real wage constant (or falling) and hence they may respond to the increasing prices by making further nominal wage demands. If their bargaining power is strong (which from the firm’s perspective is usually in terms of how much damage the workers can inflict via industrial action on output and hence profits) then they are likely to be successful.

At that point there is still no inflation. But if firms are not willing to absorb the squeeze on their real output claims then they will raise prices again and the beginnings of a wage-price spiral begins. If this process continues then you have a cost-push inflation.

For me, here's what stands out:

1. workers get higher money wages
2. firms raise prices to maintain their profits
"At that point there is no inflation"

3. workers respond by making further wage demands
"At this point there is still no inflation. But if"

4. firms raise prices again, and
"If this process continues then you have a cost-push inflation."

I suppose he says it's not inflation yet because the price increase isn't sustained yet, and inflation is defined as a sustained increase. But that's just my guess. Dunno what he was thinking, and he doesn't say.

I'm not comfortable with the idea that the first two or three or four increases don't count for much. And I'm not comfortable with the implication that how the inflation gets started is not important. Mitchell doesn't say it's not important how inflation gets started, but to my mind he implies it -- because, to me, how cost-push inflation gets started is the most important part of the story. The most important part, because if you want to stop the inflation, you have to know what caused it, and you'll find the cause at the start, or even before the start of the inflation.

Thursday, December 10, 2020

"The Golden Age Illusion"

From The Golden Age Illusion by Michael J. Webber and David L. Rigby, 1996, page 7: 

In retrospect, internal pressures were building in the advanced capitalist countries that must have derailed long-run growth eventually; rates of economic growth in North America were beginning to falter in the late 1960s and with them rates of profit. Nevertheless, by common consensus the outstanding symbol of the break occurred on 17 October 1973, when the ten members of the Organization of Arab Petroleum Exporting Countries announced a plan to cut their collective output of oil by 5% per month for the next 20 months: Gulf crude oil prices rose from $2.70 in early October to $11.65 on 1 January 1974. A less commonly identified symbol of the break occurred on 15 August 1971, when President Richard M. Nixon announced that US dollars would no longer be convertible to gold, thus denying the world a stable reserve currency. The hike in oil prices and the end of the Bretton Woods agreement only symbolize the end of the golden age; they did not cause it. Yet they are symbols of an end that we have collectively taken a long time to recognize.


Two key points therefrom:

  • rates of economic growth in North America were beginning to falter in the late 1960s
  • rates of economic growth in North America were beginning to falter in the late 1960s and with them rates of profit

Wednesday, December 9, 2020

Slow growth? Why?

"As a matter of arithmetic, the slowdown in growth has two potential components: people working fewer hours, and less economic output being generated for each hour of labor. Both have contributed to the economy’s underperformance." -- Neil Irwin, 2016

"In order to hit the lower bound of the Trump target for 2017-2020, either contributions from labor force growth, or labor productivity, or combination thereof, must accelerate by 1.8 percentage points." -- Menzie Chinn, 2017

"The speed at which the economy can grow over a longer horizon is determined by changes in two main factors: the total amount people are working — which involves both the number of workers in the labor force and the hours they work — and the efficiency with which they produce goods and services." -- Dan Sichel, 2017

"The slowdown stems mainly from demographic trends that have slowed labor force growth, about which there is relatively little uncertainty. A larger challenge is productivity." -- John Fernald and Huiyu Li, 2019


People say the size of GDP depends on how much we produce per hour, and on how many hours we work. They say it a lot.

Hey,  you can even calculate it. Given the number of hours we work and how much we produce per hour, you just multiply them together to find out how much we produce.

But saying  the size of GDP depends on hours worked and output per hour is like saying those two factors cause GDP to be what it is. And that's pretty obvious bullshit, if you ask me. It's like saying that two and two causes four. I know: You can even calculate it. But arithmetic doesn't cause four. Arithmetic doesn't work that way. The economy doesn't work that way, either. 

Just for the record now:

  1. Other things equal, it is true that if fewer people are working we will produce less, and if more people are working we will produce more. But it is also true that when the economy sucks, the fertility rate goes down, and you end up with fewer people as a result. So it works both ways: Demographics affects the economy, and the economy affects demographics.
  2. Other things equal, it is true that an increase in productivity will boost output, and a decrease in productivity will reduce output. But it is also true, or at least some economists think it is true, that a high-output economy leads to higher productivity and a low-output economy leads to lower productivity. So again, it can work both ways.

I have no trouble accepting the idea that an increase in the labor force or an increase in productivity can boost economic output. But I cannot accept the ridiculous notion that nothing else plays a role in boosting output. 

Irwin, Chinn, Sichel, Fernald, and Li, I'm talking to you: How do you dare suggest such a thing??



Does it matter? Well, yes, because except for a brief interlude in the latter 1990s, productivity has been low since the economy got slow, around 1974. And according to Dan Sichel, labor force growth has been trending down since the 1980s. Both productivity and labor force growth have been down for a good long time. Is there a way out of this mess?

Raul Elizalde

Is there a way out? There are two possible scenarios for this story to end well. One is that policymakers develop a radical policy to deal with these challenges and implement it with exquisite finesse amid broad political support. Another is that a new technology revives growth by transforming the way we live or do things.

We can pretty much discard the first scenario for reasons we find obvious...

Yeah, okay. I liked Elizalde's GDP growth calculation a lot. But I have a problem with his two possible scenarios here:

  1. a radical new policy to deal with these challenges, or
  2. a new technology comes a long and saves the day.

Elizalde dismisses scenario number one right away. That leaves him in desperate hope of new technology. Hey, it could happen. I wouldn't put it past Elon Musk to make it happen with one hand behind his back. But I don't want to depend on that. I want to fix the economy. That leaves us with only

  1. a radical new policy to deal with these challenges

the one Elizalde dismissed out of hand. I wouldn't dismiss it. But I am uncomfortable with it because it appears to presume there is nothing wrong with economic theory, and we just need better policy, but still policy that arises from existing theory. 

That will not do. Let me tweak the option a little: What we need is a more accurate understanding of our economy and its problems. 

Everybody was saying that in '09. But it only lasted about a year, I think, people saying that.

You know damn well that if economists had this more accurate understanding before 2007-2010, they might have been able to avoid that time of troubles. If they had that more accurate understanding long enough before 2007, they would certainly have been able to avoid those troubles.



We could start by going back to that brief interlude in the 1990s when the economy was good, and looking for what was different.

That's pretty well settled, isn't it? The internet was new. That's what was different. Everybody, even Alan Greenspan, attributed the improvement to "technology". And you know what else?

They stopped looking.

Tuesday, December 8, 2020

Slow growth? Since when?

Since 2010?

The economy has been disappointing on the low side consistently for several months now and that makes me and other people worry that maybe this slow growth will linger longer than we now think -- Alan Blinder, 2011


 Since 2001?

This slow growth is not some new phenomenon, but rather the way it has been for 15 years and counting. -- Neil Irwin, 2016


Since 1974?

[G]rowth in US living standards slowed after 1973 -- Scott Sumner, 2010

For the entire post-WWII period?

On our end, we looked at seven decades of GDP growth data to shed some light on the trend growth potential for the U.S. economy. After stripping out recessions, which can be caused to externalities that may not reflect productive capacity (such as oil shocks or a derivatives-based financial crisis) we calculated the 10-year average GDP growth rate. It shows a clear, steady decline and a close relationship with productivity. -- Raul Elizalde, 2019 



For a long time, I accepted 1973 as the end of the good years. But making graphs for the blog, I noticed that they sometimes suggested 1966 as the end of the good years. It opened my eyes and made me cautious.

Only recently did I find Raul Elizalde's article at Forbes. Of course I was fascinated. But I couldn't duplicate his graph. By email, I asked him about it. By email, Elizalde explained his method:

I downloaded quarterly real GDP percentage rates from FRED (A191RL1Q225SBEA). Then I eliminated all the quarters with a negative number and the following positive. My goal was to measure GDP growth during “normal” times in order to reflect the long-term growth trend of the U.S. In order to do this I took out all the negative quarters (which are outliers in the sense that the long-term trend is positive, and often due to shocks) and also took out the bounces, defined as the first positive quarter after one or more negative quarters (because bounces are often outsized when the shock disappears and the pent-up demand produce a number larger than the long-term trend). That’s why the lines and mountain in the graph seem to plateau at certain times (because of the missing negative or bounce quarters). The resulting data points are what you see.

It works:

The graph starts at 1957 because the data points are ten-year averages.
Data used for the graph goes back to 1947.

I knew about the "bounces", where recovery from recession brings an unusually big increase in economic growth. I remember Krugman pointing out the bounce of the 1930s after the depression bottomed out. I remember American Thinker pointing out the bounce of 1984 after the double-dip recession bottomed out.

I knew about the bounces, but it never occurred to me to allow for the bounce effect when figuring the trend of long-term growth. 

Impressed by Elizalde's graph, I was.

Sunday, December 6, 2020

The most important difference between cost-push and demand-pull inflation

I'm not a fan of "diagrams" in economics, but sometimes...

This is a screen capture of slide 36 from a SlideShare presentation by videoaakash15. You can click the image to visit the presentation. Fifteen, nice work on the diagrams.

Slide 36 shows two diagrams: demand-pull inflation, and cost-push inflation. Each diagram is defined by two heavy black lines, one horizontal, one vertical, that meet near a "0". The two lines are like two sides of a box that contains stuff we're not going to talk about. Again, I'm no fan of diagrams.

In the two diagrams above, the heavy black vertical is labeled "Price level, P". In every econ diagram I've ever seen, the vertical shows the price level. Dunno why. Prices go "up", I guess.

And sure enough, between the heavy black vertical and the "Price level" label there is an arrow pointing up, suggesting a move from P0 to P1 ... a move from Price level 0 to Price level 1. 

And that's how they show prices going up on a diagram of inflation.

Notice that both heavy black verticals show the same information: "Price level" label, arrow pointing up, P0 (price before going up) and P1 (price after going up).

It's a little different for the heavy black horizontals for the two diagrams. Each horizontal has a label that says "Aggregate output (income), Y". And each has an arrow. But the arrows don't point in the same direction. The arrows point in two different directions because the diagrams are for two different kinds of inflation. It is this difference, the difference in what happens to "Aggregate output (income)" for the two different kinds of inflation, that makes it important to know about the two different kinds of inflation.

For the diagram on the left, the arrow points away from the "0" that is near where the two lines meet. As aggregate output goes from Y0 to Y1 it moves away from zero and toward a larger number. This kind of inflation, demand-pull inflation, makes aggregate output and income bigger.

For the diagram on the right the arrow points toward the "0". As aggregate output moves from Y0 to Y1 it moves toward zero. Aggregate output and income get smaller. Cost-push inflation makes output and income smaller.

To be more precise: Under demand-pull inflation, output and income tend to grow faster. Under cost-push inflation, they tend to grow slower.

Demand-pull is good for growth. Cost-push is not. This is the most important difference between them. The difference, by the way, arises not from any Arthurian fantasy, but from economists' diagrams of inflation.

Friday, December 4, 2020

I'm in good company

How the banking system is creating a two-way inflation in an economy by Ahmed Mehedi Nizam 

From the abstract:

Here we argue that due to the difference between real GDP growth rate and nominal deposit rate, a demand pull inflation is induced into the economy. On the other hand, due to the difference between real GDP growth rate and nominal lending rate, a cost push inflation is created.

Caught my eye right away. Allow me to present more of Nizam's idea by quoting brief portions from the Introduction:

We propose a new model that describes the role of the banking system in creating a two-way inflation in an economy. According to the proposed model, when the nominal deposit interest rate of the bank is set to a value which is higher than the underlying real GDP growth rate then the money in the depositors’ account grows faster than the goods in the real sector. So, it will lead to too much money chasing too few goods type of scenario which eventually shifts the aggregate demand curve upward. Upward shift of the aggregate demand curve results into a demand pull inflation and an inflationary gap in output...

On the other hand, when the borrowers (investors) are charged at a rate higher than the real GDP growth rate, they (borrowers/investors) have to pay more money than they actually earn by investing the borrowed fund into the real sector. As interest expense is usually considered to be a cost of production ..., a rise in interest expense on per unit of produced goods results into an upward shift of the aggregate supply curve. As the supply curve shifts upward, equilibrium is achieved at a higher general price level resulting into a cost-push inflation and a recessionary gap in output...

I like the symmetry. In the one case, Nizam considers interest on deposits; in the other, interest on loans. I like also that his model explains both demand-pull and cost-push inflation. And, of course, I find his model satisfying because it highlights interest cost as a driver of cost-push inflation, which is the story I've been telling a lot lately.

I should point out that in both the demand-pull and cost-push sections quoted above, Nizam considers interest rates that are higher than the real GDP growth rate, leading to inflation. I didn't quote it, but in both sections he also considers interest rates that are lower than the real GDP growth rate. The outcome he finds, in both cases, is deflation. Again, the symmetry is satisfying.

The next point Nizam makes is this:

Apart from nominal deposit and lending rate, we also consider the total volume of deposit and credit in the banking system in establishing the relationship between interest rate and inflation. Because, if the amount of deposit and credit in the banking channel is not substantial as compared to the overall size of the economy then the causality running from nominal interest rate to inflation becomes weak.

And I'm sitting here screaming YES, EXACTLY!

  1. The "total volume of credit" in the banking system is total accumulated debt in the banking system.
  2. If accumulated debt is not substantial, relative to the size of the economy, then the impact on inflation (and other things) is weak.
  3. But if accumulated debt is substantial, relative to the size of the economy, then the impact on inflation and other things is substantial.

To be sure, Nizam is careful and specific, referring to "the total volume of deposit and credit in the banking system" and I'm just talking about debt, the debt, all the debt, what do I know. But we agree that you don't just look at the interest rate. We agree that you also have to look at the amount of money on which interest comes due. And we agree on the importance of counting the total volume of it.

"If the rate of interest is constant while the accumulation of debt doubles relative to GDP, the cost of interest doubles, relative to GDP."  -- Arthurian

Wednesday, December 2, 2020

Lookin' somethin' up in Money Mischief

Looking for a quote in chapter 8 of Milton Friedman's book I came by accident upon his famous line:

inflation is always and everywhere a monetary phenomenon

I noticed something else, too. Here, I scanned the top part of the page, complete with highlighting and other emphasis I left there long ago. See if you can tell what I just now discovered:

Spoiler alert: The thing that I just now noticed is that Friedman's famous line is part of a longer sentence.

The famous part is there, italicized and everything. But it's not italicized because of its importance. It's italicized to set off the famous part from the rest of the sentence, because the rest of the sentence is about the famous part.

And what Friedman says, in the rest of the sentence, is that understanding the famous part is only the beginning of understanding the cause and the cure of the problem. 

So whenever you find someone parroting Friedman's famous words, you tell em that's only the beginning of an understanding of the problem.

And if they give you a hard time, you just tell em I said.

Sunday, November 29, 2020

Not "interest only"

My concern with the growth of finance as a cause of slow economic growth goes back to the cost-push inflation of the 1970s. That inflation was often attributed to rising wages or the rising price of oil. But I think it had its roots in the rising cost of finance, roots that go back further, at least to the 1950s.

A continuing-cost problem will result in either slowing growth or cost-push inflation, or some combination of the two, depending on the level of "accommodation" provided by economic policy. If they print money you get inflation. If they don't, you get slowing growth.

Many people say inflation is always demand-pull and never cost-push. They say inflation is always caused by printing money. They say the inflation of the 1970s was caused by accommodative policy, which dealt with rising cost by increasing the quantity of money. I say that when the accommodative policy is a response to rising cost that would otherwise have caused unacceptably slow growth, the inflation is caused by the cost-push pressure.

I agree with the demand-pull view to this extent: We cannot have inflation unless the quantity of money increases enough to support spending at the higher price level. However, the focus of that view is only on inflation, as if the pressure of rising cost has no impact on economic growth. In these days of persistently slow growth, that view is painfully incomplete.

I don't imagine that I'm the first person ever to identify rising financial cost as the source of the cost pressure that forces us to choose between inflation and slowing growth. So I went looking for studies and statements where other people have expressed a view like mine. I came upon The Interest Cost-Push Controversy (PDF, 8 pages) by Thomas M. Humphrey. It sounded promising.

Humphrey's paper describes a controversy between Thomas Tooke and Knut Wicksell regarding the cause of inflation. Tooke said high interest rates add more to the cost of output than do low interest rates, so high interest rates are inflationary. In response, Wicksell developed a whole theory. Today, Wicksell's thinking is embedded in our thinking. When I said above that we cannot have inflation unless the quantity of money increases enough to support spending at the higher price level, that's Wicksell. I didn't know.

Humphrey writes:

The Tooke-Wicksell controversy is important not only because it produced the first clear statement of the interest cost-push doctrine as well as the first rigorous and systematic attempt to disprove it, but also because it helped establish the case for tight money and because it introduced the prototype of the analytical macroeconomic model that most monetary authorities use today in designing anti-inflationary monetary policies.

I found the Wicksell stuff fascinating.

Thomas Tooke's argument, as presented by Humphrey at least, was disappointing. It is not about financial cost. It is only about the cost difference arising from a change in interest rates. The "so-called interest cost-push school," Humphrey writes, "... insists that higher interest rates are inherently inflationary because they raise the interest component of business costs".

Thomas Tooke, Humphrey says,

author of the monumental six volume History of Prices (1838-57), and foremost collector of price and monetary data in the 19th century, had advanced the interest cost-push argument that high interest rates cause high prices and low rates low prices.

Tooke's focus was the effect on prices of high versus low interest rates. Nothing else. Interest only. The difference in cost attributable to a change in interest rates.

Focusing solely on the cost aspects of interest and ignoring the influence on prices of interest-induced increases in borrowing, lending, the money stock, and spending, he asserted that a reduced loan rate “has no . . . tendency to raise the prices of commodities...”

The whole "interest cost-push" argument is based on the cost of interest being greater when interest rates are higher. I was looking for an argument about the cost of finance, not just the rate of interest. In this respect, the article was a disappointment.

It seems to me that Thomas Tooke considered his topic from a static microeconomic perspective, evaluating the cost of a loan at two different rates of interest. From a macroeconomic perspective, one would want to consider also whether the total number of loans increased over time, and the aggregate cost difference between the larger and smaller accumulations of debt.

If the rate of interest is constant while the accumulation of debt doubles relative to GDP, the cost of interest doubles, relative to GDP.

If the financial sector of the economy grows faster than GDP, it creates a continuing-cost problem for all other sectors of the economy. Depending on the level of accommodation by the Fed, the result is inflation, or slow growth, or both. This result will continue as long as finance continues growing faster than GDP.

And now you know how we got to where we are today.

Thursday, November 26, 2020

Shares of GDI and the Great Inflation

Allan Meltzer dates the Great Inflation as the period from 1965 to 1984:

Compensation of Employees as a percent of Gross Domestic Income:

Click the links below to highlight the graph:

1966 to 1970 may be the wage-push part of the Great Inflation. The increase suggests it.

1971 to 1985 certainly is not wage-push. The downtrend denies the possibility.

Come to think of it, 1954 to 1965 doesn't show a wage-push increase, either. Again, there is no trend of increase in employee compensation as a share of Gross Domestic Income. But something was driving prices up. In those years we find a worrisome warning of the Great Inflation to come: the creeping inflation of 1955-1958. Samuelson and Solow wrote of it in 1960:

This emphasis on demand-pull was somewhat reinforced by the Korean war run-up of prices after mid-1950. But just by the time that cost-push was becoming discredited as a theory of inflation, we ran into the rather puzzling phenomenon of the 1955-58 upward creep of prices, which seemed to take place in the last part of the period despite growing overcapacity, slack labor markets, slow real growth, and no apparent great buoyancy in overall demand.

If inflation was rising because wages were leading the way, wouldn't demand have been buoyant?

Everywhere you look, people say cost-push inflation was due to the rising cost of oil or the rising cost of labor. But that's in recent decades. In the 1950s and '60s, before oil became a problem, everybody blamed the cost of labor. The bleedin' obvious, Basil Fawlty would say.

Obvious, yes, but not the right answer.

The growing cost of finance in the 1950s was the spark that was to create the raging fire we call the Great Inflation. 

But these days, not so much the inflation. These days, finance hinders growth instead, because the Fed is less willing to "accommodate" the cost pressure. And again, let me add that because the cost of finance creates continuing cost pressure throughout the economy, the "hindering" of economic growth has become long-term economic decline.