Employee Compensation vs Interest Paid: The Corporate Business Cost Comparison. Again

  My graphs of 30 September show corporate interest cost (red) and corporate employee compensation (blue), each as a percent of total corporate deductions. I used total corporate deductions as a measure of total corporate costs.

Those graphs ended at 1980. Here's one of them:

Graph #1: Employee compensation falls while interest costs rise

Taking the same data and looking at it out to 2007 gives us this graph:

Graph #2 (from my 2010 post Components of Corporate Cost)

After 1980, employee compensation consistently hangs at the 20% level. Interest cost runs near 8 or 9 percent of corporate costs in the 1980s, then a bit less in the 1990s. Interest cost drops to 5% in 2003-04 but then goes up again, back to 8 or 9 percent by 2007, just in time for the financial crisis.

I'm thinking it wasn't the 8-or-9-percent level that caused the crisis, as we survived the 1980s at that level. So maybe it was the rapid increase after 2004 that brought on the crisis. But no, come to think of it, the Savings and Loan crisis started in the 8-or-9-percent 1980s:

The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of 1,043 out of the 3,234 savings and loan associations (S&Ls) in the United States from 1986 to 1995.

Thanks to that crisis, borrowing decreased and interest deductions came down. But then they started going up again.

As an overview of Graph #2, I'd offer the following:

• Before the 1970s, employee compensation fell gradually (and only a little). During those years, interest costs rose gradually (but rose more rapidly than employee compensation fell).
• After the early 1980s, employee compensation paid by corporations (as a percent of corporate deductions) hugged the 20% level; when it tried to rise, it failed. Interest costs paid by corporations (again, as a percent of deductions) were less stable, showing both decline and a tendency to increase.
• During the 1970s (or really, from the late 1960s to the early 1980s, during the most severe inflation of the Great Inflation period) employee compensation had its greatest decline and interest cost had its greatest increase.

I am forced to conclude that the Great Inflation was NOT caused by rising wages, but by rising financial costs. I also must say that the Great Inflation was cost-push, but it was NOT wage-push: It was financial-cost-push inflation.

And I have to add that financial cost has only grown since that time, along with finance. So I must also say we have NOT solved the cost-push problem that we experienced during the 1960s and 1970s.

And let me add that the insurmountable slowing of economic growth that we have seen since the 1980s after inflation was suppressed, this slowing is the OTHER outcome that arises from cost-push pressures: the outcome that arises when those pressures are not relieved by inflation. Recessions aside, economic growth was very good in the 1950s and 60s and 70s; but growth was slower in the 1980s and after (except in the latter 1990s, when the financial sector was recovering from the Savings and Loan crisis). Growth has been slower since the 1980s because of the cost-push pressure created by excessive yet still rapidly growing finance.

Note that I distinguish between the so-called slow growth of the 1970s, which was the result of policy creating recessions to slow the economy to fight the inflation, and slow growth after the 1970s, which was the result of cost-push pressures that were no longer being relieved by inflation. 

If you hesitate to accept that growth was slow after the 1970s, let me remind you what the well-known, well-respected economist Scott Sumner says:

I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy.

and

my view [is] that the neoliberal reforms after 1980 helped growth...

My view is that the neoliberal reforms did not solve the problem of excessive financial cost, and that despite those neoliberal reforms, the unresolved cost problem led to a continuation of slowing growth and ultimately to the financial crisis.

You might want to note also that the relatively good economic performance of the latter 1990s occurred immediately after the significant slowdown in the growth of debt in the decade after 1985: the slowdown that occurred during the Savings and Loan crisis of 1986-1995. That slowdown brought relief from the cost pressure created by finance. To offset the reduced borrowing, the Federal Reserve increased its holdings of Federal debt in two high and sustained bursts: one in the latter half of the 1980s, the other in the first half of the 1990s. The two unusually large increases are visible also in bank reserves, and in the quantity of M1 money, money which the St Louis Fed describes as "funds that are readily accessible for spending."

Beginning around 1990, the decline in debt and the increase in M1 money brought a noticeable increase in the quantity of funds readily accessible for spending, relative to the bills we have to pay. The increase peaked late in 1993 and was drawn down gradually. Not until the year 2000 was it fully exhausted. As a result of the change in financial and monetary balances, US real GDP growth was never below four percent from Q2 1996 to Q3 2000.

Moreover, inflation remained low despite the increased quantity of money, because the financial sector was smaller, credit use was less, financial costs were lower and, most significantly, because the extra money only filled a hole in the economy that was created by the reduced use of credit.

Alan Greenspan spoke of our "new economy" as if it might last forever, and attributed the good economic performance largely to technology. Ironically, Greenspan was the main man at the monetary authority during the decade of slow debt growth and rapid M1 money growth. I don't know how he could have failed to notice these changes.

Anyway, the Great Inflation of 1965-1984 was set in motion by rising financial cost. It was followed by the S&L crisis that led to reduced growth of financial cost for a decade. That, combined with unusually fast growth of the funds available for spending, reduced the financial cost embedded in the average dollar. We were then able to spend less money to pay for the money we spend, and spend more on the output we produce. And that -- not technology -- is why we had the good years of the latter 1990s.

Oh, technology made it happen, sure. But reduced financial cost made it possible.