Sunday, January 31, 2021

Cost Pressure and Long-Term Decline

I am always willing to say prices are influenced by the spending we do. That's demand-pull, the always-and-everywhere "monetary phenomenon".

However, I am never willing to let people deny the fact that cost pressures exist. Cost-push forces are just as real as demand-pull forces.

Here's the difference:

With demand-pull, the excess of demand over supply drives prices up. The inflation can be suppressed by suppressing demand and economic growth. Then, when demand returns to normal, the economy gets back to normal.

With cost-push, there is an underlying pressure that drives prices up. Inflation can still be suppressed by suppressing demand and economic growth. And when the inflation subsides, we expect things to return to normal. But as long as the cost pressure exists, the economy cannot get back to normal.

Cost pressure, when it exists, is not necessarily short-lived. The pressure may exist and exert upward pressure on prices for a prolonged period, perhaps decades. This longevity is all the more likely to occur when the consensus assumption dismisses rather than confronts the problem of cost pressure.

Finance creates continuing cost pressure in our economy. This cost pressure arises not from a sudden increase in prices such as we saw with oil, but from the continuing growth of finance relative to the size of our economy.

As long as finance continues to grow, the cost pressure exists. As long as finance continues to grow, the threat of inflation remains, and economic growth declines.

Saturday, January 30, 2021

Friday, January 29, 2021

The Fed needs a new name

"The Federal Reserve System is the central bank of the United States." That's according to the Federal Reserve Board. (PDF available)

But here's a noteworthy press release from the Federal Reserve Board:

April 24, 2020

Federal Reserve Board announces interim final rule to delete the six-per-month limit on convenient transfers from the "savings deposit" definition in Regulation D

For release at 10:00 a.m. EDT

The Federal Reserve Board on Friday announced an interim final rule to amend Regulation D (Reserve Requirements of Depository Institutions) to delete the six-per-month limit on convenient transfers from the "savings deposit" definition. The interim final rule allows depository institutions immediately to suspend enforcement of the six transfer limit and to allow their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits at a time when financial events associated with the coronavirus pandemic have made such access more urgent.

The regulatory limit in Regulation D was the basis for distinguishing between reservable "transaction accounts" and non-reservable "savings deposits." The Board's recent action reducing all reserve requirement ratios to zero has rendered this regulatory distinction unnecessary.

Concurrently, the Federal Reserve is making temporary revisions to the FR 2900 series, FR Y-9, and FR 2886b reports to reflect the amendments to Regulation D.

The reserve requirement is zero across the board. The Federal Reserve System is no longer a "reserve system".

I suggest we call it the "Zero Reserve System".

Thursday, January 28, 2021

Mason, Rabinovich, Financialization

Joel Rabinovich. The financialisation of the nonfinancial corporation. A critique to the financial rentieralization hypothesis. 2018.  hal-01691435

As usual, I end my analysis at 2019 so as to exclude the massive covid shock.

JW Mason's “Has Finance Capitalism Destroyed Industrial Capitalism?” links to the Rabinovich paper. Mason says

As Joel Rabinovich convincingly shows, the increased financial holdings of nonfinancial corporations mostly represent goodwill from mergers and stakes in subsidiaries, not financial assets in the usual sense, while the apparent rise in their financial income of in the 1980s is explained by the higher interest on their cash holdings.

 I had to look:

Abstract: One aspect in which nonfinancial corporations are said to be financialised is that they emulate the asset and income structure of financial corporations. This is what we call the financial rentieralization hypothesis. In this article we show that the evidence used to sustain it, in the US setting, has to be reconsidered. Our findings show that, contrary to the financial rentieralization hypothesis, financial income averages 2.5% of total income since the ‘80s while net financial profit gets more negative as percentage of total profit for nonfinancial corporations. In terms of assets, some of the alleged financial assets actually reflect other activities in which nonfinancial corporations have been increasingly engaging: internationalization of production, activities refocusing and M&As.

I always look at cost. Want to measure financialization? What does it cost? And then: Who gets the income? Put the answers on a graph and you're good. I don't put much stock in "asset and income structure" and the like. But then, I'm just a hobbyist. What do I know.

In my recent glance at corporate profit, lacking both the data and the will to search endlessly to find it, I assumed that the return on financial assets is equal to the return on nonfinancial assets. I think that's a reasonable assumption. Financial assets are growing as a share of the total assets of nonfinancial corporations; this suggests that the financial return is better than the nonfinancial return; the better return would explain the growth of those assets.

On the other hand, it could be that financial assets (like the stocks and bonds in your safe) require less attention than nonfinancial assets (which require maintenance and the services of labor) so that a lower return on financial assets might be considered of equal value to a higher return on nonfinancial assets. Could go either way.

So I guessed that the rates of return are the same. This graph shows the financial-asset share of the profits of nonfinancial corporate business (NCB) as a percent of GDP:

Graph #1: Financial Asset Share of NFC Profits, as Percent of GDP

Rabinovich (2018) says "financial income averages 2.5% of total income since the ‘80s". I don't know what he means by "total income", specifically. But just by eye, I'd say my graph also averages about 2.5% since the 1980s. Pure coincidence, probably.

But maybe the rates of return are equal for financial and nonfinancial assets.

I read the Rabinovich PDF until my head was spinning, and all I learned was:

Our results show that mimicking finance was not a strategy verified in aggregate terms.

Well, fine. I'm interested in cost, not mimicry. But that was the least of my concerns. Considering the question "what type of assets should be considered as financial?" Rabinovich brings up another problem:

practically the entire increase in financial assets [relative to] total assets is due to a residual variable, ‘Unidentified Miscellaneous Assets’, which is considered as financial by the Financial Accounts of the USA.

As Mason has it:

the increased financial holdings of nonfinancial corporations mostly represent goodwill from mergers and stakes in subsidiaries, not financial assets in the usual sense

Assuming this is significant, it shoots my glance at corporate profit in the ass. No matter that "the ratio of financial assets to non-financial assets has gone from 40% in 1950 to 120% in 2001". No matter.

What else could I look at, I wondered, if not assets.

The cost of interest. The cost of interest paid by nonfinancial business corporations. And the interest received by nonfinancial business corporations, which is a cost to the rest of the economy.

Graph #2: NCB Interest Paid (blue) and Received (red) as Percent of GDP

Red: Monetary Interest Received by nonfinancial corporate business
Blue: Monetary Interest Paid by nonfinancial corporate business

Interest paid is significantly higher than interest received, as a percent of GDP: The blue line is higher.

The two follow a similar path: gradual increase to the 1970s; then rapid increase, especially in the last half of the 1970s; no increase in the 1980s; gradual decline thereafter. Reminds me of the path of interest rates.


Next graph, same data, "normalized" I think you'd call it. To remove the effects of the rise and fall of interest rates, I divided both red and blue by the Prime Rate:

Graph #3: NCB Interest as % of GDP: "Normalized" for the Prime Rate

Red is received. Blue is paid. The lines appear close but are on different axes, so they may not be close at all.

Red runs below blue until after the 1974 recession, then runs above blue until the Great Recession, then below blue again. But again, the red-to-blue comparison is an illusion because the lines are on different axes. We can say only that the lines are similar.

Notice the sharp rise after 1981 on Graph #3. On Graph #2 the sharp rise occurs before 1981. The difference is due to interest rates, which peaked in 1981. Where Graph #2 shows almost no increase in the 1980s, on Graph #3 the same data -- divided by the interest rate -- shows sharp increase because interest rates fell sharply after 1981. The increase on Graph #3 is a denominator effect.

However, both lines show a trend of increase before the sharp increase. Both lines show a trend of increase after the sharp increase. And of course both lines show increase during the sharp increase. Both lines are low early and high late. That's rising financialization.


Next graph, again for nonfinancial corporate business: Interest received as a percent of interest paid:

Graph #4: Interest Received as a Percent of Interest Paid, Nonfinancial Corporate Business

The line runs low until 1970, then shoots up until 1981, then runs high until the financial crisis.

"Low" is mostly between 25 and 30 percent. "High" is almost mostly between 50 and 60 percent. The "high" is twice the level of the "low". After the 1970s, interest received is twice as much as it was before the 1970s, relative to interest paid. That's rising financialization. 

Note also that both before and after the increase of the 1970s, a trend of increase is visible. That's rising financialization. And it's not because of changes in interest rates. Interest rates in the numerator and in the denominator for the most part cancel each other out on this graph.

In Mason's article, the one that links to Rabinovich (2018), JW says

the apparent rise in [the] financial income of [nonfinancial corporations] in the 1980s is explained by the higher interest on their cash holdings.

I believe Graph #4 shows that "the higher interest on their cash holdings" *is* financialization, and not just a happy accident.

Mason's article is still in the "proofread" stage. I don't see on my Graph #2 much of a "rise" in interest received "in the 1980s". I have to go with what I see, and I figure Mason will say something I can live with in final draft.

My graphs #3 and #4 do show increase in interest received "in the 1980s". But they show increase from the 1950s to the Financial Crisis. Far as I'm concerned, that's rising financialization. All of it.

Mason also points out that

[household debt] rose as a result of the high interest rates after 1980, not any increase in household borrowing.

I remember him pointing that out some years back:

... changes in borrowing behavior has played a smaller role in the growth of household leverage than is widely believed. Rather, most of the increase can be explained in terms of “Fisher dynamics” — the mechanical result of higher interest rates and lower inflation after 1980.

In other words, household debt rose as a result of high real interest rates after 1980, not any increase in household borrowing. High interest rates, relative to the rate of inflation.

Yeah. I think he was right about that. But in the recent post he omits the word "real". It makes a difference. We didn't have "high interest rates after 1980". We had falling rates. 

After 1981, actually.

Also in the recent post, Mason goes on to say this:

With the more recent decline in interest rates, much of this supposed financialization has reversed.

He stops me cold. He's talking about a decline of financialization since the time of the Financial Crisis. Do you see that on my graphs? I don't. Mason posits that what looked like financialization (until the crisis) was really just the result of high interest rates, and that "the more recent decline in interest rates" is evidence of it.

Mason's view seems far less plausible when the disruption of 2007-2010 is offered as an alternative explanation: Of course financial income went into decline: Finance was in crisis. It's not like we had the crisis because interest rates fell. It was the other way round. 

The "recent decline in interest rates" happened because of the crisis. Six decades of increasing financialization created a financial crisis which brought a response that pushed interest rates and costs to low levels. This is in no way the same as financialization going into reverse.

Anyway, graphs #2, #3, and #4 all show renewed increase in the most recent years. They show the rise in financialization resuming. Of course this has something to do with rising interest rates --  and with inflation. But it also has something to do with the increase in borrowing and the increase in financial activity generally

The interest rate is the price of credit. Credit is the product of finance. An increase in the cost of finance -- not only in the rate of interest, but in the whole cost of finance -- is the same as rising financialization.

I find Joel Rabinovich's paper useful for my purposes. It shows that financialization is not due to nonfinancial business "mimicking finance". It warns that financial assets are only allegedly financial (though I will wait for second-source confirmation before adopting that view). And it leaves open the method of measuring financialization in terms of cost.

Tuesday, January 26, 2021

Notes on the Biden Inaugural

Quotes from the Inaugural transcript at Politico, followed by my remarks.

President Biden:

I understand that many Americans view the future with some fear and trepidation. I understand they worry about their jobs, about taking care of their families, about what comes next. I get it.

But the answer is not to turn inward, to retreat into competing factions, distrusting those who don’t look like you do, or worship the way you do, or don’t get their news from the same sources you do. We must end this uncivil war that pits red against blue, rural versus urban, conservative versus liberal.

I understand that Biden's main theme was unity, and I certainly acknowledge that unity is a high priority. I'm not sure, from reading Biden's speech, if the people he wants to bring into the fold will be enticed by what he's offering. I don't think I'd be comfortable with it, if I was one of them.

But in the words quoted above, Biden says people are worried "about their jobs, about taking care of their families, about what comes next." These are economic concerns. You're not going to solve our economic problems be being unified. You need a plan. More than that: You need some version of the right plan. You can only solve our economic problems if you understand what's causing them and if you shut down the problem at the source. 

For the record: the federal debt isn't the problem. It's a consequence of the problem. It will be easy to keep the federal debt in check if we solve the real problem, which is the rest of the debt -- debt other than federal. It's the private sector that needs to grow, so it's private sector debt that has to be reduced, by hook or by crook. 

Most especially by policy. We just need a little creativity. Look at it this way: They make laws that encourage borrowing, but they don't make laws that encourage repayment of debt. So debt accumulates. That's the problem that must be fixed.

What, you thought the problem that created the Financial Crisis was solved?


Again, Biden:

Few periods in our nation’s history have been more challenging or difficult than the one we’re in now.

Not sure how long a period of time Biden has in mind when he says "the one we're in now." Short, probably. Since 6 January? The last four years, perhaps? Surely not decades.

We'd be lucky if it's only decades. Ian Hall writes of Arnold J. Toynbee:

The modern West, he believed, was past its genesis and growth phases, and was now in breakdown—indeed, it was now in a ‘Time of Troubles’ from which only a resurgence of ‘creativity’ could liberate it.

Not sure about this; I'm no expert on Toynbee. But it occurs to me to wonder if perhaps the "Time of Troubles" of our civilization is the whole of the "capitalism" phase of the cycle of civilization. The timing is right

Toynbee argues that our own time of troubles began during the eighteenth-century Enlightenment.

Ian Hall writes: "the most obvious symptom" of a Time of Troubles is "persistent, unlimited war"; the kind of war that "threatened the existence of the civilization." World wars; nuclear weapons; chemical weapons; biological warfare. 

Ian Hall on the Time of Troubles:

The causes of this development, Toynbee argued, were many and varied. First, there was a palpable loss of creativity, of the ability to respond to new challenges. 

Loss of "the ability to respond to new challenges": Our inability to solve perennial and long-term problems such as economic depression and the decline of growth.

Second, he observed that each civilization had seen a [schism] between the ‘dominant minority’ and the ‘internal proletariat’. 

Came to a head on the sixth of January, didn't it. Turns out Trump's people are the internal proletariat.

Third, he noted the presence in each case of an ‘external proletariat’ of barbarians or foreigners from a different civilization, which threatened the civilization from beyond its walls. 

Osama bin Laden and Iran and all that, and the Islamic civilization.

Last, Toynbee detected a ‘Schism in the Soul’ of each civilization which led to such social evils as a longing for a lost past or an unattainable future, a loss of individual or collective self-control, a rise in ‘truancy and martyrdom’, a tendency to fatalism, and an upsurge in cultural, sartorial, linguistic and sexual promiscuity.

A longing for a lost past? Perhaps like "Make America Great Again"? As for the rest, you probably know better than I.

Monday, January 25, 2021

The custom of paying in money

From 2014, I found this just now in my test & development area. It's not a final draft, but it's time to blog it!


 Adam Smith, at EconLib:

The revenues of the ancient Saxon kings of England are said to have been paid, not in money but in kind, that is, in victuals and provisions of all sorts. William the Conqueror introduced the custom of paying them in money.72 This money, however, was, for a long time, received at the exchequer, by weight and not by tale.73
That quote struck me when I read the paperback Wealth of Nations years back. At Econlib, however, footnote 72 disputes Smith's claim that William the Conqueror started paying the help in cash:
['King William the First, for the better pay of his warriors caused the firmes which till his time had for the most part been answered in victuals, to be converted in pecuniam numeratam.'—Lowndes, Report containing an Essay for the Amendment of the Silver Coins, 1695, p. 4. Hume, whom Adam Smith often follows, makes no such absurd statement, History, ed. of 1773, vol. i., pp. 225, 226.]
Absurd, then. I was a little disappointed to read that, as I've held on to that quote since the 1980s (or since whenever I first read The Wealth of Nations). But I went looking for Hume, History, volume i, pages 225-226, and I made out pretty well.

At Liberty Fund, volume 1 of David Hume's The History of England, [1778]. Nothing to quote, really, for Hume does not say "William did not pay his people in money" and Hume does not say "Smith is a jerk for saying such things". Nothing specific that's relevant. I would point out, though, that The Wealth of Nations was published two years before Hume's 1778 volume, so maybe Smith was unlikely to "follow Hume" in this particular case.

At the Liberty Fund link, the page numbers are embedded in the text!! (In case you were wondering how I found pages 225 and 6.) Just search for the page number in square brackets: [225] for example, or [226]. I don't know for a fact that Liberty Fund and the EconLib footnote refer to the same edition of Hume's work with the same page numbering, but in this case it seems a fair guess.

So, okay, well... What does Hume have to say on the subject? I searched for coin. I found coincide a couple times, and coined. The fifth hit was a relevant one. Page [278]:

It is said, i that this prince, from indulgence to his tenants, changed the rents of his demesnes, which were formerly paid in kind, into money, which was more easily remitted to the Exchequer. But the great scarcity of coin would render that commutation difficult to be executed, while at the same time provisions could not be sent to a distant quarter of the kingdom. This affords a probable reason, why the ancient kings of England so frequently changed their place of abode: They carried their court from one palace to another, that they might consume upon the spot the revenue of their several demesnes.
Which prince?... Henry... in the early 1100s... King Henry
In other respects, he executed justice, and that with rigour; the best maxim which a prince in that age could follow. Stealing was first made capital in this reign:c False coining, which was then a very common crime, and by which the money had been extremely debased, was severely punished by Henry.d Near fifty criminals of this kind were at one time hanged or mutilated; and though these punishments seem to have been[278] exercised in a manner somewhat arbitrary, they were grateful to the people, more attentive to present advantages, than jealous of general laws.
//I have some other note that says HENRY started paying in money
//find that old note for this post Art

This is from my son's high school history book (Welty and Greenblatt pp.587-589):

The first nation-state to develop in Western Europe was England. The story begins with the conquest of Anglo-Saxon England by William the Conqueror, Duke of Normandy, in 1066.

William imposed his own type of feudal system on England. He took away much of the land that had belonged to Anglo-Saxon nobles and gave it to his personal followers. However, he did not completely trust these nobles so the manors he gave them were widely scattered.
At the time the nobles (like the kings, I presume) had to travel from one manor to another and consume their 'taxes' in kind.
William also required that the nobles take an oath of allegiance to him. Decentralization of authority was basic to the feudal system, but the new Norman ruler wanted as much power as possible in his own hands.

William's successors continued to try to lessen the power of the nobles. Henry I (1100-1135) began to pay his officials salaries, making them more dependent upon him. He also established a royal court and a treasury that audited the accounts of the kingdom. Henry established one system of law for all his subjects. It incorporated much from both Anglo-Saxon and feudal customs and practices.
Okay. The part about William the Conqueror is for context. Henry I came later. Henry I (1100-1135) began to pay his officials salaries...

Forget the part about "making them more dependent on him". Maybe that follows, maybe it doesn't. But if it wasn't William the Conqueror -- or "William the Bastard" as he is sometimes called -- who started paying his people in coin, then it was Henry not long after William. 1100 is not that long after 1066.

So: After the Dark Age, in Charlemagne's time, 800AD, coin started coming back. And then, some 300 years later, governments started paying people in coin.

Things moved slowly in those days.

Friday, January 22, 2021

Henry Hazlitt, by the way, author of "Economics in One Lesson"

F. A. Hayek, in The Road to Serfdom:

Most planners who have seriously considered the practical aspects of their task have little doubt that a directed economy must be run on more or less dictatorial lines...

from his chapter bearing the title "Economic Control and Totalitarianism". 

What Hayek said about totalitarianism was reinforced, for me, by what the historian William E. Leuchtenburg wrote about the Great Depression in Franklin D. Roosevelt and the New Deal:

It was frequently remarked in later years that Roosevelt saved the country from revolution. Yet the mood of the country during the winter of 1932-33 was not revolutionary. There was less an active demand for change than a disillusionment with parliamentary politics, so often the prelude to totalitarianism in Europe...

Many Americans came to despair of the whole political process, a contempt for Congress, for parties, for democratic institutions...

Many believed that the long era of economic growth in the western world had come to an end...

Many argued that the country could get out of the morass of indecision only by finding a leader and vesting in him dictatorial powers. Some favored an economic supercouncil which would ignore Congress and issue edicts; Henry Hazlitt proposed abandoning Congress for a directorate of twelve men. Others wished to confer on the new president the same arbitrary war powers Woodrow Wilson had been granted. Even businessmen favored granting Roosevelt dictatorial powers when he took office.... "Of course we all realize that dictatorships and even semi-dictatorships in peace time are quite contrary to the spirit of American institutions and all that," remarked Barron's. "And yet -- well, a genial and lighthearted dictator might be a relief from the pompous futility of such a Congress as we have recently had.... So we return repeatedly to the thought that a mild species of dictatorship will help us over the roughest spots in the road ahead."

From our vantage point some nine decades after the start of the Great Depression, we know the Depression as an economic problem. Why all the sick chatter about dictatorial power and replacing Congress? And indeed, why all the sick politics of our time?

Like the Great Depression, the problem of our time -- the problem of the last half-century and counting -- is an economic problem. But it's not our only problem. I see two others:

  1. Our leaders, and the voters who lead them, act as if they know what must be done to solve the problem. They don't.

  2. Our leaders, unaware of the source of the problem, apply as a solution policies that are similar to those that created the problem to begin with -- policies based on their same flawed ideas.

Thursday, January 21, 2021

The trouble with models


There are several different ways of doing good economics. ... But what has always appealed to me, ever since I saw Nordhaus practice it on energy, is the MIT style: small models applied to real problems, blending real-world observation and a little mathematics to cut through to the core of an issue. 
The first summer I worked for him, Nordhaus began with only a vague sense of how to think about the problem of appropriate pricing of energy. I was able to watch the process by which he crystallized that vague sense into a model, and then was able to see the way in which that model transformed everyone's perception of the issue.

In one summer -- three months, or some portion thereof -- Nordhaus went from having no idea about the appropriate pricing of energy, to transforming everyone's perception of the issue.

My first computer was a Radio Shack PC-1 "pocket computer" with one K of memory and the BASIC language built in, a gift from my mother-in-law.

I read the manual and tried to figure out how to use the BASIC language. But I could make no headway. So I got a little book of computer games written in BASIC, and typed one in. When I ran it, there was an error. So I compared what the book showed to what I had typed. There was a discrepancy: As I remember, I used a semicolon where I should have used a colon. Something like that, anyway. 

I fixed the problem, and ran the program again. But there was still an error. I checked my work, found the discrepancy, fixed it, and tried again. But the error was still there.

About that time I noticed that it wasn't the same error every time. Each error was a little further down in the code. Suddenly I realized that the computer was helping me fix my errors, one at a time, and that we would eventually run out of errors.

Fortunately it was a short program. We ran out of errors, the computer and I, before I ran out of patience. And suddenly, instead of getting an error, the little game worked. After that, computers got a lot easier. And I was hooked.

That all probably took me three months, or some portion thereof.

When I felt like I could do more than my little computer could do, I signed up for a course in BASIC programming. Loved it. After that, I got my first desktop computer, a Commodore 64. In addition to BASIC, I taught myself assembly language and tried to learn the C language.

Later on, I graduated to an IBM-PC compatible, learned assembler all over again, and finally succeeded in learning C. Later on again, I found the "Visual Basic" language that comes with Excel, and picked that up. By this time, Krugman was probably a full professor.

I wasn't into collecting recipes, and I hadn't yet started using the computer to keep notes and quotes from my reading. But I was always interested in using the computer to solve problems that came up at work -- mostly problems like "this is tedious and boring". Things are very often tedious and boring because they are repetitive, and computers are very good at doing repetitive things. So I always had little puzzles to work out on the computer, even if I didn't get to use them at work, and I learned a lot.

During that time, Krugman's beard would have been turning gray.

The last place I worked, I was there 15 years before retiring. We had a metal shop where we fabricated steel components. We had a wood shop where we built large assemblies, always similar in design but differing in dimensions and details. Repetitive work.

My job was to make drawings for the wood and metal shops, based on customer requirements. Everything was made of lumber held together with steel components. Because the stuff we made was almost always similar to something we made before, for a new job we'd start with some old drawings and start making changes. Again, repetitive work.

You know how it is: Work is work. It's good most days, but once in a while it gets to ya. The longer I was there, the more some particular tasks seemed particularly tiresome. I would take one of those tasks, take it home, and see if I could use the computer to automate it. Sometimes I could.

Because we used computers to do our drawings, sometimes I would bring my automation stuff to work and start using it, and actually make my job less boring. But after you make the most boring task less boring, you soon find that some other task is now the most boring. So I always had something to work on.

Long story short, after several years I had enough stuff automated that my computer was doing a good portion of my drawings for me, while I just coached it. My drawings got more standardized. And because AutoCad, like Excel, came with Visual Basic, I was able to automate the process of making parts lists in AutoCad, transferring them to Excel sheets, and generating the information the production shops required. Talk about relieving tedium!

I retired five or six years ago now, and they still use the system that I came up with on my own time.

The trouble with models

The point of this story is that, when you're dealing with a complex system like manufacturing or the economy, you don't sit down for a couple days and have the whole thing worked out.

You don't start by knowing nothing about it, and end up two months later knowing so much that you transform the world. Not in manufacturing, and certainly not when you're dealing with the economy. (Not that Krugman is saying otherwise.)

You don't start with a fragment of the production process or a fragment of the economy, work out some nifty little thing, and call it done.

The world of computer programming didn't go my way. They made standardized accounting software and standardized  manufacturing software, and you're expected to pay hundreds of thousands of dollars to buy it. And then you've got so much money invested in it that you refuse to listen when your people tell you that the new software doesn't work the way your company works.

I didn't automate anything for a long time. My first task was to get familiar with what we do and the way we do it, familiar with it to the point where the boredom was becoming painful. And then the mind would wander, and I would think of a way to automate some little piece of the boring process.


Or the mind would wander, and I would realize that no one addresses the cost problem behind cost-push inflation. They just quash the inflation.

Or I would realize that the cost problem, unaddressed, causes the fall of profits and living standards.

Or I would realize that the fall of profits and living standards is exactly the problem we face every day.

Or I would realize that the cost problem might not go away on its own. It might survive for decades. It might cause profits and living standards to fall for decades, maybe longer.

Or I would realize that the growing cost of finance is exactly the sort of problem that could cause this long-term decline.


The only thing I haven't realized yet is how to convince people of the importance of these realizations.

Wednesday, January 20, 2021

Excerpts: Charles L. Schultze, 1959





Charles L. Schultze











What happens when you fight cost-push by reducing demand?

"When, as in recent years, prices are rising during a period of growing excess capacity, a further restriction of aggregate demand is more likely to raise costs by reducing productivity than it is to lower costs by reducing wages and profit margins."
[page 2, item 11]


Something I never thought of, the second sentence here:

"Prices and wages have a dual nature when considered in the aggregate: they are costs to buyers and incomes to sellers. Thus an increase in the general level of prices does not automatically mean a reduction in the quantity of goods and services demanded as it normally would in the case of a single commodity. The increased cost of purchasing any article or any factor of production is matched by the higher incomes received by the seller. So long as the increase in prices is accompanied by an equal increase in money expenditures, real purchases of goods and services will not be affected and employment will not be reduced."
[page 5] [but watch out for indirect effects, Schultze says.]

Okay. If prices go up and money is spent faster, money is also received faster and people have money to buy everything they planned to buy before prices went up. So... First thoughts:

  • Inflation isn't a problem? Wrong. The value of the dollar is still affected.
  • You still need to raise interest rates? Yes because otherwise there is nothing to stop the inflation. But then, Schultze points out that 
    "With a constant money supply, higher prices normally lead to a tighter money market, which in turn has some depressing influence on investment demand."
    Interest rates would tend upward on their own. // Note also that Schultze is not yet thinking in terms of household demand for credit. It was 1959, after all.

I consciously didn't say above that "we spend more". I said "money is spent faster". We don't have more money, so we can't spend more. Velocity goes up instead. This presumes, however, that we're not yet spending money as fast as we can. You can't spend it faster than you get it.

Still on page 5, Schultze finishes his thought:

"If these and other indirect effects are important, their depressing influence on demand must continually be offset by demand increases from other sources, if the rising price level is not to result in rapidly growing unemployment."
This one clearly applies to cost-push inflation in general: A rise in prices unaccompanied by a rise in the money supply will depress demand. So will prices that are held steady by restricting money growth. For demand-pull inflation that's the goal. But for cost-push it's a problem.

Schultze asks: "Do labor unions and monopolistic firms largely disregard the state of the market in setting prices and wages?" One answer:

"The possibility that strongly organized groups can push up their cost prices in the absence of ex ante excess aggregate demand is not 'an empirically important possibility,' according to these demand-pull theorists."
[page 6, quoting Milton Friedman.] [Surprise!]
Schultze continues:
"Further, according to this theoretical approach, the existence of inflation implies that the excess demand must be an aggregate excess. If prices and wages are responsive to demand conditions, excess demands in particular areas of the economy, balanced by deficient demands in other sectors, will merely lead to a realignment of relative prices."
[page 7]
That's right... The demand-pull view insists that all price increases are relative, except when all prices are going up because there is too much money.

Schultze is single-handedly demolishing Friedman! What a treat it is to read this stuff!

I can use this one:

"No one would deny that there is some level of unemployment and excess capacity which would halt a price-wage spiral."
[page 7]

I like what he says, because creating unemployment and excess capacity (and recession) does not solve the cost-pressure problem. This is a problem that can bring civilization to its knees, and everyone ignores it.

How not to identify cost-push:

"The fact that in recent years wages have risen faster than productivity, for example, is often cited as evidence that we have been experiencing a cost-push inflation. But this relationship tells us absolutely nothing about the nature of inflation. In the purest sort of demand-pull inflation, wages would also rise more rapidly than productivity. By the same sort of "reasoning" we could cite the fact that money expenditures rose more rapidly than output as a proof of demand-pull inflation. An equally strong condemnation applies to demonstrations which point to the rise in the money supply or its velocity as proof of the demand-pull nature of inflation."
Exactly right: If cost-push pressures convince the central bank that "accommodation" is necessary, that doesn't make the resulting inflation demand-pull. I like this guy.
"Even the timing of wage and price increases cannot be offered, by itself, as evidence of the nature of the inflationary process. Suppose, for example, that prices are marked up mainly in response to rising wages. Then an excess demand inflation will first lead to a rise in wage rates through its impact on the labor market, and only thereafter in a price rise. The historical data would indicate that the increase in wages preceded the rise in prices, yet the inflation would be one which was initiated by excess demands."
Yeah okay: if excess demand for labor leads to the wage hikes, that can get the ball rolling. I get what he's saying. Schultze offers another example:
"A cost-push inflation need not arise solely from an autonomous upward push of administered wages or prices. If prices are set by applying a constant margin to costs, and if wages are determined by movements in the level of consumer prices, then an initial general price rise, stemming from any source, can perpetuate itself, as wages and prices successively adjust upward to each other."

This last paragraph is good! And the one before. Schultze is concerned about how cost-push gets started, not only about how it continues. Too many explanations are of the "turtles all the way down" variety, offering no hint of what it was that got the ball rolling in the first place. 

(Hint: It was the cost of finance. It's always the cost of finance. And that's always my answer.)

All of that is from page 7, by the way... page 14 of 144.

In that last example Schultze says an initial price rise from any source can perpetuate itself, as wages and prices successively adjust upward in response to each other. Agreed. So how come everybody on the internet says cost-push inflation is temporary and rare???

Art walks away, mumbling to himself.

Tuesday, January 19, 2021

Pop goes the weasel

From the St Louis Fed: 

Managing a New Policy Framework: Paul Volcker, the St. Louis Fed, and the 1979-82 War on Inflation (PDF, 32 pages) by Kevin L. Kliesen and David C. Wheelock

Whether you applaud or outright reject monetarism, 1979-1982 is a significant moment in US economic history. I started reading their paper soon as I found it, one o'clock in the morning no matter.

I got to the fifth paragraph before I had to stop and respond. Kliesen and Wheelock write:

Volcker was a forceful leader who acted on his conviction that a regime change was necessary to bring inflation under control. Many of the obituaries and commentary after his death cited approvingly Volker’s commitment to restoring price stability and the Fed’s credibility. Volcker’s policies were controversial at the time, however, and arguably contributed to a severe “double-dip” recession in 1980-81.

Arguably contributed? Volcker's // oh my god they spell his name two ways in that paragraph! Even the Blogger editor recognizes the misspelling and offers to add a "c".

They say Volcker's policies arguably contributed to a double-dip recession. That's shirking responsibility: There's nothing "arguable" about it. Milton Friedman in Money Mischief:

slow growth and high unemployment are not cures for inflation. They are side effects of a successful cure -- as we found out in 1980-83.

FRED's recession dates (from NBER) for the double-dip -- I don't think I've heard anyone call it that since the 1980s -- are

Peak  Trough
1980-01-01 1980-07-01
1981-07-01 1982-11-01

Date discrepancy: Kliesen and Wheelock refer to the two recessions by their start dates; Friedman captures the whole of those recessions with his dates. Do Kliesen and Wheelock use the dates they use as a way to weasel out of admitting monetary policy's responsibility for the recessions? POP! 

Probably not. I wouldn't even mention it, if not for their use of the word "arguably".

Paul Krugman:

A lot of what we think we know about recession and recovery comes from the experience of the 70s and 80s. But the recessions of that era were very different from the recessions since. Each of the slumps — 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 — were caused, basically, by high interest rates imposed by the Fed to control inflation...

Since the mid 1980s, however, we’ve had the “Great Moderation,” with inflation quiescent. Post-moderation recessions haven’t been deliberately engineered by the Fed ...

There it is again -- "double-dip". Like me, Krugman is old enough to remember that description in use at the time.

In addition to the recessions identified by Krugman, there was the near-recession of 1966-67: 

Having choked off the money supply as an anti-inflation device in 1966 so tightly that it produced a serious slump in housing and construction (called by some a "mini-recession"), the central bank started pouring out money too quickly and too generously in 1967 and thereby spoon-fed a new inflation.
Source: Stabilizing America's Economy, George A. Nikolaieff, editor; from "Nixonomics: How the Game Plan Went Wrong," by Rowland Evans Jr. and Robert D. Novak, as it appeared in Atlantic Monthly, 228:66-80. July 1971.
And on that note, there is Milton Friedman in Newsweek, October 17, 1966:
The only way to make an expansion of this kind last is to continue to accelerate monetary growth. However, that would produce still more rapid inflation. To avoid this consequence, the Federal Reserve has already sharply reduced monetary growth—indeed, too sharply—to a rate of about 3 per cent a year since April.

The tapering off of monetary growth, like the initial monetary expansion, will at first affect production more than prices...

It is probably too late to avoid a mild recession...

Friedman wasn't afraid to admit that tight money can cause recession.

Friday, January 15, 2021

GDP and the compensation of employees

Found myself looking at Compensation of Employees at FRED. It has a series name that's easy to remember: COE. "C" is for "compensation" ... "O" is for "of" ...

The everyday view: As Percent of GDP:

Graph #1: Compensation of Employees as a Percent of GDP
COE includes "wages and salaries" and "supplements to wages and salaries"
(which I think means "benefits")

Lots of sharp edges on that blue line.

The first big increase, from First Quarter 1950 to Fourth Quarter 1953, that's gotta be because of the Korean war.

The second big increase, from Q1 1966 to Q1 1970: That would be part of "the Great Inflation".

From that peak, downtrend to mid-'84: That also occurs during the Great Inflation. But it shows a downtrend. Compensation of employees didn't fall in those years. But it fell behind. GDP increased at a faster rate. In other words, after 1970 it wasn't wages driving prices up. Wages were failing to catch up.

It still irks me that the inflation was described as "wage-push".

Another oddity: The blue line goes downhill from 2001 to 2012, except for an upward burp before and during the 2009 recession, the one they call "the Great Recession." 

Plenty of "Great" stuff on this graph: Everything but the economy.


That "burp", where employee compensation appears to be going up at a time when the economy is on the brink of collapse, that can't be compensation going up. It's gotta be GDP falling faster than payroll.

Maybe we can see it. I can put compensation of employees and GDP on separate lines, and compare rates of growth:

Graph #2: Percent Change from Year Ago of Compensation of Employees (blue)
and Percent Change from Year Ago of GDP (red)

Yes: Just to the left of the 2010 date, the vertical gray bar marks the "great" recession. Just to the left of that, the blue line is above the red. And just a pixel or two to the left of that, the red line starts above the blue and drops below it. Red is falling faster than blue.

Something similar must happen within the vertical gray bar -- because on Graph #1 the line goes up twice in the gray bar -- but I can't see it on this graph.

Take a moment to look at the whole graph: Isn't it interesting that the two lines vary so much but still run so close together? That's how it struck me. It shouldn't be surprising, though. Okun's law says we should expect that kind of behavior.


I can take those two lines and subtract one from the other. Because the lines vary similarly, a lot of the variation will go away.

If I start with GDP growth and subtract compensation growth, the resulting line will be above zero when GDP is growing faster than compensation, and below zero when GDP is growing slower than compensation. So then we will be able to see what happened during the Great Recession when both lines on Graph #2 were falling.

The blue line is the result of the subtraction:

Graph #3: GDP Growth Rate minus Compensation Growth Rate

Willikers! It's jiggier now than before! I said a lot of the jigginess would go away.

Actually, much of the variation did go away. Yes, the line is still crazy up-and-down, probably more than before. But almost all of it is contained between 3 and -3 on the vertical axis. On Graph #2 the lines were mostly contained between 15 and zero or maybe 15 and -5. There was a lot more distance between highs and lows on Graph #2. On #3, a lot of that variation is gone.

Graph #3 shows only the gaps between the red and blue lines of Graph #2: the difference between the lines. The distance between red and blue on #2, that's exactly what Graph #3 shows.


So... We were going to look at what happens during and just before the Great Recession.

Just before the gray bar of the Great Recession, there is a sharp "V" as the blue line falls below the -1 level and then bounces back up to zero just around the start of the recession. The line goes below zero because compensation was growing more -- or shrinking less -- than GDP. This corresponds to the spot on Graph #2 where the blue line was above the red, just to the left of the Great Recession.

Now, within the gray bar: On Graph #2 we couldn't see what happened. On Graph #3 we see a very sharp, very narrow drop toward the -2 level in the middle of the gray bar. For that brief time GDP was falling faster than compensation.

The line then shoots up above the 2 level as compensation falls faster than GDP.

Immediately then, another drop toward zero, just at the end of the recession.

In sum: During the recession there were two brief times when GDP growth fell faster than compensation growth, plus the one brief time just before the recession. This accounts for the "burp" on Graph #1 -- three upticks before and during the Great Recession, where it looks like employee compensation was increasing when it should have been falling. It was falling. But so was GDP.

Well, I probably put y'all to sleep by now. Unfortunately, things are just about to get interesting. (But remember, it's me saying this.)


Looking at Graph #3 overall, I see a spike after every recession. Reminds me of productivity, "output per hour", where you also get a big spike after every recession.

Being a hobbyist of the economy, and one who learns mostly by looking at graphs that put other people to sleep, I have to wonder if there is any relation between the spikes in employee compensation and the spikes in output per hour. And of course I have to make another graph.

Graph #4: GDP versus Employee Compensation (Difference in
Growth Rates) (blue), and Output-per-Hour (Productivity) (red)

Well that's hard to look at. And there doesn't seem to be much similarity between red and blue. They start out alike, but then the red line drifts down and runs low for most of the graph. Then too, the jiggies seem to match until around 1970, but after 1970 they go off in different directions. At the start red and blue go up and down together. But in the 1990s (for example) red goes up while blue goes down.

Despite all these differences, if you look you'll see a good big spike after every recession, in both the red line and the blue. That similarity is interesting -- and all the more interesting because the red and blue are otherwise so different.


Coming out of every recession we have spikes in output per hour and in the growth rate difference, both.

The meaning of the growth rate difference is... GDP growth minus compensation growth... an upward spike means GDP is suddenly growing faster than compensation. In other words, employers are getting a bargain: more nominal output per dollar of labor.

And the meaning of an upward spike in the output-per-hour line? More real output per hour.

So those post-recession spikes mean more output per dollar of labor, and more output per hour of labor. Now, what can we learn from this? 

I have to think about that.

Thursday, January 14, 2021

"Grunt work" graph update

In my constant search for economic clarity, I recently noted that a lot of "personal income" comes from sources other than "the wages of labor" (to use Adam Smith's term). I found data for "Share of Labour Compensation in GDP", converted from percent-of-GDP to billions-of-dollars, and put it on a graph along with Personal Income.

I also showed the Labor Compensation number as a percent of Personal Income:

Graph #1: Personal Income (red), Labor Compensation in billions (blue)
and Labor Compensation as a Percent of Personal Income (green)

That was 22 days ago. Just this morning my plodding Neanderthal mind noticed that "Compensation of Employees" might make a useful addition to the graph.

I put it on there (purple line) and it came out just a little below the blue "Labor Compensation" number. Glad to see that, as it seems to suggest my thought process was on the right track.

Then I added a line showing Compensation of Employees as a percent of Personal Income (black) for comparison to the green line. Here's the graph:

Graph #2

Wow. There's a good big gap between green and black. Several percentage points. Not what I expected from looking at blue and purple.

Green and black do show similar paths, especially after the 1969 high point of the black line. From start-of-data, however, green runs downhill and black runs flat. And if you look a little before that high point, black is running uphill.


I thought I had found a click sequence that eliminated the title-text overwrite problem that FRED graphs sometimes have. 


Wednesday, January 13, 2021

To "B" or not to "B", that is the question

In the recent FRED Blog post I looked at yesterday, they say

Because money is valued as a payment instrument, people are willing to hold a fraction of their wealth in money form for the sake of convenience, even though money earns relatively little interest and cash usually earns no interest at all.

I see that line of reasoning too often:

  • Scott Sumner relates it to velocity: "Interest rates are the opportunity cost of holding cash.  If you lower interest rates, people will choose to hold more cash."
  • David Glasner says there is "a rental price for money, and that rental price represents what you have to give up in order to hold a unit of currency in your pocket or in your bank account. What you sacrifice is the interest you pay to the one who lends you the unit of currency, or if you already own the unit of currency, it is the interest you forego by not lending that unit of currency to someone else..." He claims, bizarrely, that there is no opportunity cost if you borrowed the money you're holding, but an interest cost instead.

That's way more times than I ever wanted to see that reasoning.

To put it in FRED Blog terms, the "fraction of their wealth" that people are willing to hold as non-interest-bearing money changes when the interest rate changes, but in the opposite direction. Something like that.

I have a problem with this whole line of reasoning, because I'm someone who always spends money quick as I get it. I never have to decide whether my preference is to earn interest on the money or to hide the money under the mattress and "pay" the opportunity cost.

It seems to me that the understanding economists have is based on either

  1. money is close enough to equally distributed that everyone has some to spare, so that everyone is faced with the question: to hoard or not to hoard? These alternatives are far more crucial than actually spending money in that world, it would seem. Or
  2. money is so unequally distributed that those who have some to spare have so much of it that their decisions drive the velocity of money. The rest of us spend every dollar and have nothing at all to spare, but still don't spend enough to have an effect on the velocity of money.

"A" is obviously false. "B" is absurd -- it is absurd to imagine that the vast bulk of the American people spending the vast bulk of their income might have essentially no effect on the velocity of money -- and yet "B" is evidently true, as it is obviously false to say money is close enough to equally distributed that everyone has some to spare.


Tuesday, January 12, 2021

(Snidely) "The Committee’s choice of a monetary policy framework is not a short-term choice."

Covid, Trump, and Money: Two serious distractions from my permanent and overriding focus. I skipped em.

Interesting post at the FRED Blog. It offers a good definition of money:

if you can use it to buy goods and services and to settle debts, then it’s considered to be money.

I still go by Joe Salerno's definition:

money serves as the final means of payment in all transactions.
which of course means money can be used "to settle debts". The FRED Blog definition is good.

The post -- by David Andolfatto and Joel Steinberg -- says the recent rise in M1 is the result of a change in Federal Reserve regulations:

On April 24, 2020, the Federal Reserve Board announced that Regulation D would no longer impose limits on the number of transactions or withdrawals permitted on savings deposit accounts.

Apparently, banks have the option to

continue to report the account as a “savings deposit”

or to suspend enforcement

of the six-transfer limit on a savings deposit, [and] report that account as a “transaction account”

Andolfatto and Steinberg say that the big increase in M1 is a result of banks opting to call the accounts "transaction" accounts. In other words, it's not an increase in the quantity of money. It's a change in the way money is counted. That makes sense: As they point out, there is no comparable big increase in M2 money (of which M1 is part).

This suggests that the rapid acceleration in M1 since May 2020 is mainly from money moving out of the non-M1 components of M2 into M1, rather than reflecting any acceleration in the demand for transaction balances.

This all makes sense. But it's not like nothing happened. M2 is more liquid than it was before. 

According to the post,

it’s not immediately clear what advantage there is from the bank’s perspective in relabeling savings accounts as transactions balances.

But there must be an advantage: "the big increase in M1" is evidence of it.


The post links to the April 2020 announcement of the regulation change. The announcement:

The Federal Reserve Board on Friday announced an interim final rule to amend Regulation D (Reserve Requirements of Depository Institutions) to delete the six-per-month limit on convenient transfers from the "savings deposit" definition. The interim final rule allows depository institutions immediately to suspend enforcement of the six transfer limit and to allow their customers to make an unlimited number of convenient transfers and withdrawals from their savings deposits at a time when financial events associated with the coronavirus pandemic have made such access more urgent.

It's covid-related. That again. I should have known. Their next paragraph:

The regulatory limit in Regulation D was the basis for distinguishing between reservable "transaction accounts" and non-reservable "savings deposits." The Board's recent action reducing all reserve requirement ratios to zero has rendered this regulatory distinction unnecessary.

"The Board's recent action reducing all reserve requirement ratios to zero has rendered this regulatory distinction unnecessary." This is the evolution of finance: one thing leads to another. 

The evolution of finance is always something to be wary of.

The post also links to some "frequently asked questions". One question asks whether the "interim final rule" is temporary or permanent. Permanent:

The underlying reason enabling the changes in Regulation D is the FOMC’s choice of monetary policy framework of an ample reserve regime. In such a regime, reserve requirements are not needed. As a result, the distinction made by the transfer limit between reservable and non-reservable accounts is also not necessary. The Committee’s choice of a monetary policy framework is not a short-term choice. The Board does not have plans to re-impose transfer limits but may make adjustments to the definition of savings accounts...

Evolution at work.

Come to think of it, evolution brought us covid.

In their conclusion, Andolfatto and Steinberg offer this thought:

In any case, it seems that the modification of Regulation D in late April has effectively rendered savings accounts almost indistinguishable from checking accounts from the perspective of depositors and banks.

I guess I'm gonna have to stop thinking in terms of M1, huh.

Average work-week?

I remember being surprised to read that in the middle ages people worked about the same amount of time that we work today. That's nothin. Check this out:

Since the 1960s, the consensus among anthropologists, historians, and sociologists has been that early hunter-gatherer societies enjoyed more leisure time than is permitted by capitalist and agrarian societies; for instance, one camp of !Kung Bushmen was estimated to work two-and-a-half days per week, at around 6 hours a day. Aggregated comparisons show that on average the working day was less than five hours.

Monday, January 11, 2021

Debt is not a component of aggregate demand

Wikipedia's Aggregate demand article, under Debt, says

A post-Keynesian theory of aggregate demand emphasizes the role of debt, which it considers a fundamental component of aggregate demand;

I wish they wouldn't say it that way. Debt is not a "component" of aggregate demand. The rest of the sentence is better:

the contribution of change in debt to aggregate demand is referred to by some as the credit impulse. 

This part of the sentence refers to the change in debt. That's correct. An addition to debt is a measure of "extra spending" created by new use of credit. A reduction in debt would imply money being returned to the lender, and a reduction of spending. 

The sentence that comes next shows why it is incorrect to emphasize "the role of debt" in aggregate demand:

Aggregate demand is spending, be it on consumption, investment, or other categories.

Aggregate demand is spending. You can't spend debt, so debt cannot be a component of aggregate demand. 

Debt is what remains after you borrow money and spend it. Or as I prefer to say it, debt is what remains after you use credit.

Saturday, January 9, 2021

The Age that Sucks

Proofreading yesterday's post after posting it -- shame on me -- I had another thought.

One might argue that the Minsky-Keen date for the end of the post-WWII golden age, 1966, stands out as a high point in the pattern of the "Average Annual Hours Worked" graph:

Graph #1

That being the case, one might wonder if a comparable point in the pattern -- the high point in the year 2000 -- marks the end of a somewhat less "golden" age and the beginning of the age that sucks. You hear people talk sometimes of "the end of the American century". This could be that -- and, oddly, precisely on schedule.

Interesting, I think, because it puts the start of the 2007-2010 disruption (and related problems) at the year 2000 and explains, for example, the inexplicable 2.0% average Real GDP growth of the 2001-2019 period.


Why the decline in hours worked?

To be sure, average annual hours worked depends at least in part on the preferences of labor. But the guy whose preference is to work less that the boss wants is soon not working at all.

The decline in average annual hours worked was no doubt in part a result of labor union efforts. But after the Air Traffic Controllers got fired, union efforts have had little to do with it:

A big part of the decline in average hours worked can be attributed to employers' preferences, which depend on economic conditions. When economic conditions deteriorate, average hours fall.

Friday, January 8, 2021

Nah, that can't be

At FRED, a search for labor force turns up almost 27,000 datasets. 30 pages of results. Halfway down the first page I was distracted by a shiny object: Average Annual Hours Worked by Persons Engaged for United States:

Graph #1

First thing that caught my eye: the big drop at the start.

I blinked and looked again: After being interrupted by the 1953-54 recession, a sharp drop in average hours worked, from 1955 to 1958.

Maybe you know where my mind goes next: Samuelson and Solow (1960): What James Forder said: "The question they were addressing was that of the explanation of the inflation of the 1950s – particularly the period 1955-57".

Any relation between the drop in hours worked and inflation? possibly cost-push inflation? possibly wage-push? Wage demands could have been rising to compensate for the fall of hours worked. Could be. What else does the graph show? 

A longer big decline, from 1966 to 1982, almost the whole of the "great inflation".

Well that's weird. Wage demands spurring inflation despite four recessions? That's hard to fathom. But it is odd that both big drops in "hours worked" occur at times when inflation was a problem.

Hm, there is one more interesting drop on the graph, from 2000 to 2009. Here's inflation during that time:

Graph #2: Three Measures of Inflation, 2000-2009

An argument could perhaps be made.

It wouldn't mean that wage costs are always what drives inflation. It might mean only that wage demands are a coincident indicator or a contributing consequence.

When we see persistent declines in hours worked, it seems we also find increasing inflation.