Household debt: The cost/benefit curve

Thinking about household debt, boost, and drag.

The amount we add to our debt in a given year represents a boost to the economy which arises from the spending of that money.

The total amount  of the debt we carry represents a drag on the economy which results from making the payments on that debt.

The ratio, the addition to household debt relative to the total, is a measure of the benefit arising from taking on more debt.

This graph shows the ratio. The first year shown is 1947:

Graph #1: New Debt relative to Total Debt of Households

Taking on new debt makes the ratio go up. But taking on new debt adds to the total debt we carry, and that makes the ratio go down.

I don't know what the numbers mean, the numbers on the vertical axis. I can describe them as representing "new debt relative to total debt" for households. But I can't put it into more meaningful terms. Still, one can see that the ratio starts out high, when we had little total household debt, and that it ends up low.

I know that since 1980, we pay off about 5 percent of our debt every year. It varies, but roughly 5 percent.

I also know that FRED has data on how much we pay as interest every year.

So I can tweak the graph to show new debt relative to the cost of total debt -- new debt relative to the interest and principal payments we make on our debt. It's just an estimate based on that rough 5% number. But it creates a picture that I want to see:

Graph #2: Additions to Household Debt relative to Household Debt Service Cost (est.)

The shape of this graph is similar to that of the first graph. But the vertical axis numbers now mean something. At the 2.0 level, we buy twice as much on credit as we pay for debt service. At the 1.0 level, the amount we buy on credit is equal to the amount we pay for debt service. Below the 1.0 level, we pay more than we borrow anew. This is all based on that rough 5% number, of course, but maybe it gives you something to think about.

In 1947, when people had relatively little debt, debt service cost was low and we added $2 to our debt for every $1 of debt service we paid. Maybe that's how we get hooked on credit, getting more than we pay for at the start.

I'm thinking that probably each of us has a debt cost/benefit curve like that: It starts out high when we get a job and start using credit. Then the ratio falls as our debt accumulates, and we're lucky if we can stay close to the 1.0 level. Except there's no way that can happen.

These days, though, student loans being what they are, many people are already using credit even before they get a job. Yeah. You know what that's called? "Financial innovation."

So on the graph I notice that the cost/benefit ratio first comes in at the 1.0 level in 1951, and then again in 1954. It drops below the 1.0 level for the first time in 1956, '57, and '58 -- this could be related by cause or by effect (or both) with the "creeping inflation" of those years -- and returns briefly to the 1.0 level in 1959.

I also think I see the effects of inflation on debt -- a higher level of additions to debt, and more spending relative to existing debt -- in the two "humps" of the 1970s. And maybe I see the start of a third hump in the peak of 1985 , when the rate of inflation was down but borrowing was still high relative to the borrowing of the 20 years prior. 

And then a bowl-shaped low following that 1985 peak, the low being evidence of the Savings and Loan crisis. After the S&L crisis, another large hump, this time not explained by inflation but by an act of desperation, a last gasp that ends badly.

Oh, well. Live and learn.

It's not us, by the way. It's policy. The rich people we elect and the central bankers do their best to make things better. I believe that. But their ideas on how to make things better are based on being rich and being bankers. And that doesn't do it for people like me.

1977: "This is much too simplistic a view..."

On page 521 under the heading "Disbelief", George Terborgh from "Unwinding the Present Inflation":

Strangely enough, it is still possible to find economists who deny on theoretical grounds that wage-push inflation can exist. Stranger still, this view is entertained by some eminent business journals. The following comments refer to the British efforts to abate the wage spiral:

All of these calculations assume that this kind of compact with the unions will in itself bring about a slower rise in the general price level. We don't believe labor causes inflation; [we believe] that at best all labor can do is cause a temporary change in relative prices. Governments cause inflation through excessive monetary expansion.

This is much too simplistic a view of a complex phenomenon. Since the mix of demand-pull and cost-push inflation varies over the business cycle, no single explanation can be valid for all phases.

In a footnote, Terborgh's quote is referenced to the Wall Street Journal, June 4, 1976.

In those days, cost-push seems to have been attributed almost exclusively to wage-push and the response of  prices. That is a good explanation of a continuing (built-in or expectations- or conflict-driven) inflation. But it ignores the imbalance that initiates the inflation.

What got the inflation started? In other words: What was the real cause of it?

My answer:
The idea that using credit is good for growth
Leads to:
The policies that encourage credit use
Which lead to:
The accumulation of debt, the growth of finance, and the growth of financial cost
Which lead to:
financial cost-push pressure, while finance itself provides endogenous "accommodation" so that the price changes are not merely relative, and the general price level rises.

But not just since the 1990s, when we finally began to realize that it wasn't only government debt that was a problem. Rather, since the late 1940s and early 1950s, when debt other than federal was already growing unsustainably fast. Or at the latest, before the mid-1960s when the effects of financial cost started showing up as the end of a "golden age" and the start of a "great inflation".

 

Using credit is good for growth, of course. But using credit creates debt. Policies that encourage the use of credit also encourage the growth of debt.

When policymakers create policy to encourage the use of credit, do they also create policy to accelerate the repayment of debt? No.

Does this explain the unnatural accumulation of debt (other than federal) to insanely high levels? Yes.

Does the increase of this debt lead to the increase of federal debt? Yes.

When policymakers create policy to encourage the use of credit, do they also create policy to accelerate repayment of debt? No.

Would this problem be easy to solve? Yes.

Is cost-push inflation a drag on economic growth? Yes.

Would that problem be easy to solve? Yes.

Would policy that accelerates repayment of debt be an anti-inflation policy? Yes. 

So what's the hold-up?

"Why has the employment–population ratio declined in the United States?"

From the Monthly Labor Review: Why has the employment–population ratio declined in the United States? by Lawrence H. Leith, April 2021

Leith writes:

In a recent article titled “Explaining the decline in the U.S. employment-to-population ratio: a review of the evidence” (Journal of Economic Literature, September 2020), former Commissioner of the U.S. Bureau of Labor Statistics Katharine G. Abraham and her coauthor, economist Melissa S. Kearney, examine these trends for the period from 1999 to 2018 and seek to explain the economic factors driving them.

Abraham and Kearney quantify and rank some of the factors that contributed to the declines in the employment–population ratios among prime-age men and women over the 1999–2018 period. The authors warn that none of the factors they examine work in isolation and are, in fact, interrelated; moreover, they were unable to quantify some of the factors because the evidence was too sparse. Nevertheless, Abraham and Kearney find that “labor demand factors are the most important drivers” of the overall decline in the employment–population ratio among 25- to 54-year-olds over the period. In particular, they cite the marked increased in imported goods from China as the single most important factor driving the decline...

Abraham and Kearney also find that labor supply factors have been less important than labor demand factors in the decline of the employment–population ratio for 25- to 54-year-olds over the past two decades.

Results

I have come to use the Google Ngram Viewer as a thesaurus for preferences -- for example, to see whether "thus spake" or "thus spoke" is more commonly used.

Another technique I use is to search for different versions of a concept, partly in quotes, and then just check the number of search results found.

Recently I set up some benchmark searches, in quotes:

About 531,000 results: "demand-pull"

About 426,000 results: "cost-push"

Then I added the word "inflation" to the quoted phrase, and the result-counts fell by more than half:

About 200,000 results: "demand-pull inflation"

About 205,000 results: "cost-push inflation"

I was a little surprised by that. But it guided my decision to omit the word "inflation" from my four search phrases:

About 179,000 results: increase in the cost of production "cost-push"

About 110,000 results: left shift in aggregate supply "cost-push"

About 73,200 results: decrease in aggregate supply "cost-push"

About 31,800 results: maintaining profit margins "cost-push"

The way I learned cost-push -- maintaining profit margins -- is the least observed explanation, only 7½% of the 426,000 results. I was more than a little surprised by that.

 
I couldn't resist reviewing the results. One line caught my eye immediately:

What we have now is clearly cost-push inflation.

That turned out to be from The 1977 Economic Report of the President: Hearings Before the Joint Economic Committee, Congress of the United States, Ninety-Fifth Congress, First Session. Part 4: Invited Comments

The line that caught my eye was part of a response from George Terborgh: "Unwinding the Present Inflation".

"Proximate cause"

 

Some people argue that printing money is not the cause of inflation. I think it's a waste of time to make that argument. Even if we avoid getting caught in a trap about the meaning of the word "printing", and even if we avoid getting caught in a trap about the meaning of the word "money", it is still a waste of time to make that argument.

The "proximate cause" and the "real reason" are two different things. I give Milton Friedman his proximate cause, because I don't see any way around it. The level of prices is linked to spending; and the level of spending is linked to money.

Whether the money must increase before prices go up, or whether money can increase after the fact, is a boring, petty, and irrelevant concern. The level of prices, and changes in the level of prices, are tied to money. I don't see any way around it.

In a normal economy, printing money is the proximate cause, the immediate cause of inflation. But this does not mean that printing money is the real reason the inflation occurs.

From the Wikipedia article:

In sociology

Sociologists use the related pair of terms "proximal causation" and "distal causation."

Proximal causation: explanation of human social behaviour by considering the immediate factors...

Distal causation: explanation of human social behaviour by considering the larger context in which individuals carry out their actions.

A Hypothesis:

If the cost of finance increases from one or two cents per dollar, to three to five cents or more, those who pay this cost have greater incentive to raise their prices to cover the additional cost.

It may be that a cost increase of one or two percent is less than the increase of normal economic growth, so that the normal annual increase of money is sufficient to cover the rising cost of finance, at least for a few years. The rising cost may still lead to rising prices, but if the price increases occur every three or four years, say, they will be scarcely noticed, at least in the short run.

But if the increased cost of finance amounts to three or five percent or more, at or beyond the limits of normal economic growth, the normal increase of money is not enough to support this rising cost. The rise of prices, to cover the cost, will become more frequent and ultimately annual. At this point, the inflation can scarcely be missed.

Inflation that arises due to rising cost is cost-push inflation. The proximate cause of this inflation may be an increase in the quantity of money. But the ultimate or distal cause and the real reason for this inflation is the increasing cost of finance. It doesn't take long, though, for the reason to change. When the price of everything is rising, the rising cost of everything is the reason inflation continues.

At that point, Milton Friedman says the proximate cause is relevant, and the only way to stop the inflation is to limit the quantity of money. I can live with that.

But it doesn't solve the problem, because the inflation is not the original problem. The inflation is a consequence. The problem is the initial rising cost: the rising cost of finance. Until this problem is solved, either the inflation will continue, or the restriction of money will reduce economic growth, or both. The problem cannot be ended until the initiating cost problem is solved.

Prices are going up now because price setters think it will work, now

Or because it *is* working, now.

 
Reading all the time on cost-push inflation, I find sometimes statements identifying inflation as a general increase in prices. "Prices change all the time," I read the other day, "but inflation is a general increase in prices."

Prices change all the time. They're always testing the water. If they sell more than they expect at the higher price, the new low price that comes next will be higher than the old low. They're testing the water. All the time. 

If prices can go up, they will.

A thought from a couple years back:

Value is what a thing is worth. Price is what you have to pay to get it. These days, there seems to be little connection between value and price.


I like Adam Smith's idea that the value of the labor that goes into making something is the measure of the "exchangeable value" of the thing. It's an important concept because it ties monetary value to real output. I don't see "supply and demand" doing that. Not any more.

Supply and demand is just an arrangement. It's the way things happen to be, these days. When you can buy a hardened washer for your lawn tractor for $2 or $3 in one place and $12 or $14 in another, price no longer signifies something meaningful. It's just what we have to pay to get a thing. And please don't explain to me that the $14 "includes shipping". That's just another example of the exorcism of meaning from the concept of price. (Anyway, they tell you shipping is free!)

On top of that, we've got everyone from Universal Basic Income supporters to Helicopter Drop theorists saying it might be a good idea to throw money at people as a way to make the economy work better. I have to say (number one) that throwing money at people has nothing to do with the way the economy works.

I have to say (number two) that if we're throwing money at people so people can buy things, then we've got consumers with income that has no relation to what they've given up in exchange for that income.

So we've got consumers with income that is doesn't match up with work done, buying from producers setting prices that don't match up with the costs of production.

The economy exists in the exchange of value. When things are exchanged at prices that have no significance, the price system no longer conveys useful information.

And I should add:

Some people say that's a result of inflation. I say it encourages inflation.

When there is no connection between prices and costs, on either side of transactions, rampant inflation becomes a real possibility. And the obvious way to shut it down? Tight, tight money.

Does that solve the problem? No. It only stops the inflation.

Why now?

Because the covid recovery may be strong enough that prices can go up a little faster for a while. And because, with the minimum wage about to double, price setters want to take immediate advantage of the opportunity to even things up.

Prices are going up now because price setters think it will work, now.

Why I had to compare the GVA and GDP price indexes

I took a look at Nonfinancial Corporate Business GVA relative to GDP:

Graph #1: GVA of Nonfinancial Corporate Business relative to GDP

Trend upward from 1947 to 1981. Trend downward from 1981 till now. Just like interest rates. 

Just like interest rates. Now that's interesting. Not sure why the similarity. Maybe it's because the rate of interest and the rate of inflation follow similar paths??? I'll poke around the edges of this until there's something interesting to grab on to, or until I get tired of trying -- whichever comes first. But not today.

I see a big increase there, tall and wide, starting third quarter 1954. And I see the ratio above 0.52 from second quarter 1955 thru third quarter 1957. Looks like high output. I'll have to see how that relates to the 1955 surge in Labor Force Participation, and low productivity and all. But not today.

Dunno why, but the next graph I made was the same data except real-to-real instead of nominal-to-nominal. Should come out exactly the same, I was thinkin.

It didn't:

Graph #2: Real GVA of Nonfinancial Corporate Business relative to Real GDP

 Trend upward from 1947 to 2000 (instead of to 1981), and then but slowly down.

I knew right away: It had to be that the GVA price index is not the same as the GDP Deflator price index. (I ran into this kind of problem before.) But in this case there seems to be a huge difference between the two deflators.

And of course I had to do the "big difference" post, just to be sure it wasn't my glitch. But that wasn't today, either.

The unit of output

If you're driving, you probably have a preferred speed in mind: so-many miles per hour. If you're working you probably earn a definite wage-per-hour or salary-per-year or take-home-per-week. The units of time are specific and well-defined. You know what an hour is, and a week, and a year.

What is cost "per unit of output" ? Output may be well-defined, but it is hardly specific; and what in god's name is a unit of output? 

Okay, let's say "a unit" is one of them. Does that help? If we talk about one unit of output, do we know what it is? I don't think so. 

Are all the units of output the same? No. Only in the imagination, if at all.

"The production of one unit"

Long ago I quoted Kaminska of FT:

unit labour costs — the labour cost attached to the production of one unit — are staying positively muted

I showed the graph, and said

Kaminska seems to think the graph shows labor cost. How does she describe it? "The labour cost attached to the production of one unit". Oh right, right: "One unit".

We're talking about the whole economy here, all the output produced in our economy. Could be a Ford. Could be a TV dinner. Could be a cup phone. Do you know what "one unit" of output is? Do we all agree on it? I don't think so.

 

My old boss used the word "unit" so much that I would listen for it and try to figure out if there was some secret meaning that I was overlooking. Nah. He just meant the assembly we were working on, in the steel shop. But since then, the word "unit" always gets my attention when someone uses it. Kaminska, for example.

"Unit labor cost" came around again recently, in another old post. At interfluidity, a clarification of the meaning of the phrase:

Unit labor costs are nominal wages per unit of output.

 And now we can no longer avoid the question: What is a "unit of output"?

I think it means what my old boss meant -- one of those things we make, when we make output. Any one of them, as if they are all equal and interchangeable. But I remember Keynes:

But it is a grave objection to this definition for such a purpose that the community’s output of goods and services is a non-homogeneous complex which cannot be measured, strictly speaking, except in certain special cases ...

Keynes was right. But that doesn't stop us from trying to tally output. It doesn't stop us from talking about "units" of output. Google Search says it finds two million links for the quoted phrase "per unit of output". The first among these -- at EconData Online -- offers this definition:

The interpretation of labor cost per unit of manufacturing output (hereafter called unit labor cost) is straightforward--it is the cost of worker compensation and benefits per unit of manufactured output.

"Labor cost per unit of output" is "worker compensation and benefits per unit of output". They define labor cost for me, but they don't define a "unit of output".

I'm not gonna check them all, but I expect all two million sites would do the same. We're supposed to just pretend we know what a unit of output is. And yes, I usually do that, too.

 

Well here's somethin. At NBER, from the out-of-print volume Capital and Output Trends in Manufacturing Industries,1880-1948:

Man-hours per unit of output — the reciprocal of "labor productivity" — are reduced whenever labor is replaced by other factor inputs ...

Labor productivity is output per hour. The reciprocal is hours per unit of output. To figure something "per unit of output", divide something by output. 

Sure. I knew that. But it still doesn't tell me what "a unit of output" is. I know what an "hour" is, and a "week", and a "year". But I don't really know what an "output" is, or a "unit of output". I know it was recently produced. I know somebody paid for it. And I know you can somehow divide by it. But I don't know what it is.

And that's all we're gonna get.

• Wikipedia: "In economics, average fixed cost (AFC) is the fixed costs of production (FC) divided by the quantity (Q) of output produced... Average fixed cost is fixed cost per unit of output." Division, again.
  
• OECD: "In broad terms, unit labour costs show how much output an economy receives relative to wages, or labour cost per unit of output. ULCs can be calculated as the ratio of labour compensation to real GDP." Division, again. So maybe a "unit of output" is a dollar's worth of real GDP? Nah, I don't think so. A dollar's worth is value, or worth. It isn't output.
  
• Google: "In order to show you the most relevant results, we have omitted some entries very similar to the 109 already displayed." 

Well that was quick.

I know about dividing by GDP. The word "per" tells me to divide, and anyway economists always divide by GDP. But if you're going to talk about "a unit of output" you need something more tangible: a widget that you can eat or drive to work or use to build a house. Something you can wear. Something you can read. Something you can relax on, while watching football on it. 

All of the above. A unit of output is the universal product: There is no such animal. And the word "widget" is used to represent it.

Calculating the Number of Units of Output

I found this old note that I left on my desktop:

net interest??
gross interest cost adds to the price of output
how much does it add, i wonder...

i can use "total labor cost"
divided by "labor cost per unit"
to get the "number of units" produced!!

and then divide business gross interest cost
by the number of units produced
to figure the interest cost per unit of output.

No shit.

I put a few graphs together at FRED. That's the trick that forces me to think about relations between data sets. And I came up with a short cut: NCB interest paid, divided by GVA NCB, equals the interest cost per dollar's worth of output.

Graph #1: NCB Interest Cost per Dollar of GVA

The interest cost was less than two cents per dollar of nominal output in the early 1950s, three cents in the early 1960s. Around five cents in 1970, and six in the mid-1970s when the economy slowed -- unless it slowed around 1966 (as Minsky and Keen describe) when interest cost went above three cents per dollar of output.

NCB interest cost reached nine or ten cents per dollar of output in 1980. Eleven before the 1991 recession, near nine for the next two recessions, and five or six cents now, per dollar's worth of output.

Since 1970, cost peaks are obvious and related by timing (and by cost, certainly) to recessions. Even in the 1950s, these recession-related peaks are visible. (And there is a pretty rapid increase around 1955-57, at the time of that pesky "creeping" inflation.)

The peaks are undoubtedly related to the rising interest rates that precede recessions. But even if we trim off the peaks and look at what remains, the line plots a mountainous path. That mountain of cost is due not so much to the rate of interest as to the mountain of debt that Nonfinancial Corporate Business accumulated over the years.  Interest rates have been trending down since 1981 and are now about as low as they were in the early 1950s. But the interest cost is still well above what it was in the 1950s.

 

Yeah, but this is all interest cost per dollar's worth of output. I want to see it per unit of output. So much for my shortcut.

FRED offers a data series named Gross value added of nonfinancial corporate business, a nominal measure of the output of NCB business.

They offer another series, named Price per unit of real gross value added of nonfinancial corporate business. How they figure that, I do not know. But price per unit is price per unit. Note that it gives the price per unit of real gross value added, but the "price per unit" price is nominal.

To divide the first series (Gross value added) by the second (Price per unit) I follow the old schoolboy's rule: Invert and Multiply. So then I'm multiplying GVA (dollars) by the number of units and dividing by Price (dollars). By the division, dollars cancel dollars and I'm left looking at the number of units produced.

That's what Graph #2 shows:

Graph #2: Number of Units of Real GVA Produced by NCB

Dollars cancel dollars, and we are left with "Billions" as our vertical axis units.

The plotted line runs from a little below 1,000 to something over 9,000. But the vertical axis units are "billions". So the plotted line shows increase, from a little below 1000 billion units produced in 1947, to something over 9000 billion units produced in 2019.

In other words, from a little less than one trillion units of output in 1947, to more than nine trillion in 2019.

As a point of information, for NCB business the nominal value of the GVA in 2019 was $10,579.340 billion (or $10.57934 trillion). The number of units of output NCB business produced that year was 9.40488 trillion units. The price per unit comes to half a penny more than $1.12 for each unit of output produced (by NCB business) in 2019. About as much as a dozen eggs.

It's simply amazing, isn't it, that such things can be calculated.

So I took the ratio from Graph #2, the number of units of output, and took the "monetary interest paid" by NCB business and divided it by the number of units, to get interest cost per unit of output:

Graph #3: NCB Interest Cost per Unit of GVA

Looks much like Graph #1, except it never goes downhill. There seems to be a floor, somewhere around 5½ cents per unit of output.

5½ cents of $1.12½. That's just about 5% of the price of every unit of output we bought from nonfinancial corporate businesses in 2019. Just for interest on their debt. And that's the floor, the low estimate.

The big difference between GDP and GVA

The big difference is the price index.

I took nominal GDP and divided it by real GDP to get the deflator, the GDP price index.

I did the same with nominal and real Gross Value Added to get a GVA price index.

And then I went back to the list of data I usually use for labor productivity and figured the same for business sector output and for nonfarm business sector output: nominal relative to real.

I got a graph with four lines:

Graph #1

The highest line, blue, my calc for the GDP Deflator.

The highest line shows the most price increase. The lowest line (red) shows the least price increase.

Red is my calc for the GVA price index (for Nonfinancial Corporate Business, NFB  NCB). Nominal relative to real. I indexed these lines, all four of em, where they start (1947/01/01) so I can see how they change as the years go by. (By default they are indexed near the end of the series (presently 2012) so they all meet in that year, run very close for a decade or more before and after that date, and show their differences in the early years, which I think is bullshit.)

The two lines in the middle: Green is the business sector price index. Purple is the nonfarm business sector price index.

Not shown: The Consumer Price Index, which runs higher than the blue line, and the PCE Price Index, which runs close to the blue. (I didn't check that today, but it's what I remember from when I did check it.) Not sure why the consumers' "basket of goods" always inflates more than the business basket does. Not even sure the "basket of goods" description applies to anybody but consumers.

Hey -- if consumer inflation always runs high, and business inflation low, shouldn't "cost of living adjustments" be higher for consumers than for businesses? Seems to me. If inflation is 2% we should get 3%  wage hikes and they should get 1% price hikes. Yeah.

This is the first time I've looked at the GVA price index. It certainly is lower than the GDP deflator. Ah yeah, they probably hold their prices down by holding wages down. One hand slaps the other.

Some things are important. Google's social conscience is not one of them

 

"Discover Woolaroo: preserving global languages"
"Celebrate Asian Pacific American Heritage Month"
"Learn about entrepreneurship, equity, and style in YouTube's first ever #BeautyFest"
(Every day we care about something different)

-- https://www.google.com/

 

 
I don't know why I write. I just know I have to write.

Micro is about each of us. Macro is about all of us. What's always good for each of us is not always good for all of us. The worse things get, the less it matters (to each of us) and the more it matters (to all of us). And the decline of society accelerates. 

"Civilizations die from suicide."

My conservative friend Richie once told me he had a simple rule: If it lowers his taxes, he's for it.

Richie was short-sighted: What's best in the short run may be costly in the long run. Henry Hazlitt warned of this; I don't have Economics in One Lesson handy, but Hazlitt said the greatest flaw in economic thought is the failure to think through the consequences.

Found it. Mises has it:

In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

 Hazlitt reduces it to "a single sentence":

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Seems about right.

Mare is good. Way better than I expected. Mare of Easttown. Some of the characters get a little too caught-up in their own troubles, but there's not much of that. Kate Winslett's Mare is believable.

I like shows where the economy sucks and you can tell because of the effect it has on life. I fell in love with Hinterland for exactly that. Mare of Easttown presents it well, too. So does Nomadland, come to think of it -- extremely well. 

I dunno if people get that about these shows, that showing how bad the economy is is kind of the main point. Coping with it as best you can, that's what makes the story. But the overriding, underlying problem in these stories is the bad economy.

The story is always told from the "each of us" side. Never from the "all of us" side. Yeah, sure, in Nomadland we see a tenuous group of people, a group that could perhaps evolve over time into one of those survivor enclaves like we saw in the old Mad Max movies. 

But those are old now, the Mad Max movies. Time has passed. Our economy has deteriorated further. We are closer to the edge, where zip codes are retired and life as we know it is over. The stories these days no longer look beyond that precipice and toward recovery.

We're closer to the edge today, and the stories peer over the edge and down upon the troubles below.

If you don't understand the point of stories like Nomadland and Mare, it's because you don't realize just how close we are to the edge.

To realize that -- that's what's important.

Not what I was looking for, but worth a look

 

From the Occupational Outlook Handbook, 1959 edition

The three columns of data on the right show percent of population for each income range. The largest group of women earned between $3000 and $3999 in 1957; the largest group of men, between $4000 and $4999.

That table comes up because I found it. (It's not one of a series on a topic, I mean.)

I was reading Charles L. Schultze in Employment, Growth, and Price Levels: The effects of monopolistic and quasi-monopolistic practices (September 1959). Schultze says:

The rise in salary costs per unit was not only due to an increase in salary rates -- which rose by about the same amount as wage rates -- but also by the rising ratio of salaried output to employment.

In context, that statement looks to me to be a crucial part of his "demand shift" argument, so I wanted a look at the numbers that Schultze was talking about: wage numbers and salary numbers, separately.

Apparently there is no such thing anymore. It's all "wage and salary" now, numbers combined, as if the three words were one.

This corruption of thought is far too common. I've been similarly troubled by "supply and demand" and by "money and credit". Such word combinations cannot be described as "portmanteau" because they do not expand the vocabulary. They reduce it. They reduce our ability to think about things. How can one evaluate Schultze's demand-shift hypothesis if data on wages and salaries are no longer presented separately?

How can one understand that the source of our economic problems is that we have come to use credit for money, when people think only in terms of "moneyandcredit"?

"Not conservative enough"

A headline at The Hill: Republican says Stefanik not conservative enough to be GOP leader

In an essay titled Liberalism and Labour, given as a speech in 1926, Maynard Keynes said:

As things are now, we have nothing to look forward to except a continuance of Conservative Governments, not merely until they have made mistakes in the tolerable degree which would have caused a swing of the pendulum in former days, but until their mistakes have mounted up to the height of a disaster.

He said it in 1926, three, almost four years before the crash of 1929 and the Great Depression.

He knew. Somehow, he knew.

An interesting paragraph from Anna J. Schwartz

At NBER: Chapter 3, Secular Price Change in Historical Perspective by Anna J. Schwartz (1987). I find a lot of useful insights scattered in with facts and data. Recommended.

From page 93 (or 17 of 33 in the PDF):

One important change in the eighteenth century was the proliferation of forms in which money was held and used. In England, silver and gold coin were supplemented by note issues of the Bank of England, London private banks, and, after 1750, country banks, as well as by inland bills of exchange created by individual borrowers or lenders. In Holland, where the Bank of Amsterdam was founded at the beginning of the seventeenth century, paper money became well known. In Spain, its use became familiar in the last quarter of the eighteenth century. In France, lingering distrust created by John Law's ill-fated banknote issues effectively ended further public willingness to hold money in any form but coin until the Revolution.

BLUE is NonFinancial ... RED is Financial

Gross Value Added (GVA):

Graph #1: Output of Nonfinancial Corporate Business (NCB) = blue
and Output of Financial Corporate Business (FCB) = red

GVA is like GDP by industry, or GDP by sector. 

Here I show GVA for financial and nonfinancial corporate business. The nonfinancial corporate sector is much larger than the financial. Blue runs high.

 

Corporate Profits:

Graph #2: Profits of Nonfinancial Corporate Business (NCB) = blue
and Profits of Financial Corporate Business (FCB) = red

Nonfinancial Corporate Business Profits are much greater than Financial Corporate Business Profits. Blue runs high.

 

Profits as Percent of GVA:

Graph #3: NCB Profits as a Percent of NCP Output (blue)
and FCB Profits as a Percent of FCB Output (red)

GVA is like Output by sector. Here, we see the profits of NCB as a percent of the output of NCB, and the profits of FCB as a percent of the output of FCB. Relative to output, the rate of profit to NCB is a much smaller percentage than the rate of profit to FCB. 

Blue runs low.

That's great for finance. But it's not good for the economy.

The role of wages in the 1955-57 inflation

The first result returned by my search for the creeping inflation of 1955-57 was Employment, Growth, and Price Levels: The effects of monopolistic and quasi-monopolistic practices, dated September 1959, from the Joint Economic Committee of Congress.

The text returned by the search:

But the major thesis of this paper is that the creeping inflation of 1955 – 57 is different in kind from such classical inflations , and that mild inflation may be expected in a dynamic economy whenever there occur rapid shifts in the mix of final ...

which turns out to be part of a statement by Charles L. Schultze, who we saw this past January in another publication of the Joint Economic Committee.

The inflation was "different in kind" from the classic demand-pull inflation, Schultze says. He gives me something to live for.

Schultze and Google Search open a door and leave it open for me and my thinking on the cost-push problem. And then Schultze says

Similarly there is no attempt here to prove that autonomous upward pressures of wage rates have had no impact on the price structure. Such pressures may have played a role in recent inflation.

And I suddenly wanted to show that wage rates played no role in that inflation. I don't know where this comes from, but my mind went instantly to Components of Corporate Cost, from 2010, where I show corporate compensation of employees falling as a share of corporate costs (as measured by corporate deductions) for the 1948-2007 period.

And then instantly to my list of FRED data that I usually use for labor productivity...

 ... and yes, the list has business sector compensation and business sector current dollar output. And if I look at the ratio of those two I can see the nominal cost of labor relative to the nominal price of output. And yes,

Graph #1

labor cost goes down from start to finish, so: No, wages have not been gaining on prices. And hey, that graph looks an awful lot like labor share.

Graph #2

Yes it does. Exactly like Labor Share.

The other components that make up the price of output are nonlabor cost, and profit. I found that data not long ago. I'll have to find it again.

But oh, there is a sharp down-and-up after the 1954 recession. That'll be involved in the 1955-57 inflation. Here, look at 1950-1962:

Graph #3

The plotted line drops down to a low point after 1954. That low point is First Quarter 1955, early in the year-long rise of the labor force. The line reaches its next high in second quarter 1956. Most of that increase occurs in 1956, the year after the year-long rise of labor force participation.

Checking compensation per hour:

Graph #4

The low point in the middle of the 1954 recession is 1954 Q1. The line drifts down to a low in 1955 Q4, then rises to a peak of more than 8% in 1956 Q4. So wages did go up, but not until 1956. This confirms what we saw on Graph #3.

Wages didn't go up until 1956. But prices were already going up early in 1955:

Graph #5: Three Measures of Inflation, 1950-1962

It wasn't wages that got the 1955-57 inflation going. It was the year-long increase in labor force participation that occurred in 1955. And the unusually large increase in employment in 1955 and '56 and into '57:

Graph #6

The large increase in new, unskilled workers. They came at a bargain price, but hiring them led to a fall in productivity that increased business costs and started the 1955-57 inflation.

High contrast

From Wikipedia:

Say's law has been one of the principal doctrines used to support the laissez-faire belief that a capitalist economy will naturally tend toward full employment and prosperity without government intervention... Say's law was generally accepted throughout the 19th century... John Maynard Keynes argued in 1936 that Say's law is simply not true...

From Milton Friedman's presidential address to the  AEA, 1967:

These theoretical developments ... did undermine Keynes' key theoretical proposition, namely, that even in a world of flexible prices, a position of equilibrium at full employment might not exist. Henceforth, unemployment had again to be explained by rigidities or imperfections, not as the natural outcome of a fully operative market process.

 

Consider the contrast between Keynes's rejection of

the laissez-faire belief that a capitalist economy will naturally tend toward full employment and prosperity

and Friedman's rejection of Keynes:

Henceforth, unemployment had again to be explained by rigidities or imperfections, not as the natural outcome of a fully operative market process.

Keynes rejected the view that "full employment" is the economy's natural state. Friedman rejected the view that it isn't.

David Hume did not assume full employment.

Inflation and Disinflation in Turkey, edited by Faruk Selcuk, Libby Rittenberg, Aykut Kibritcioglu:

O'Brien (1975) argues that there are some differences between transmission mechanisms in classical and neoclassical versions of QTM. The neoclassical model is based on the assumption of full employment, and is characterized by a dichotomy between the real and monetary sectors. Real wages will be determined in the real sector (labor market) while nominal prices are a function of the money supply. Therefore, increases in the money supply increase the general price level by leaving the volumes of goods demanded and supplied, and hence, real output unchanged. 

On the other hand, O'Brien writes, some classical economists like David Hume do not assume full employment and there is no room for a dichotomy. According to Hume, an increase in the money supply does not increase the general price level through a different transmission mechanism. The increase in nominal cash balances of economic units initially results in higher expenditures for goods, and hence, in higher production. Then, under the assumption of underemployment, prices start to adjust to risen money supply. As a result, money is not neutral as in the neoclassical model; it has also some real effects in the short run.

 
David Hume did not assume full employment. 

Milton Friedman did. Friedman in The Counter-Revolution in Monetary Theory, page 8:

If the government gets the funds by borrowing from the public, then those people who lend the funds to the government have less to spend or to lend to others.

Those who lend to government have less to lend to others.

Q: At what time in history (since Charlemagne, say) would lending to others have reached its "full employment" stage?

A: It would have to be the time that Keynes referred to in Chapter 23 as "the greatest age of the inducement to investment" and in Chapter 21 as "a period of almost one hundred and fifty years" when "rates of interest were modest enough to encourage a rate of investment " that was "consistent with an average of employment which was not intolerably low."

"[N]othing short of the exuberance of the greatest age of the inducement to investment could have made it possible to lose sight of the theoretical possibility of its insufficiency."

-- J.M. Keynes

At such a time, it would have seemed that "full employment" had been achieved.

When, exactly? I'd say from the publication of The Wealth of Nations to the First World War: the 138 years from 1776 to 1914.

During that time, it seemed reasonable and natural to think full employment had been achieved. Investment was viewed with an optimism that now seems unnatural. It seemed self-evident that "supply creates its own demand". And economists lost sight of the theoretical possibility that investment could be insufficient.

However, economists this side of the first World War have no such ready justification for assuming full employment.

If you think of civilization as a massive business cycle some 2000 years in length, the 150 years of the "greatest age" make a nice high point. This coincidentally puts Charlemagne just at the bottom, where he was busy starting the upswing of the cycle.

This is why the economy changes: It is part of a massive cyclical phenomenon. Economic forces change and sometimes fade; and other driving forces (religious, political,  military, and irrational) may also each have a dominant phase. But the cycle is a handy framework for thinking about the economy.

And if you think of economic forces as among the forces that drive the cycle, you can see why David Hume (1711-1776) did not assume full employment, and perhaps why J.B. Say, just a little later, did.

It also becomes obvious that Milton Friedman shouldn't have. Nor should we.

And Friedman would be wrong.

 

"Friedman rejected cost-push as a credible source of sustained inflationary pressure."

- Anna Schwartz

 

If you reject the possibility of cost-push, only government remains as the cause of inflation.

 

But if the problem is cost-push, the focus on inflation is the wrong focus.

Labor force growth and labor productivity

The relation between labor force growth and labor productivity? I don't know. So I went looking.

Crazy Explanations for the Productivity Slowdown (PDF, 40 pages) by Paul M. Romer

For the explanation of the productivity puzzle, the key implication of this revised interpretation of growth accounting is that an increase in the rate of growth of labor will be accompanied by a fall in the rate of growth of labor productivity. This may explain the productivity slowdown in the United States since the 1960s...

 

Determinants of Labor Productivity: An Empirical Investigation of Productivity Divergence, by Misbah Tanveer Choudhry, University of Groningen, The Netherlands

We  analyzed  the  determinants  of  labor  productivity  for  the  group  of  40  countries,  representing   four   different   income   groups   in   the   world.   This   study   confirms   the   diminishing return to labor force participation rate both in short run as well as in the long run. We find that negative impact of increased  labor  force  participation is high in lower and lower middle income economies compared to high income and upper middle income economies.

WHY HAS THE EMPLOYMENT-PRODUCTIVITY TRADEOFF AMONG INDUSTRIALIZED COUNTRIES BEEN SO STRONG? by Paul Beaudry & Fabrice Collard. Working Paper 8754

Neoclassical growth theory predicts that, along a transitional path, countries with higher rates of labor force growth should exhibit less labor productivity growth due to the need to use scarce capital to equip new workers.