It has to go up, or everything I thought I knew about the economy is wrong.

Here I develop an example of financial cost after World War II and consider the growth of that cost in subsequent years. The growing cost of finance is a source of cost-push pressure. It drives prices up and economic growth down. Moreover, the growing cost of finance is endless, because finance is our primary growth industry.

The growing cost of finance was the prime mover, the initial cause that set in motion not only the wage-price spiral of the 1960s and '70s, but also our subsequent decline.

 
For manufacturing, the FRED data on Average Hourly Earnings goes back to 1939. For the private sector in total, it goes back only to 1964.

Graph #1: Average Hourly Earnings before 1980

Where they overlap, the two data series run close. (Less close after 1980, but still close.) I will take the manufacturing data as an estimate of the average "Total Private" wage before 1964.

The FRED data for interest paid by the household sector starts in 1946. It's a big number -- billions, not dollars per hour. But I only want to see how fast it goes up, compared to hourly earnings. So dollars vs billions is not a problem.

Graph #2: Average Hourly (blue, red) and Interest Cost (green) Comparison

I added interest cost (green) to the graph. If I take the green line and multiply it by 0.86 and divide it by 1.735, green and blue will be exactly equal in 1946. I'll do that, I'll make them both 0.86 in '46. Plus I'll zoom in by cutting off the years after 1965:

Graph #3: Interest Cost (green) and the Average Hourly (blue, red)

Interest cost goes up a lot faster than the average wage in these early years. But in 1946, when the average hourly earnings amounted to 86 cents, people didn't spend their whole paycheck just to pay interest. There wasn't that much debt in those days, for one thing, and interest rates were low.

I should make the green line less. Household debt amounted to 20 percent of personal income in 1946. And the mortgage rate was, say, 4%.

So I can picture my dad's 86-cent hourly wage, and figure his debt was 20% of that, 17 cents of every dollar he earned in 1946. And the interest on the mortgage was 4% of 17 cents, or two-thirds of a penny. So now I want to divide the green line by something to make the 1946 value equal to two-thirds of a penny. That's what Dad paid for interest, out of every dollar he earned.

On graph #3, both lines have the value of 86 cents in 1946. If I divide 86 by 0.67 (which is two-thirds of a penny) I get 128.36. So I want to go the other way and divide the green line by 128.36 to reduce the 1946 value to two-thirds of a penny:

Graph #4: Household Interest Cost per Dollar of the Average Wage

It worked! The green line, now low on the graph, has a value of $0.00670 in 1946: two thirds of a penny.

The interest cost doesn't look like a big number, does it, on graph #4.

Let me look at it another way: interest cost as a percent of average hourly earnings. It will go up. It has to go up, or everything I thought I knew about the economy is wrong.

Graph #5: Household Interest Cost per Dollar of the Average Wage, Percent

Household Interest Cost
as a Percent of
Average Hourly Income

The green line goes up, as expected. It goes up faster than the average wage. It had to, if finance is the true source of the cost-push pressure. It had to.

So now I can say that the rising cost of finance in the years after the second World War contributed to the "creeping" inflation of 1955-57, the inflation that troubled Samuelson and Solow back in 1960. I can say also that in the years after the second World War, the rising cost of finance created cost pressure that led to rising wage demands in the latter half of the 1960s.

"Wage-push inflation" they called it. Labor got the blame. Nobody looked into it enough to notice that the rising cost of finance was putting pressure on wages. Nobody had our back. Nobody looked out for consumers. Nobody. 

Eh, that was all a long time ago. I remember, and I resented the "wage-push" nonsense because it meant they were blaming me and people like me for the inflation, people just scraping by. But I don't hold a grudge. That's not what this essay is about.

This essay is about the cost of finance -- a cost that can create cost pressure and cost-push inflation as surely as OPEC can. But people still talk about OPEC as a source of inflation -- and wages as a source of inflation -- and nobody, far as I can tell, nobody ever points the finger at finance and says here is the cost that drives cost-push. But it is. Finance is at the root of the inflation problem. Excessive finance.

It is all well and good to say business has to raise prices because wages have gone up, and to say labor needs a wage hike because prices have gone up. But the real question is "Which came first?" We have accepted the story of the wage-price spiral for half a century and more, without ever insisting that there must have been a first cause.

There must have been a first cause. But it cannot be wage hikes and it cannot be price hikes, because in the accepted story each is caused by the other. There must be some other cause, some initial cost increase that set the price spiral in motion.

That initial cost was the cost of finance.

Inflation is not the worst of the problem. Worst is the cost pressure, the cost push. Cost-push slows economic growth. The real problem is not cost-push inflation, but cost-push decline. And the problem is not once upon a time long ago. The problem is long-term decline, driven by the long-term growth of finance now and for the past 60 years.