The Theory of Problematic Debt

A response to "Do entrepreneurs constitute a class?"

This post is a response to one at In Defense of Anagorism:
https://astoundingteam.com/wordpress/2014/01/28/do-entrepreneurs-constitute-a-class/

 

In The Wealth of Nations, Book One, Chapter Six, Adam Smith considers "the component parts of the price of commodities": land, labor, and capital. I always want to add finance to that list. And the landed aristocracy has become less important, so maybe we can drop "land" from Smith's list. Then I get what you get:

"I identify three distinct classes that are actively involved in production. I call these (from top to bottom) financiers, proprietors and wage-earners."

But I wouldn't say financiers are "actively involved in production". That's the trouble with finance: it adds to the cost of production (and consumption) without actually adding output. So it is always a source of cost-push pressure. Maybe finance is passively involved in production?

https://www.econlib.org/library/Smith/smWN.html?chapter_num=9#book-reader

Six moments

First, this summary of an observation made in 1850, from the Liberty Fund:

Frédéric Bastiat, while pondering the nature of war, concluded that society had always been divided into two classes - those who engaged in productive work and those who lived off their backs (1850)

For Bastiat, the two classes were those who owned everything, and those who did the work.

 

Next, from an 1895 book by Brooks Adams, grandson of John Quincy Adams:

The Latins had little economic versatility; they lacked the instinct of the Greeks for commerce, or of the Syrians and Hindoos for manufactures. They were essentially land-owners, and, when endowed with the acquisitive faculty, usurers. The latter early developed into a distinct species, at once more subtle of intellect and more tenacious of life than the farmers, and on the disparity between these two types of men, the fate of all subsequent civilization has hinged.

For Adams, the two classes were farmers and usurers. Note that ancient Rome was an agricultural society, so that when Adams says "farmers" he means basically everyone, usurers aside.

From a 1916 essay by Vladimir Simkhovitch:

Because of this peculiar character of credit in certain historical periods, money lending was not a savory occupation. The gentleman, therefore, who in our industrial and mercantile life is a pillar of society and a respectable financier, is known by a different name under agricultural conditions. His name is Usurer.

Again, farmers and usurers in ancient Rome.

In the 1921 book Modern Economic Tendencies by Sidney A. Reeve, under the heading The Expansion of Financialization:

Indeed, the birth and growth of this practice, with its variations, has so revolutionalized our national methods of organizing industry, during the last quarter-century, that a business man of 1890 would find himself at sea to-day. The whole aspect of our more prominent engineering houses has been transformed, to meet this modern condition, from that of shops or designing-offices pure and simple into concerns more or less completely financial in character and function...

Reeve does not specifically identify the classes, but notes the clear advance of finance that had taken place, now more than 100 years ago.

From the abridged 1960 edition of Toynbee's A Study of History:

... the horizontal schism of a society along lines of class is not only peculiar to civilizations but is also a phenomenon which appears at the moment of their breakdowns and which is a distinctive mark of the periods of breakdown and disintegration, by contrast with its absence during the phases of genesis and growth.

Toynbee does not identify the classes, but does find momentous significance in the historical moment when the difference between classes becomes a "schism".

At Amazon, Michael Hudson's 2022 book The Destiny of Civilization is described:

A narrow rentier class has gained control and become the new central planner, using its power to drain income from increasingly indebted and high-cost labor and industry. The American disease of de-industrialization has resulted from the costs of industrial production being inflated by the economic rents extracted by this class under the system of financialized monopoly capitalism that now prevails throughout the West.

The costs of industrial production have increased, Hudson says, because of increasing financial costs to employer and employee alike in our increasingly indebted world. I agree.

Hudson's "rentier" is the same as the "usurer" of Simkhovitch and Adams. Myself, I just refer to the growth of debt or the growth of finance, and sometimes just to interest cost.

 

The graph below does not show the cost of interest payments, or any cost. It shows how often the phrase "interest payments" arises in Google Books books.

Some but not all of the works quoted above are from Google Books.

Most of the quoted authors probably used the phrase "interest payments" at one time or another, but I didn't quote any of them using that phrase.

So what's the graph for? It shows general interest in the phrase "interest payments" among writers who perhaps saw increasing interest cost as a problem, or perhaps saw it as not a problem, or who happened to use the phrase for other reasons. I'm using the Ngrams image as a white noise background. In the foreground I added the names of the six authors quoted above, and the dates of the writing.

I think the rising background noise adds urgency to the quotes. So does the grand decline in use of the phrase since 1988, which stands as an indication of the (hopefully not yet final) final victory of the rentier class as described by Michael Hudson.

Notice also that in 1850, when Bastiat wrote, use of the phrase "interest payments" had not yet begun to percolate.

(Click Image for a Bigger View)

Arthurian debt policy

Our anti-inflation policy is all wrong.

 

I understand the "raising interest rates" method of fighting inflation: It reduces the money flowing into the economy from borrowing. Less money means less inflation. I get it. But it is not a good plan.

Less money means less spending, and less spending means less inflation. But less spending also means less economic growth. That is why inflation-fighting often leads to recession. 

But recessions are not the big problem. They are only evidence of it. The big problem is that this anti-inflation policy, applied consistently, results in the consistent slowing of economic growth.

To maintain a policy where inflation is limited to two percent, as we did for many years, is to maintain a policy of low economic growth.

Economists ask: "Why is economic growth slow?" Growth is slow because of our anti-inflation policy.

Demand-pull inflation arises from too much demand, too much spending, too much money in the economy. By definition, in a slow economy there is not too much demand. Our inflation is not demand-pull.

Cost-push inflation arises from too much cost. Our inflation is cost-push. Some people say cost-push inflation is rare, but they are wrong.

Cost-push inflation is common because there is too much cost in our economy. Too much financial cost. In response to the financial crisis of 2007-2008, policymakers pushed interest rates down as low as they could go. That response was an admission that financial cost was too high.

The problem is not interest rates. The problem is debt. We have so much debt that reducing interest rates does not solve the cost problem, even when interest rates are as low as they can go.

We think of finance as the solution to all our economic problems. But that thinking has created another problem. That thinking has created the high cost of finance.

We have many policies that make credit more available. And we have many policies that encourage the use of credit. Therefore, credit use grows rapidly. But we have no policies designed to accelerate the repayment of debt. Therefore, debt grows to extremely high levels.

The personal income tax provides a deduction for mortgage interest. So we don't have to pay income tax on the money we use to pay the mortgage interest. In effect, this makes mortgage interest less costly for the taxpayer. That makes it less costly to have a mortgage. 

The policy makes it less costly for us to be in debt. It encourages people to be in debt.

That policy also reduces the tax revenue the government receives. But even if the cost to government was exactly the same, it would be better to have policy that encourages taxpayers to get out of debt.

Instead of getting a tax deduction for the interest we pay, we should be getting a tax deduction for paying down our debt ahead of schedule. This policy would help us get out of debt. It would reduce debt. It would reduce financial cost. It would reduce cost-push inflation. It would reduce the need to raise interest rates. It would reduce the policy-induced slowing of economic growth. And by reducing the cost of finance, it would bring some vigor back to our economy.

It has been a long time since people talked about economic vigor.

Friends and family

Happy holidays!

The "nubs" of finance

This one didn't go where I thought it would.

See for yourself the persistent growth of finance:

Graph #1: The Persistence of  Memory  Finance

The growth of finance doesn't plot out as straight as the trend line, but the plot is not far off. Based on the graph we can say that Financial Corporate Business has been growing by two percent of GDP every 25 years. But don't forget: GDP was growing over all that time. Finance was gaining on that gain. Finance was growing faster than the economy. 

As if we didn't have enough finance already.

Maybe you are thinking 2% in 25 years isn't much. But, well, the change in GDP growth was half as much -- It was only 1%, period-to-period. For the first 25-year period, the average of quarterly Real GDP growth rates was 4.1 percent. For the second 25-year period, the average was 3.1 percent. For the third 25-year period, the average growth rate was 2.3%. Economic growth was great in the first period, not so good in the second, terrible in the third. And finance was gaining twice as fast as economic growth was declining.

Economists predict even slower growth in the future. McKinsey says global economic growth will fall by half in the next fifty years. That would put us in the neighborhood of 1% growth -- probably in half the time McKinsey says, and right on schedule. And finance will be 10% of GDP by then.

While we're waiting, take a look at the history shown on the graph:

• In the first 25-year period, 1947 thru 1972, when RGDP growth was great, the growth of finance was running on the high side of its trend line. But around 1963 something changed: the blue line shows the growth of finance running below the trend line until the early 1980s. What happened between those low-side dates? The Great Inflation happened. Inflation is related to the Quantity of Money; the Q of M is related to the borrowing we do; an increase in borrowing is related to an increase in the size of finance. There is a connection between inflation and the size of finance.
  
  
• In the second 25-year period (1972-1997), after 1975 or so the blue line shows finance creeping back up to trend. The line runs above-trend from the early 1980s to around 1987, the Reagan years. But then the line goes low again, indicating a slowdown in the growth of finance from 1987 to around 1997. This slowdown was a consequence of the Savings and Loan crisis. Wikipedia puts that crisis between 1986 and 1995. And the graph does show the blue line creeping back up to trend again after 1995.
  
  
• In the third 25-year period (1997-2022) the growth of finance runs high from around 1998 thru 2006. The growth of finance this time is greater than in the previous above-trend episodes; the gap between red and blue lines is greater. But then suddenly we had a "financial crisis". You can identify it by the sharp low between 2007 and 2011 on the graph. Coming out of the crisis, finance grew below-trend for five or six years, and then things got back to normal -- for finance. For the rest of us, not so much.

Here's an interesting bit: Just at the end of the 1998-2006 high in the growth of finance, there is a little nub. I don't know what else to call it (nub: "a small lump or protruberance" according to Oxford Languages). Immediately after the little nub, finance fell into crisis.

That's not the interesting part. The interesting part is the second nub, the one we see in the last two years on the graph. It is similar in shape to the first nub, and similarly higher than the five or six years leading up to it. But this second nub is bigger and more ominous. Plus, the Federal Reserve is busy right now raising rates and creating the next recession, just like they did before the 2008 crisis. Does this mean that after the new nub we get a new financial crisis?

Oh, I don't know. I'm no good at predicting things. I'm always wrong. 

So that's good, right? It means we don't get another financial crisis in 2023, right?

Oh, I don't know. I'm no good at predicting things...

Happy holidays, anyway.

The words 'interest payments' in Google Books, 1800-1935

... and the awakening to financialization:

(It does go up more after 1935.)

"The importance of the interest item"

Click for Source

Surprise!

Remember 2008 and the financial crisis? Remember how the economy was slow for several years after that? They would show a graph of GDP rising on-trend, then suddenly falling below trend during the troubles, and then resuming a trend of increase, but at a lower level.

As you probably know, GDP was briefly good in 2021. People thought covid was over, and we felt pretty good about that.

The graph below shows GDI (Gross Domestic Income), which is just another measure of GDP:

Graph #1: Gross Domestic Income

Family Income by Source, 1988

From an article from 1995: Should We Ax the Capital Gains Tax? at the St Louis Fed:

The second column ("Capital") in the table shows the percentage of income from capital (as opposed to income from wages) as the Note below the table says.

Funny thing about that note. Right in the middle of it they change from explaining the table to making excuses for favorable treatment of the wealthy. It's blatant.

You'll find a similar midstream change in the third paragraph of the article:

• Paragraph 1 introduces the topic: "The battle over whether to cut the U.S. capital gains tax is raging again..." (This was from 1995, remember.)
  
  
• Paragraph 2 argues in favor: "On the one side are those who argue" in favor of the capital gains tax cut.
  
  
• Paragraph 3 starts out by saying "On the other side, however, are critics..." But the next sentence takes the proponents side, and it's all downhill from there.
  

Such writing is for people who already have their vested interest and their opinion in favor.

 

It wouldn't matter, except in the long run this is part of a battle over the continued existence of civilization.

The true meaning of "capital"

You might be interested in this page from CFI. 

I was going to quote two paragraphs, but the Terms of Use are, um, very corporate.

You still might find the page on capital interesting. But don't quote from it! Their "Terms of Use" page says something like they have the right to castrate your heirs if you do.

All that remains

Recently I said:

If debt was low again, really low, we would have money left over after paying the bills. No one would have to be demanding wage increases or raising prices.

To continue that thought: In the low-debt, low-financial-cost economy, people would have more income available to spend, and business would have more available for profits. I know, they say business profits are high already. But they're talking about a few big businesses, like Apple and Google. I'm talking about Mom-and-Pop shops. The ones you see on the local news every so often, going out of business, where the proprietor is crying on camera.

In the low-debt economy, the mom-and-pops would be doing better. Moms and dads and families would be doing better. Big businesses would probably be doing better, too.

But it's not magic. We need low debt to get costs down for people and for businesses. But we need something more as well: We need something to make people "feel" that the economy is better, to make people feel that things are good again. We need something like winning the second World War or putting covid behind us. But covid didn't work, did it.

Winning WWII gave people a jolt. People had jobs. People had money to spend. The jolt got the economy going. Then things were good for 20 years or more. The economy was good for 20 years or more.

Putting covid behind us gave us just one good year:

Graph #1: Annual Rate of Real GDP Growth, 1980-2021

2021 was the best year for GDP growth since Reagan's "Morning in America".

So maybe this leaves a lot to be desired. GDP is not the most satisfactory measure. And because of increasing inequality, the people who most need a good economy get the least benefit from it. And anyway, 2022 sucks, I know. I know.

But what happened? Why didn't the jolt work?

Well, it tried to work, but we still have too much debt. Too much financial cost. So instead of getting great growth, this time we got inflation. We got cost-push inflation. Prices went up because businesses were trying to cover their costs. But we will never cover our costs as long as the cost of finance keeps rising.

These days, people say there's no such thing as cost-push inflation. They say it, because if the money isn't there -- if the spending isn't there -- then you won't get the inflation. 

Yeah, but you won't get growth, either, if the spending isn't there. The economy just slows more. And there is still the "cost-push" to deal with: Cost pressure, arising from the cost of finance. 

And since finance continues to grow, the cost of finance continues to rise, and the cost pressure is unrelenting. And things get worse.

 

I don't like the term cost-push. The "cost-push inflation" concept implies that you cannot have cost-push pressures if you don't have inflation. But that is wrong. So I just talk about "cost pressure". Cost pressure can be relieved by inflation. But that is not the best plan, because inflation does not solve the cost pressure problem. Inflation is only a way to cope with the cost pressure problem, even as that problem continues to grow worse. That's what the "two percent target" was, a way to get a little growth by allowing a little inflation. Not the best solution.

To solve the cost pressure problem, we must first discover what creates the cost pressure.

Growing financial cost creates the cost pressure.

To solve the cost pressure problem caused by the growth of finance, we must first discover what is causing the growth of finance.

Economic policy promotes the growth of finance.

To solve the problem created by economic policy, we must make sure policymakers understand that the chain of causality begins with them. A lot of people think government is running the economy into the ground on purpose. I don't see it that way. I don't see how that could be. I think they just don't know how to fix the problem. But even if it is on purpose, we can probably get them to see that the cost of finance is a problem, not a solution.

Economic policy promotes the growth of finance, and has done so since the end of the second World War. At some point along the way, finance became too big and costly for our economy. We could no longer afford it. That's when things started to go wrong.

We could probably argue for the rest of our lives about when things started going wrong. That wouldn't be productive. We need to start replacing money-that-costs-interest with money-that-does-not-cost-interest. We have to reduce the cost of interest, but we still need enough money that the economy can function.

We can keep doing that, gradually, for a while. And we should start thinking about what level of debt would best promote economic growth. And thinking about proportions: how much of the total debt should be owed by government, and how much should be owed by the private sector. If we can fine-tune these two adjustments, the level and the proportions, we can make our economy unimaginably good. Unimaginably good.

Remember, borrowing money and spending it is good for growth, but paying the interest and repaying the principal are bad for growth. But there will be some level of debt and some balance between government share and private-sector share of debt that best promote price stability and economic growth.

To solve the problem created by economic policy, we must make policymakers understand the problem. All that remains is to convince them.

Where no output is produced, one sector's gain is another's loss

The profits of financial (nonproductive) corporate business are smaller than those of nonfinancial (productive) corporate business. At the end of 1951, the profits of finance were only 10% of nonfinancial profits. Until the mid-80s they were generally less than 20%. Financial profits ran about 30% of nonfinancial in the 1990s, between high peaks. And since 2010, between 30 and 40 percent. Financial business profits are less than nonfinancial business profits. But financial profits have been gaining on nonfinancial profits. 

To look at that gain I show financial profits (red) and nonfinancial profits (blue) as percent of GDP. I index both ratios to show them equal in the first quarter of 1952:

Graph #1: Financial (red) and Nonfinancial (blue) profits, relative to GDP
with both ratios indexed near the start for purposes of comparison.

The lines start out equal in 1952. But consider the early years, up to the late 1970s: Financial profits show a general uptrend. Nonfinancial profits show a mild downtrend. 

Indexing makes the graph exaggerate what I will say now, but what I say is still true: If the financial share of corporate profits held fast at the 1952 level, the financial profits above that level would instead have been the profits of nonfinancial corporations, or would have added to labor's share of income, or would have worked out as just plain lower prices, as financial costs fell as a share of productive sector costs. Any of these options would have been better than the way things actually turned out.

 

Nonfinancial profits on the graph show a mild downtrend. It looks mild to me. But when I google profit crisis of the 1970s the featured snippet says: 

In the 1970s, US capitalism suffered a legitimacy crisis as the economy was mired in high inflation, unemployment, and slower growth. The rate of profit had been decreasing since the late 1960s and by the mid-1970s Wall Street was in poor shape.

Clicking the link turned up "The Revenge of the Capitalist Class" by Thomas Volscho. Google's snippet came from the Abstract. Here's the next sentence:

Capitalists politically mobilized in the 1970s to restore the rate of profit and to restore power to economic elites...

In Financialization as symptom, Chris Dillow says:

"My generation of leftists ... was shaped by a crisis of non-financial capitalism – that of the 70s and early 80s... [L]et’s start with the crisis of the 70s. Profits were then being squeezed by wage militancy. Thatcher’s response to this was to weaken labour’s bargaining power by (inadvertently!) creating mass unemployment..."

He's right, except for the "wage militancy" part -- but that was Thatcher's error, not Dillow's. The actual cause of the profit crisis was the growth of financial cost, which increased the cost of the average transaction, increased financial profits, pushed the cost of living up, pushed nonfinancial business costs up, and pushed nonfinancial profits down. Dillow also says:

Financialization is the result of a shift away from low-profit activities in the real [nonfinancial] economy.

Early on, rising financial costs drove nonfinancial profits down until people noticed the problem. But their policy changes encouraged financialization and drove financial cost even higher. The graph shows it.

Bill Mitchell writes:

Rowthorn says that the mid-1970s crisis – which marked the end of the Keynesian period and the start of the neo-liberal period – was associated with a rising inflation but also an on-going profit squeeze due to declining productivity and increasing external competition for market share. The profit squeeze led to firms reducing their rate of investment (which reduced aggregate demand growth) which combined with harsh contractions in monetary and fiscal policy created the stagflation that bedeviled the world in the second half of the 1970s.

Since that time the world has been bedeviled by the solutions that were put into place.

And finance was growing the whole time

Graph #1: Household Debt as a Percent of Disposable Personal Income  1946-2021

We ("households") owed debt equaling about 20% of Disposable Personal Income (DPI) in 1946. That tripled to 60% by 1962. More than half our household income, by 1962.

The ratio ran flat from the mid-1960s to the early 1980s. Not by coincidence, Allan H. Meltzer puts the start of the so-called "Great Inflation" at 1965, and the end at 1984. Inflation increased DPI so rapidly that it made the ratio run flat all through those years, even though household debt was still going up.

After the Great Inflation, the ratio doubled from around 60% to more than 120%, just in time for the financial crisis. Most people who write about this stuff would say it was our own fault our debt went up. I say it was the fault of policy -- the economic policy that encouraged credit availability, encouraged credit use, discouraged repayment of debt by making interest payments tax-deductible and, according to Scott Sumner, by restricting wage growth.

Since the high point in 2007 the ratio has fallen to just below the 100% level, so that household debt is now about equal to DPI. But it is still way too high. You can tell because our economy still sucks.

If debt was low again, really low, we would have money left over after paying our bills. No one would have to be demanding wage increases or raising prices.

Cost pressure

If we have a "cost pressure" problem, it impacts the whole economy. The cost pressure works the way an oil crisis works -- (1) by creating a general inflation and (2) by slowing economic growth. But with cost pressure it is not necessarily the oil producing nations that benefit.

1. I think we have a cost pressure problem. I think this because we never really did stop the inflation. Oh, we slowed it, yes. But prices did not stabilize. Instead, policymakers quit trying to achieve "stable prices" and started trying to achieve "stable inflation" instead. Stable prices means zero inflation. Stable inflation (with a two percent target) means they shoot for two percent inflation every year.
   
   
2. I think we have a cost pressure problem. I think this because economic growth has been slowing for almost the whole time since the end of World War Two. Economists do acknowledge bits and pieces of the slowing, and try to explain it. But they certainly have not reversed it. The slowing continues. Pay does not keep up with prices, and it gets harder and harder to find a better job.
   

We have had inflation and slowing growth for many years. So I think we have a cost pressure problem.

The rapid growth of finance since the end of the second World War suggests that finance is the sector which benefited from the increasing cost pressure that we were living with. The rapid growth of finance suggests that the growing income received by finance is the growing cost that causes inflation and slows the growth of jobs and income in the general economy. 

Again, the growth of finance is responsible for the cost pressure, the inflation, and the slowing growth that we have been living with now for half a century and more. And finance was growing the whole time.

A quick look at household debt

The graph shows Dollars of Household Debt per Dollar of Principal Repaid:

Graph #1: Household debt per dollar of household debt repaid  1980-2021

In 2007, shortly before the financial crisis, the debt we ("households") owed was 25 times the principal we repaid that year. Maybe that doesn't sound insurmountable to you. But at that level, with an interest rate of anything over four percent, interest adds more to our debt than we are paying back.

Cost push inflation ... Cost push ... Cost pressure

Financial cost -- essentially, debt and interest cost -- is the source of the cost pressure which leads to inflation and slow growth. And the more we use tight money to fight inflation, the worse things get. Tight money is not the proper response to cost pressure.

Economic policy is the engine that drives the growth of finance and financial cost. Policy encourages it. We think our pro-finance policies are good. We think those policies help the economy and we are unwilling to change them. Our unwillingness to reverse those policies is the reason we have been unable, since the 1970s, to eliminate the upward pressure on prices and wages and the downward pressure on growth.

There can be no way out of this problem until we change our thinking about the benefits of finance.

Look: The effects of finance are nonlinear. When we have little debt, as in the 1950s and 60s, the benefits of finance outweigh the costs. But when we have too much debt, as in the 1970s and after, the costs of finance outweigh the benefits.

It's pretty simple, really. When you have too much debt, it does more harm than good.

You'd have to wrinkle your nose when you say it, to convey Sumner's disgust

Scott Sumner at EconLib, 5 January 2022:

"The dirty little secret of wage/price controls is that the government’s actual objective is to control wage growth, and the price controls are a fig leaf added to make the policy seem more “fair”, thus making it more politically feasible."

Even completely wrong statements can get points for clarity. But my first reaction --
Well, my first reaction was "Sumner's disgust".

My second reaction was "If his statement wasn't so political, I  might agree". But on second thought, no.

My third reaction is this. The government's actual objective is to control the value of the dollar. The way it goes about that task, or so I've read maybe three times, is by controlling wage growth. This is more or less what Sumner says.

But things are not as simple as Sumner indicates. I will say again the same thing I have said 100 times before: The government's objective should NOT be "to control wage growth", nor "to control the value of the dollar". The government's objective even at this late date should be to understand the source of the problem -- to understand why the upward pressure on wages and prices was so powerful that we were unable to push inflation down to zero. (I refer to four decades of "low" inflation from 1983 thru 2020 when the price index rose from 100.0 to 261.6.)

I guarantee you that if and when the source of the problem is correctly understood, eliminating the upward pressure on wages and prices will be a much easier task.

Oh, and the rising inflation of the last couple years? Caused by "supply chain" issues, they say. I think the cause of this rising inflation is that we never really solved the inflation problem that has troubled our economy since the 1970s. And the covid disruption was enough to upset the tenuous price stability we had "achieved" since the '80s.

The way the cookie crumbles

Below the footnotes of the 1968 article "The Threat of Wage and Price Controls" at fee-dot-org, there is this brief thought from Irving S. Olds:

The Price of Price Controls

The whole recorded history of man is strewn with the wreckage of the great civilizations which have crumbled under price controls; and in forty centuries of human experience, there has never been — so far as I can discover — a single case where such controls have stopped, or even curbed for long, the forces of inflation. On the contrary, in every instance I can find, they have discouraged production, created shortages, and aggravated the very evils they were intended to cure.

IRVING S. OLDS

Caught my attention because of the end-of-civilizations thing. But the emphasis on price controls is misplaced.

I looked the guy up:

Irving Sands Olds (1887–1963) was an American lawyer and philanthropist. He served as chairman of the board and chief executive officer of U.S. Steel from 1940 to 1952, and was partner at White & Case.

CEO of US Steel. Perhaps his remarks on price controls were in response to the wage & price "guideposts" of the Kennedy era, which were established after the US Steel price hike of 1962. Kennedy had been told US Steel would not raise prices.

Ten years earlier, Truman had nationalized the steel industry, and the Supreme Court shot that down.

I make three brief points, and focus on the third:

1. Civilizations don't crumble because of price controls. 
2. Civilizations don't crumble because of the inflation that gives rise to price controls.
3. Civilizations crumble because that unrelenting inflation is cost-push, the kind of inflation that undermines economic growth.

Civilizations crumble when economic growth is undermined because, like a shark, civilization must keep moving forward or it will die. Toynbee said as much (page 10):

"Why did the Barbarians ultimately break through? Because, when a frontier between a more highly and a less highly civilized society ceases to advance, the balance does not settle down to a stable equilibrium but inclines, with the passage of time, in the more backward society’s favour."

So did Quigley (page 141):

"After  centuries  of  expansion  our  society  is  now  organized  so  that  it  cannot  subsist;  it  must  expand  or  it  will  collapse."

And Keynes, in his toast to economists:

"economists, who are the trustees not of civilization, but of the possibility of civilization."

Perhaps old Irv Olds was just saying the same, but I don't think so.

Lindblom

"I think highly of the social reformer — not, of course, the crank with his panacea but the imaginative thinker who combines a concern for the general welfare with a conviction that man within limits can intelligently plan his social structure."

- Charles Lindblom in Unions and Capitalism (1949)

An insufficiently studied phenomenon

Inflation is probably the most-studied topic in all of economics. How inflation gets started must be the least-studied topic.

"a better dream"

In "Wage Policy in Recovery" by H. B. Shaffer (June 21, 1961) under the heading "Risks in Reviving a Protectionist Trade Policy" we read:

Competition from foreign producers encourages affected business and labor groups to press for higher tariff barriers and more rigorous import restrictions of other kinds to protect the domestic market. Yielding to such pressure, to any significant extent, would run counter to the longstanding American policy of encouraging freer trade among non-Communist countries, would invite reprisals restrictive of American sales abroad, and would complicate U.S. participation in the General Agreement on Tariffs and Trade (Gatt) and in the Organization for Economic Cooperation and Development, a newly formed 20-nation economic alliance scheduled to begin operations next September.

What Shaffer is reporting as the source of this problem, as I see it, is "the longstanding American policy of encouraging freer trade". Free trade, in other words, is not good enough; it has to be "freer" -- and we have to encourage that.

We can not abandon the policy or even tone it down a bit because that would interfere with our freer-trade plans for the General Agreement on Tariffs and Trade and the OECD. The reason we cannot tone down those plans, in other words, is that we don't want to. 

That was in 1961. But things haven't changed much since then. We use policy to "encourage" certain things, and those things generally come about. If our economy grows worse as a result, perhaps it is because the people who decide what to encourage do so based only on what is best for themselves.

Or maybe they're just wrong.

I am reminded of a better plan proposed by Hayek:

Neither an omnipotent super-state, nor a loose association of “free nations” but a community of nations of free men must be our goal.

I am reminded also of the strategy that would let the Hayek plan succeed:

... if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours.

 

Free trade, as we know it today, promotes the merging of nation-states into economic communities like the European Union. Such communities in principle are "lovely". But we are finding out the hard way that economic community is not enough to make the plan work. Political unification is also required. So, behind the scenes, the culture is modified until people begin to think in terms of the super-state, to think in terms of "Europe" rather than "France", to think of themselves as Europeans rather than Frenchmen. People are being manipulated to facilitate the progress of the super-state. 

The super-state is promoted as "better for the economy". That is a crock. If you can't fix the economy of a nation-state, you damn sure will not be able to fix the economy of the super-state. If we cannot learn to provide ourselves with adequate employment by our domestic policy at the nation-state level, surely we will never achieve it at the super-state level.

The whole concept of the super-state, in my uneducated opinion, is the product of the mealy minds of the already super-wealthy whose further accumulations are in some small degree hindered by national boundaries and the economic policies they contain. The concept is supported by lesser wealth-holders with unrealistic dreams of super-size wealth, and by those with neither wealth nor a better dream to turn to.

The "omnipotent super-state" that Hayek rejects, I should add, is the same as the "universal state" of Arnold J. Toynbee and the "universal empire" of Carroll Quigley.  This super-state appears late in the Cycle of Civilization, shortly before the Dark Age which brings the cycle to completion.

Is this dire prediction? No. It is only a way of looking at the world. I suppose we could just wait to see if it turns out again to be true -- unless you have something better to do, like calling for change in the policies that promote our continuing decline.

An eye-opener from Samuel Milner

Samuel Milner:

Unwilling to wait decades for the political decline of New Deal liberalism, the core industries of post–World War II America repurposed collective bargaining as a means to reduce the costs of organized labor.

from the Abstract of "The Problem of Productivity: Inflation and Collective Bargaining after World War II" at ResearchGate.

Explaining the Growth of Finance

Profit as percent of GVA for Financial and Nonfinancial Corporate Business:

Graph #1 at FRED

GVA is like "GDP by sector".

The Kennedy years

In the 1950s, cost-push inflation was sometimes attributed to low productivity.

In The Wage-Push Inflation Thesis, 1950-1957 Lowell E. Gallaway (1958) wrote:

Simply stated, the wage-push inflation thesis holds that money wage rates have increased more rapidly than physical productivity and, consequently, have exerted upward pressure on costs and prices.

 In Time magazine, 15 July 1957, we read:

General Motors set up the first automatic "annual improvement factor" increase in wage contracts in 1950
...
The upward trend of wages was due not only to the scarcity of labor but also to the spread throughout industry of the G.M. idea of automatic increases. This ran counter to traditional business practice because it placed emphasis on a long-term rise in productivity and kept wages rising even when productivity temporarily stopped rising (as it did last year) or business temporarily slackened (as in steel and autos this year).

Note that they knew already in 1957 that productivity "stopped rising" in 1956.

Note also that a decline in productivity will increase labor cost to business, just as wage hikes do. It would be an easy mistake to blame wages, if the problem was low or falling productivity. But you couldn't fix that problem by holding wages down, not in the 1950s, and not since the 1980s.

In the Kennedy years, productivity was sharply in focus. In 1996 the L.A. Times recalled that President Kennedy

used a tactic his economic advisor, Walter W. Heller, called “jawboning” to urge business and labor to behave responsibly. In Kennedy’s time, that meant pay increases shouldn’t exceed productivity gains--and price hikes shouldn’t exceed increases in wages.

And again:

In his [January 11] 1962 State of the Union, Kennedy declared, “Our first line of defense against inflation is the good sense and public spirit of business and labor--keeping their total increase in wages and profits in line with productivity.

Networker writes:

Kennedy, since the Inaugural Address and beyond, had been asking Americans and American business to exercise restraint to enable the United States to meet its obligations and strengthen its economy. The Steel Workers of America agreed to hold off their demands for higher wages if the Steel Companies, on their part, would not raise the price of steel. The workers kept their end of the bargain, the companies did not, ordering a price increase after a strike was averted. This dishonest and irresponsible act angered Kennedy, as is made clear in the following speech.

Then, from Kennedy's April 11 1962 speech:

... there is no justification for an increase in steel prices. The recent settlement between the industry and the union, which does not even take place until July 1st, was widely acknowledged to be noninflationary, and the whole purpose and effect of this Administration's role, which both parties understood, was to achieve an agreement which would make unnecessary any increase in prices.

In his very next sentences, again, productivity was central:

Steel output per man is rising so fast that labor costs per ton of steel can actually be expected to decline in the next 12 months. And in fact, the acting Commissioner of the Bureau of Labor Statistics informed me this morning that, and I quote, "employment costs per unit of steel output in 1961 were essentially the same as they were in 1958."

It's a good speech. Kennedy was angry. He called for "a higher sense of business responsibility for the welfare of their country".

It's not like Kennedy didn't know about productivity and cost. He knew. He was focused on it. And he tried to keep prices from rising.

It didn't work.

The above is taken from mine of 21 April 2021. In that post my focus was the cost of interest and its impact on wage hikes:

Debt was accumulating. The cost of finance was rising. Surely, by the time interest on household debt was taking more than 5% of employee compensation, people considered it part of the cost of living. Surely, rises in our paychecks had to cover the rises in our interest payments.

Annual household interest costs were above 5% of employee compensation by 1960. And with household interest cost growing faster than GDP from 1946 to 1986, wage hikes that covered the cost of interest would surely have looked like inflationary increases. Looked inflationary, and were inflationary.

Wage earners were trying to cover their costs. It was cost-push inflation, due to the rising cost of finance. It looked like inflationary wage increases for a reason, yes. But finance didn't get the blame. Wages did.

I should add that as long as we continue to ignore the cost of finance, we will never solve our economic troubles.

 

In the present post my focus is on the cost of finance for Nonfinancial Corporate Business (NCB), our creators of output.

Nonfinancial corporate business is NCB, not NFC. NFC is an NFL football thing.

The problem was not simply that the steel companies ignored Kennedy's jawboning in 1962. The problem was rising cost -- specifically, the rising cost of interest. In the mid-1950s, the interest paid annually by nonfinancial corporate business was less than two percent of the value of output they generated (as measured by Gross Value Added). In 1962 it was almost three percent. 

Graph #1: Interest Cost as a Percent of GVA for Nonfinancial Corporate Business

Interest cost is even higher when we compare it to profits. Annual Interest paid as a percent of NCB profits before tax amounted to 9.5% in 1955. By 1962 the interest cost had more than doubled, to 19.2% of before-tax profits:

Graph #2: NCB Interest Cost as a Percent of NCB Profits Before Tax

NCB interest cost as a percent of after-tax profits increased from 17.5% in 1955 to 34.3% in 1962.

Businesses keep track of their costs.  When U.S. Steel increased prices in 1962, angering Kennedy, they knew their interest costs were rising. Even if wage hikes were held down to match productivity gains, U.S. Steel needed a price increase to cover their rising interest costs.

But the negotiations, apparently, were all about productivity and the cost of labor.

The US economy in the early years after WWII

The 1960 paper by Paul Samuelson and Robert Solow and the issue it addressed were the topic of James Forder's 2010 paper Economists on Samuelson and Solow on the Phillips Curve:

The question they were addressing was that of the explanation of the inflation of the 1950s – particularly the period 1955-57 – and the implications it had for macroeconomics. Mild though that was later to seem, this 'creeping inflation' as it was called was, at the time, a source of much anxiety.

This graph shows the years 1948 to 1978. The blue line shows inflation using the "urban" data that seems to serve as a "nationwide" measure. The red line shows the interest rate that the Federal Reserve raised or lowered to control inflation:

Graph #1: Blue is Inflation, shown as "percent change from year ago" of the CPI.
Red is the "Federal Funds" interest rate for which the Federal Reserve set targets.

After the end of the second World War, it took a few years to get inflation stabilized. But inflation (blue) did quiet down to below 1% by the end of 1952. The Federal Funds rate (red) doesn't appear on the graph until July 1954, but we can reasonably assume interest rates rose enough to reduce early-1950s inflation and create a recession in mid-1953: My proxy for FedFunds rises from the end of the 1949 recession to the start of the 1953-54 recession.

The red line shows the FedFunds rate following the same pattern after the 1953-54 recession: persistent increase from the end of one recession to the beginning of the next; rates only fall as the ensuing recession slows the economy and starts to bring inflation down. 

The graph shows the Federal Funds interest rate rising almost immediately as the 1953-54 recession ends. The graph shows that the interest rate kept going up even as prices fell for a whole year: The blue line (inflation) went below zero in September 1954 and didn't surface again until September 1955. As Lorraine Lee rightly says, "counterinflationary policy is basically severe austerity."

The increase in the blue line between 1955 and the 1957-58 recession was the inflation that Samuelson and Solow were writing about in 1960, the "creeping inflation".

And again, almost immediately after the 1957-58 recession, the Fed started raising the interest rate. The FedFunds rate hit bottom in July 1958 and started going up. Inflation continued falling until April 1959, and only rose after that.

This brings us to the 1960 recession.

The 1960 recession began in April 1960 and ended in February 1961. CQ Researcher provides Wage Policy in Recovery, a remarkable article by H. B. Shaffer dated June 21, 1961. The opening paragraph:

Satisfaction over multiplying signs that the country is fast leaving the recession behind is currently clouded by fears that too vigorous a recovery will set in motion a new inflationary surge. The risks in the situation have impelled the Kennedy administration to make special efforts to prevail on labor and management to keep wage-price levels steady as business activity expands.

Shaffer's words emphasize the bipolar approach to inflation management that is visible in the historical data. March, April, May, June: It took four  months to go from "Things are great!" to "Oh, no! Things are too good!" -- and Shaffer's article was written even before June was out. There was "much anxiety" about inflation, as James Forder said.

And this brings us to President Kennedy.

JFK assassination: 22 November 1963

Fifty-nine years.

I was in algebra class when they announced it.

Some things, you don't forget.

A detail

My habit is to use the inflation measure FRED calls CPIAUCSL because I memorized the name of it and because it was FRED's most popular inflation measure when I was looking for a name to memorize. (It still is their most popular inflation measure.) But that inflation measure gives the CPI "for all urban consumers". 

I figure most consumers are urban consumers. I used the urban measure for a long time without worrying that it might be different from the national measure. But now I have decided to take a look at it, and that is our adventure today.

On the graph I show the first dataset as a wide, bright blue line and the second one narrow and bright red so I can see how the one line matches the other. But it is easier to see if the image is bigger. To see a bigger version of the graph below, click on the graph image. To access the graph at FRED, click the word "Graph" in the caption.

Graph #1

By eye, red and blue differ a little in 1954, 1962, 1967, and 1970. But the two lines are similar enough that I figure the "urban" measure is a good match to the "national" measure. I should say, though, that I don't really know if the blue is a national measure. It sounds national from the dataset title "Consumer Price Index in the United States" but if it is a national measure, I don't really know.

The values used for the graph are annual.

The red line starts in 1948 and ends with the most recent annual data to date, 2021. The blue starts in 1951 (I don't know why) and ends in 2012; this series was "discontinued". I like it because the red line sticks out at both ends. I think that makes the graph easier to read.

Not that it matters, but FRED's name for the blue dataset is USACPIBLS. I didn't memorize this one, but it is easy enough to parse: For the USA, it is a measure of CPI from the BLS. Sometimes the names are easy like that.

If you remember the 1970s inflation, you know "CPI" is "Consumer Price Index"; it was on the news all the time. With this current inflation I don't know that they emphasize "CPI" so much. 

And BLS is the Bureau of Labor Something.

 

I'm not happy that I don't know if the blue line is supposed to represent "national" data. So I found another dataset that sounds like it might be national: "Inflation, consumer prices for the United States". I don't know if this one represents national data, either, but I figure two weak links are better than one because I'm using them in parallel, not in series: I'm using two chains to carry this analysis, each with one weak link.

FRED's name for this one is FPCPITOTLZGUSA. I didn't even try to parse it.

For this graph I used the one above, at FRED, and just swapped datasets. The colors and line widths worked themselves out automatically.

My second chain:

Graph #2

This time the blue line starts in 1960 and ends with the red one in 2021. And here, blue matches red so well it makes me wonder if they just used the red data and cut off the first few years to make the new dataset look different.

So I still don't know about urban vs national. But I'm going to keep using the "for all urban consumers" measure of inflation, and I'm gonna figure that it works as a measure of inflation nationwide.

Monetary Interest Paid by Households as a Percent of Disposable Personal Income

Graph #1: Monetary Interest Paid by Households as a Percent of DPI, 1946-2021

Arthurian theory:

Interest cost to households rose from 1% of DPI in 1946 to 2% by 1951. Those costs rose to 3% by 1956, 4% by 1963, and 5% by 1977. That's fact, not theory.

Usually, a normal yearly pay raise is around 3%, they say. But the source graphs behind that claim only go back to 1998. Lacking better data, let's suppose the 3% annual pay increase was typical going all the way back to 1946. 

In 1956 households were paying 3% of their disposable income just to cover their interest costs. In other words, the pay raise that year barely covered the cost of interest. In later years, the annual interest cost kept rising -- reaching 8% by 1986 -- but the old reliable pay raise kept plugging along at 3% annual.

Maybe we should allow for inflation, which started climbing in the mid-60s. Raises would have increased; that's just part of the inflation. Does this affect this analysis? No, because the pay raises are reflected in the "disposable income" numbers, and the interest paid is shown as a percent of disposable income. Inflation did increase our income, yes. But even so, "monetary interest paid" increased faster than income in those years. That's what the graph shows.

Anyway, the inflation mostly impacts the graph (and the economy) after 1965 or so, and by then the annual interest cost amounted to more than four and a quarter percent of income and was still climbing. Even if pay raises amounted to more than 3% annual, the interest paid by households each year increased faster than after-tax income all through the 1950s and '60s and '70s, as the graph shows.

Reviewing what we know, annual interest costs after 1956 were higher than annual pay raises. Interest costs made gains on income every year. So the cost of interest, all by itself, could have been enough to get the Great Inflation going in the 1960s, as people struggled (many even going on strike) to keep their income from falling behind their costs.

Thus the rising cost of finance created the Great Inflation. That's Arthurian theory. Everyone else blames oil or wages.

This same cost problem, the cost of finance, would have affected the business world. One price increase that comes to mind is the 1962 increase by U.S. Steel. President Kennedy was not happy about that one.

//

My goal here, as always, is to show that the rising cost of finance is the one factor we can reasonably hold responsible for the decline of the US economy in the decades since the second World War.

If supply-side economics doesn't solve the problem, we could always try this

Another slavery quote from Arnold J. Toynbee:

When Attica, on Solon's initiative, led the way from a regime of mixed farming to a regime of specialized agriculture for export, this technical advance was followed by an outburst of energy and growth in every sphere of Attic life. The next chapter of the story, however, takes a different and a sinister turn. The next stage of technical advance was an increase in the scale of operations through the organization of mass-production based on slave labor... Here the technical advance was offset by a grave social lapse, for the new plantation slavery was a far more serious social evil than the old domestic slavery. It was worse both morally and statistically. It was impersonal and inhuman, and it was on a grand scale. It eventually spread from the Greek communities in Sicily to the great area of Southern Italy which had been left derelict and devastated by the Hannibalic War. Wherever it established itself it notably increased the productivity of the land and the profits of the capitalist, but it reduced the land to social sterility; for wherever slave-plantations spread they displaced and pauperized the peasant yeoman as inexorably as bad money drives out good. The social consequence was the depopulation of the countryside and the creation of a parasitic urban proletariat in the cities, and more particularly in Rome itself.

I was gonna leave it at that. But what follows is too good to leave out. Decline-of-Civ stuff:

Not all the efforts of successive generations of Roman reformers, from the Gracchi onwards, could avail to rid the Roman World of this social blight which the last advance in agricultural technique had brought upon it. The plantation-slave system persisted until it collapsed spontaneously in consequence of the breakdown of the money economy on which it was dependent for its profits. This financial breakdown was part of the general social debacle of the third century after Christ; and the debacle was doubtless the outcome, in part, of the agrarian malady which had been eating away the tissues of the Roman body social during the previous four centuries. Thus this social cancer eventually extinguished itself by causing the death of the society upon which it had fastened.

 

These "technical advances", Solon's and the plantation slavery, were by any measure economic developments. Economic issues are always most crucial, and -- as your negative reaction to that assertion will likely confirm -- are the least recognized as crucial until troubles get particularly bad. 

As Hayek said in The Road to Serfdom, the common view that economic matters are "matters of secondary importance only" is "altogether unwarranted."

Toynbee on the growth of government

From A Study of History:

A classic example of this necessity of stepping ever farther into an ever-widening breach is afforded by the administrative history of the Roman Empire during the two centuries following its establishment. The Roman secret of government was the principle of indirect rule. The Hellenic universal state was conceived of by its Roman founders as an association of self-governing cities with a fringe of autonomous principalities in regions where the Hellenic culture had not yet struck political root. The burden of administration was to be left to these local authorities. This policy was never deliberately revised; yet, if we resurvey the Empire at the end of two centuries of the Roman Peace, we shall find that the administrative structure has been in fact transformed. The client principalities have been turned into provinces, and the provinces themselves have become organs of direct and centralized administration. The human resources for the conduct of local government gradually ran dry, and the central government, faced with this increasing dearth of local administrative talent, found itself constrained not only to replace client princes by imperial governors but to put the administration of the city-states into the hands of appointed ‘managers’. By the end of the story the whole administration of the Empire had passed into the hands of a hierarchically organized bureaucracy.

Toynbee explains the growth of governance (and authoritarian control) as the "necessity of stepping ever farther into an ever-widening breach".

We have an ever-widening breach. The attack on the Capitol was fruit of that poisonous tree. There is a lot of focus on that attack, and a lot of fret. All the focus is on the January 6th result of the breach. None of the focus is on the cause of the breach, which to my mind is the unrelenting decline of the US economy, and on the failure of Democrats even to acknowledge that decline.

A lifetime ago, FactCheck.org evaluated President Trump's inaugural address; I wrote about that evaluation on my old blog. The Google hit that led me to FactCheck said, in part:

in his inaugural address, Trump portrayed the United States as a nation in decline, ...

That got me interested, because I also "portray" the United States as a nation in decline. Here's the summary of my critique of the FactCheck article:

FactCheck tells us that inaugurals usually serve up "broad platitudes and generalities". So we should expect the wording of the Trump inaugural to be broad and general. But FactCheck takes great schools, safe neighborhoods, and good jobs, filters them through the word "carnage", and gives us only "crime". FactCheck takes a focus on jobs and flushes it down the toilet by suggesting that we have all the jobs we need. And FactCheck takes a focus on improving our economy and reduces it to "welfare".

The FactCheck response is incorrect.

They were critical of Trump, so to my mind their view serves as part of the Democrat's response. But the response, the FactCheck response, was to get crabby because Trump "portrayed the United States as a nation in decline".

This is the graph I used in my old post:

The Long-Term Decline of Real GDP Growth

Our economy is in decline. Going by the black trend line, our economic performance fell from better than 4% annual in 1948, to less than 2% annual in 2013. Half the growth we had when our economy was good has been lost in a lifetime.

Republicans talk about making government small enough you could "drown it in a bathtub". But the problem is not that our government is too big. The economic problem is not that our government is too big. We could have bigger government or smaller government, I don't really care. Changing the size of government will not fix the economic problem.

We have to fix the economic problem. This problem, the economic problem, is the source of our "ever-widening breach".

Toynbee: "shepherds of men"

I hit the mother lode in Arnold J. Toynbee's A Study of History. Expect one post per day for the next three days.

Three posts. Okay, so maybe not a mother lode.

From "A Study of History", because it's good:

... the ‘shepherds of men’ are always economically—though not always politically—superfluous and therefore parasitic. From the economic standpoint they have ceased to be shepherds keeping watch over their flocks and have turned into drones exploiting the worker-bees. They have become a non-productive ruling class maintained by the labour of a productive population which would be better off economically if they were not there.

 

I should point out that Toynbee wasn't offering a general statement. In the "..." part of the quote above, he was describing a particular environment and a particular type of society. But I still like the quote.

Inequality and the cycle of civilization

Keynes, retiring in 1945 after 33 years editing the Economic Journal, gave a toast at a dinner given in his honor. He toasted economists:

economists, who are the trustees not of civilization, but of the possibility of civilization.

Economists, he was saying, are responsible for making civilization possible. Should they fail at the task, civilization becomes impossible. The economy must be good, Keynes was saying, or civilization cannot endure.

Long-term slowing of economic growth is indistinguishable from the decline of civilization.

In my view, the cycle of civilization is an economic cycle driven by wealth: If the growth of wealth outpaces the concentration of wealth, times are good; otherwise, they are not.

What woke me up was the sudden thought that trade goes all the way back in human history. There has always been trade. There is always this force at work, concentrating wealth. And here's the thing: When wealth grows faster than it concentrates, wealth spreads. You get the upswing of an economic cycle. But when wealth concentrates faster than it grows, you get the downswing.

If you read me, you can guess where my mind takes these thoughts: A cycle ... since the beginning of human history ... driven by the concentration and distribution of wealth: A cycle of civilization.

Ordinarily, stopping the concentration of wealth might stop the decline of civilization. But things have now progressed too far: To preserve civilization, the concentration of wealth must be reversed. Keep in mind, ye preserver of civilization, that concentrated gains outweigh widely distributed gains:

Concentrated gains tend to lift the few and lower the many. Given the increase of inequality, there is a point beyond which the gains from economically viable choices are not sufficiently distributed to permit us to say that "humanity" is lifted. It is only below this determining point that the distribution of gains assures the lifting of humanity.

The ageing of capitalism increases economic inequality. This suggests that reducing inequality might help reverse the ageing process and restore the health and vigor of our economy, and of our civilization.

Britannica says that after the fall of Rome there was "a virtual disappearance of urban life" for three or four centuries.

The growth and decline of cities is a useful indicator of the growth and decline of civilization. The fall of New York's Twin Towers is a benchmark in our decline.

Carroll Quigley, on page 266 of The Evolution of Civilizations, lays out the "process" by which civilization "dies" and is "reborn". His process of decline includes the decline of cities:

there is a general exodus from the towns as people try to find a place in which they can be attached in some stable social and economic relationship to the food-producing earth...

We are not there yet. But we can judge by our cities, and say the decline of our civilization is under way.

Here, Timothy Taylor quotes Paul Cheshire, from the Housing Watch Newsletter:

... cities are the most welfare enhancing human innovation in history: they empowered the division of labour, the invention of money, trade and technical inventions like the wheel – let alone government, the arts or culture.

Welfare-enhancing? Sure: The growth of cities is part of the process of the growth of civilization. But to me, Cheshire's statement lacks context. It lacks the context that would be provided by thinking in terms of the cycle of civilization. 

Does Cheshire discuss the decline of cities? He does not. Not in the interview. The closest he comes is when he says

Another endemic problem of urban policy is what I have called ‘faith-based displacement activity’ – spending resources on problems urban policy cannot solve, such as societal inequality.

He calls inequality a "truly serious problem". But he complains about "spending resources" on such problems, problems that arise in the decline phase of the cycle of civilization. Problems that "urban policy cannot solve". But he does not see these problems in context. He does not see the rise of such problems as part of the decline of civilization.

He only sees the bright side. Cities, he says, are "welfare enhancing". Evaluating trends, he sees "the resurgence of large cities." Policy that "restricts the supply of urban land" is the problem, he says. It's lucky that "cities are so resilient because urban policy is generally so bad!" he says. Policy is "not useful for facilitating urban growth", he says.

It's all one-sided. Cheshire's view is all policy-related and all pro-city. Yes, he admits, cities give rise to incidental problems, but the real problems of cities (he says) are imposed on them by policy. Policies interfere with city growth, he says. It's lucky cities are so resilient. And that's it: That's his whole argument. 

But cities do not only decline because their policies are less than perfect. Big picture, cities decline with civilization.

Take a city out of the "rise" of civilization and drop it into the "decline" phase. Do the city's problems increase? Of course the problems increase. That's what I'm saying: Cheshire's argument lacks the context that the cycle of civilization could provide. He was "brought up in London and was always fascinated by it" -- and that is really all that his argument shows.

Our declining cities are evidence of the decline of our civilization.

For me, the problems of cities suggest 1. rise, and 2. decline. Cheshire sees 1. rise, and nothing beyond that. I am reminded of another Tim Taylor article: Macaulay on Economic Progress, 100 Years Before Keynes where Taylor asks a question:

"Yes, maybe economic progress is about to stop and reverse itself. Maybe we will be immiserated by new technology. Maybe the future is one of mass starvation from overpopulation. But looking back at the historical experience of the last several hundred years, what can be the basis for having any confidence in such pessimistic claims?"

The basis for such claims is the cycle of civilization. The "last several hundred years" were the upswing and the peak of the cycle. 

Taylor asks his question, I'd say, because he thinks it has no answer. He sees no answer to it because he excludes the possibility of the decline of civilization. I don't often invent views and attribute them to other people, but in this case I can see no reason to ask the question Taylor asks, except that he excludes the possibility of the decline of civilization.

Civilizations decline. This time is not different. Toynbee maintained that the fate of civilizations is determined by their response to the challenges facing them. We must rise to the challenge, and we must have the right response.

Accepting the idea that civilization runs in cycles does not mean we must accept every bad thing that happens as proof "the end is near". It only means we are willing to consider such an ending as possible, should events and logic demand it.

The irony here is that dismissing the concept of the Cycle of Civilization is the best way to assure that the decline phase runs its course.