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.