Sunday, February 26, 2023

The surprising words of Henry Hazlitt


Henry Hazlitt: "Inflation in One Page". From

Henry Hazlitt: What you should know about Inflation. GoogleBooks "Read free of charge", 152 pages. Second edition, 1965.

From paragraph 3 of Hazlitt's "one page" paper:

The causes of inflation are not, as so often said, “multiple and complex,” but simply the result of printing too much money. There is no such thing as “cost-push” inflation.

To restate Hazlitt's view: It isn't cost-push or wage-push or any such thing that causes inflation. Only "printing too much money" can cause a general rise in prices. 

No surprise there: Henry Hazlitt, like Milton Friedman, was a monetarist.

Like Friedman, Hazlitt uses the words "always and everywhere" to tie money to inflation. On the first page of What you should know about Inflation, Hazlitt says

"Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit."

He repeats the words in a later chapter, again to tie inflation to the quantity of money. 

Friedman of course is famous for saying “Inflation is always and everywhere a monetary phenomenon”. They were two of a kind, Hazlitt and Friedman. They were no-such-thing-as-cost-push-inflation people.

Let's get back to paragraph 3 from the one-page paper -- this time, the middle part. This is where Hazlitt considers the consequences of wage and price increases that are not supported by monetary expansion:

If, without an increase in the stock of money, wages or other costs are forced up, and producers try to pass these costs along by raising their selling prices, most of them will merely sell fewer goods. The result will be reduced output and loss of jobs.

Without an increase in the quantity of money, the result according to Hazlitt is not inflation but reduced output and the loss of jobs.

Hey, I get it. It takes money to support economic activity. And it takes more money to support that activity at higher prices. In a monetary economy, transactions require money. I know. But it kills me when people say there's no such thing as cost-push inflation. Because costs go up, and if I don't get a raise I get further behind. But that's just my problem.

It is a severe international problem when people dismiss the possibility of cost push inflation, and along with it dismiss the threat of reduced output and the loss of jobs, the cost-push threat. So it made me sit up and take notice when Hazlitt said wages and other costs may sometimes be "forced" up. He was saying there may be times when cost-push inflation is inevitable. It is an extraordinarily important point -- especially from a monetarist like Hazlitt.

(I see at FEE a 1976 article by Hazlitt titled "Where the Monetarists Go Wrong". So Hazz might not be happy that I call him a monetarist. My mistake. But he was much like a monetarist, in his focus on money.)

And, last, the last part of that third paragraph:

Higher costs can only be passed along in higher selling prices when consumers have more money to pay the higher prices.

See, now it all comes together in a way that makes sense to me: Sometimes our costs go up, and in order to get by we need an increase in the paycheck -- and then the boss needs to raise his prices to pay for it. But as Hazlitt points out, these higher costs can only be passed on if there is an increase in the quantity of money, an increase enough to sustain the existing volume of transactions at the higher level of prices.


I am not arguing in favor of inflation here. Don't jump to that conclusion.

One surprising word in Hazlitt's one-page paper -- "force" -- has changed how I interpret what he is telling me: It is not that there is no such thing as cost push inflation, but that ordinarily there is no such thing. This, I can live with.

And then I got wondering if Hazlitt said anything about wages and costs being "forced" up in the 152-page book. The first occurrence of the word "force" that I find occurs on page 9:

Wage and price rises, in brief, are usually a consequence of inflation. They can cause it only to the extent that they force an increase in the money supply.

It's not what I was looking for. Come to think of it, it's better. In the one-page essay we have Hazlitt saying it may sometimes happen that costs are somehow "forced" up. And then on page 9 of the book, we have him saying it doesn't happen often, but it can happen that the rising costs will "force" an increase in the quantity of money.

It's a two-stage process. First, prices are forced up. Second, rising prices force an increase in the quantity of money. Bingo, you've got cost-push inflation. And it's Henry Hazlitt saying this. For me, that was the surprise.

Okay. If you want to say cost-push inflation is rare, that's fine with me. You may be right. I think a lot of people say cost-push inflation is rare, and you're probably all of you right. I'm not prepared to say.

But a "rare" inflation is a lot more common that a "no such thing" inflation. I'll be happy when people stop saying there's no such thing as cost-push inflation, and talk instead about how rare it is. If it is rare in fact, we largely avoid the cost-push threat, but we cannot simply dismiss that threat.

Friday, February 24, 2023

Force or Pressure?

As is often the case, I am thinking again about cost-push inflation. In my preliminary notes I have been describing "cost pressure" as the source of the price increase. But I was always confused about "pressure" and "force" and which is which. So I'm looking for advice.

Seems to me that something causes prices to increase. I think the thing that causes the change in prices is a "force" and the response of prices is a measure of the "pressure" transferred from the force. This is probably all silly except in special cases, but let's pretend I'm dealing with special cases.


Wednesday, February 22, 2023

A 2005 warning of the 2008 financial crisis

Among the early warnings I've seen for the 2008 financial crisis, this one is the earliest:

Graph #1: Personal Consumption Expenditures as a Percent of Disposable Personal Income

That 2005 peak in spending is the earliest warning I can remember.

Makes sense, I guess, given that yesterday I discovered our mortgage interest payments don't come out of our disposable personal income (!) if you can believe that.

It was, after all, a "housing" crisis.

I notice also that the general downtrend (to the early 1970s) followed by uptrend does seem to match the path of personal saving (as a % of DPI) if you invert it. It all seems to work together.

Regarding that personal saving graph -- somebody should compare the WWII increase to the covid increase, and estimate the inflation we will have seen by the time prices "stabilize" again. Just to see if MV=PQ has any validity at all...

Tuesday, February 21, 2023

Who pays the mortgage interest?

Too many lines on this graph. Sorry. It had to be done:

Graph #1: Sorting out household interest cost

The lowest line is jiggy because it shows monthly data. The other lines show annual data and are smooth.

The jiggy line shows "personal interest payments" from Table 2.6. Personal Income and Its Disposition, Monthly. It's the lowest line on the graph. The green line runs close to it. I think these two are the same, except for two things:

  1. the different frequencies (annual versus monthly) create some separation; and
  2. the lines may be from different sources. Except they are NOT from different sources; both are from BEA.

But I still think these two lines should be the same. If not, then I don't understand what's going on here. As I understand it, then:

The green line shows interest paid by households on debt other than mortgage debt.

The purple line (above the green) shows interest paid by households on mortgage debt.

Green and purple together should add up to the total interest paid by households. They do.

The red line (with black dots) is really two lines. The red one shows total interest paid by households. The black-dot line shows the sum of the green and purple lines. The black-dot line matches the red line, so green and purple together do add up to the total interest paid by households.

So the graph can be simplified. Green and purple do add up to red. I correctly understand the component parts of total household interest cost. So we can forget about the red and black lines, and just consider the lower three lines.

The purple line, household mortgage interest cost, is definitely NOT counted in the jiggy "personal interest payments" line.

Mortgage interest is not counted as part of personal interest. This is probably because they figure the purchase of a home as business activity. This is something I never looked into but it has come up a few times. I remember Oilfield Trash telling me:

CPI views housing units as capital (or investment) goods and not as consumption items. Spending to purchase and improve houses and other housing units is investment and not consumption.

Clip from Table 2.6
So paying the mortgage interest isn't counted as use of personal income. Table 2.6 confirms it: "Personal interest payments" are part of the "Personal outlays" that are subtracted from "Disposable personal income". But "Mortgage interest payments" are not.

According to Table 2.6, subtracting "Personal outlays" from "Disposable personal income" leaves "Personal saving". 

Apparently, Mortgage interest payments are counted as part of Personal saving.

That doesn't sit right with me. Count the repayment of mortgage principal as saving, if you insist. But interest paid on the mortgage is income to somebody else. It is not part of my saving.

I need a cup of coffee.

Sunday, February 19, 2023

A theory of the world

Whatever your understanding of the economy, how ever you believe it works, if you rely on your belief when you engage in economic activity, then your theory of the world is true.

What remains, then, is to sort the true world-theories by how commonly-held they are. The most commonly held theories describe the way our economy works most of the time.

Perhaps this sounds crazy, but it is no more than what is commonly called "expectations".


No, I don't know if I believe what I just said. But some questions have no better answer.

Friday, February 17, 2023

Keynes on Austerity

From the Halley Stewart Lecture, 1931: "The World's Economic Crisis and the Way of Escape". From the essay by J. M. Keynes. I found the quote in an old post at haroldchorneyeconomist.

For clarity I have used the word "austerity" in the first sentence, in place of Keynes's word "economy" in the quote below:

"An austerity campaign, in my opinion, is a beggar-my-neighbour enterprise, just as much as competitive tariffs or competitive wage-reductions, which are perhaps more obviously of this description. For one man’s expenditure is another man’s income."

The quote from Keynes reminds me: Back in 2010 I read an interview with Dr. Kurt Richebacher. Here is the part that struck me:

Q: Give us the cause of the profits problem.

A: Corporate cost cutting, for one. The widespread measures that individual firms take to improve their own profits have, in the aggregate, the opposite effect on the profits of other firms. Business spending is the key source of business revenues, not consumer spending. A retrenchment in business spending cuts business revenues. Higher profits and higher prosperity cannot possibly come out of general cost cutting.

It is the same story Keynes told: the Austerity Cannot Work story.

For the record, Richebacher was identified as Austrian. Keynes, of course, was the Keynesian, until later Keynesians redefined the meaning of the term.

Wednesday, February 15, 2023

Seeing growth slowing

At FRED, the annual version of Real GDP -- the one with inflation stripped out of the numbers so we can see a real (honest) measure of economic growth -- looks like this:

Graph #1: GDP with price changes removed, to show real growth

The blue line begins in 1929 and ends in 2022. It curves gradually upward over time, and growth appears to be good. But I think we know that growth is not good.

Graph #1 doesn't show the growth rate of GDP. It shows amounts of GDP. Bigger amounts are higher on the graph. But increasing amounts don't always mean better growth. It's like getting a 10-cent raise in your paycheck: It is an increase, yes, but you're not even keeping up with the cost of living.

There are two things: There's the data that you put on the graph, and there's the way the graph shows the data.

The GDP data we're using has inflation stripped away so that the numbers don't increase from prices going up. The numbers only increase from producing more stuff. You have to do that to see GDP growth. But to see or compare changes in growth, you have to do something else. This second thing is to tweak the graph to make the vertical scale a log scale.

Graph #1 shows GDP gradually curving up. The graph shows that we we are producing more and more. But we need to know more than that. We need to know if we're growing as much, now, as we did 10 years ago. Or 30 years ago, or 50. 

Are we growing faster than we did years ago, or slower, or about the same? You cannot tell by looking at the first graph. But you can tell by looking at this one:

Graph #2: GDP with price changes removed and the Vertical Axis showing a Log Scale

The second graph shows the same data as the first. I only checked a box to make the vertical axis show a Log Scale. Just the vertical axis is different. But the line now shows a downward curve rather than an upward curve. The downward curve on a log scale graph means growth is slowing.

On a graph with a log scale, a straight line indicates a roughly constant rate of growth. And the steeper the line, the faster the growth is.

To my eye, the blue line from 1950 to 1970 is pretty straight, and more steep than from 1966 to 2007. And then from 2010 to 2022 the line is even more straight, and even less steep. I added three trend lines by eye, based on these straights and dates:

Graph #3: Same as #2, with three trendlines added by eye

The early period (1950-1970) goes uphill faster than the midsection, and the midsection goes uphill faster than the period since 2010. Economic growth has been slowing. You can't see it on graph #1, but growth has been slowing. The log scale graph makes it easy to see.

You may notice that the middle period starts before the early period ends. Yeah. I look for straight-line trends from left to right, and I look again from right to left. Sometimes the right-to-left view suggests an earlier date, like the 1966 of the middle period. Also I think that when a trend changes, it often takes a few years for the change to be completed -- and 1966-1970 is one of those times.

I jotted down my dates for the three "straight" sections where the growth rate doesn't change much. Then I went back to the FRED data and figured the average growth rate for each of those three sections. There is more difference than I expected:

Graph #4: Average rates of Growth, where the plotted line is relatively straight

Just over 4% in the early period. Just over 3% in the middle years. And just over 2% in the most recent period. Growth slowed by about one percentage point after 1970 and again after 2007.

I know, one percent doesn't sound like much. But one percent every year from 1970 to 2007, compounded, does add up. In his 1995 book To Renew America, Newt Gingrich said that if we can get "a 1 percent increase in our economic growth rate" then "the Social Security Trust Fund never runs out of money". One percentage point more growth means a lot more GDP.

And yes, Gingrich was yearning for the good growth of the 1950-1970 period. As am I.

Trend lines by eye are nice, but trend lines by Excel are better. The next graph shows Real GDP (the same data as before) and a trend line based on the 1950-1970 data, using a log scale:

Graph #5: Real GDP and the 1950-1970 trend line

The trend line (red) is an exponential curve, the curve that curves uphill like crazy, like a covid graph. But an exponential curve shows a constant rate of growth, so on a Log Scale graph the exponential curve is a straight line. Yeah, I am still amazed by this -- and sometimes fooled by it.

Now, think of the red trendline as showing where Real GDP would be if growth kept to the 1950-1970 trend rate. And the Real GDP line, well, it's just sad and droopy. Real GDP is growing a lot slower now than it did 50 to 70 years ago:

Tuesday, February 14, 2023

The 1950-1970 trend

Think of the 1950-1970 trend of Real GDP as a flat red line.

What was Real GDP doing, in the years since that time?

It was going downhill.

Relative to trend, we are lower now than we were at the bottom of the Great Depression.

Sunday, February 12, 2023

Life has its ups and downs

Graph #1: Expenditure on Financial Services as a Percent of Personal Consumption Expenditures

Graph #2: Wages and Salaries as a Percent of Personal Income

Once in a while we must stop and ask a simple question: When did the problem start?

Friday, February 10, 2023

Choose your battles


Divide both sides by Q.

(MV)/Q = P

In English: (Money times Velocity) per unit of output equals price.

Less rigorously: The price level depends on the quantity of money and how frequently it is spent.

And that is still pretty damn rigorous.

The price level depends on the quantity of money and how frequently it is spent.

I don't have a problem with that.

Some people say "but money is endogenous" -- money is created within the economy, by the people who engage in economic activity. Okay. So maybe those people are disagreeing with one detail of something Milton Friedman said. But that doesn't mean that "The price level depends on the quantity of money and how frequently it is spent" falls apart.

They wish it did, maybe. But it doesn't. Prices still move with the Q of M. And with hiccups and lags.


The price level depends on the quantity of money and how frequently it is spent.

"But you have not defined money!"

Exactly! It is not a problem that money is here undefined. It is a solution. For example, borrowed money works just as well as paycheck money when it comes to influencing prices. So we can include credit (which is money that we have to pay interest on) along with money (which we don't pay interest on), and call it all "money".

And the other thing, V, the Velocity of money -- If we consider Velocity to be a property of money, then we can drop V from the equation and simplify things. If we have M, we'll spend it. Maybe we spend it faster; maybe we spend it slower; it depends on conditions and what we choose to do. But I don't have a problem saying that both borrowing and velocity are included in my concept of "money".

So we can tidy up the "(MV)/Q = P" thing by saying that the M implies the V. So the "V" drops out of the equation, and then we don't need the parentheses because we have simplified things. And the slash in the equation means "per unit of" Q -- per unit of quantity: "Each".

We are left with only

M = P

But I don't want to say Money equals Price. I'd rather say Money determines Prices. Or again, the price level depends on the quantity of money (where our definition must say money is inclusive and flexible, because the economy changes over time). Or better: Money and Prices move together and, perhaps with some exceptions, Money determines Prices. Trying to get everybody on the same page here.

What we are left with, I think, is something that Milton Friedman could have accepted. I don't know, really, if he would have. But I can accept "Money and Prices move together" as derived above, and still accept Friedman's explanation in Money Mischief and elsewhere about the quantity of money being the main cause of inflation. I can even accept the "always and everywhere" part.


I worry that some people might object to my reasoning because they disagree with Milton Friedman. But those people may be working backwards from their conclusion that "Friedman is wrong" and making arguments that they hope will prove him wrong. 

I have no patience with that. You don't begin with your conclusion and work backwards from there. 

Some of those people might say it is true that the quantity of money and the price level are related, but point out that this is only because economic activity (buying stuff) can change the quantity of money. Again, they are still trying to prove Friedman wrong. I say, chicken or the egg? I say it doesn't matter which comes first, the economic activity or the quantity of money. If the deal affects the quantity of money, then the deal cannot be completed without the quantity of money being affected.

(Note that I am not saying anything here about policy.)

If you still want to disagree with Milton Friedman, there are much better things to disagree with than his "always and everywhere" view. Take his graphs, for example. The "money relative to output" graphs in Money Mischief and Free to Choose. Friedman says that money relative to output increases on a path that is extraordinarily similar to the path of the price level, "always and everywhere". He presents the graphs as evidence that his claim is correct.

I first looked into this in the 1970s because my textbook (the 1975 McConnell) said the monetarists and the Keynesians disagreed. The disagreement was over some detail regarding the velocity of money, as I recall. But the textbook only said they disagreed, and left it hanging like that. That was unacceptable. That was when I went to the library and discovered the Historical Statistics and Statistical Abstract.

Friedman said the path of the price level and the path of "money relative to output" (MRTO) are similar. The price level goes up, and up. 

I used M1 for money, because M1 is money that circulates, and it is spending that impacts prices.

I used GDP -- but I guess it must have been GNP back then, in the 1970s -- as my measure of output. I'll call it GDP, here. I made a MRTO graph, M1 relative to GDP, and stared at it. It went down, down, down. It didn't go up and up.


Years went by.

In Friedman's Money Mischief, in the chapter with the graphs, in a footnote, Friedman identifies the data he used to make the graphs. He used "real" output. Inflation-adjusted output. He divides the quantity of money by a set of numbers that have inflation stripped out of them.

He divides numbers that do have inflation in them by numbers that don't have inflation in them. That's the reason his MRTO goes up like prices: there is inflation in the numerator and not in the denominator. Friedman's calculation is like dividing Money by GDP at actual prices, and then multiplying the result by the price level!

Of course his MRTO looks like the price level. He multiplies the price level into it!

Friedman's graph shows MRTO going up on a path similar to inflation because he multiplies the MRTO by the price level. Only he doesn't do it on the up-and-up. He takes the inflation out of the output number and calls that number "real" output. Then he takes the quantity of money (which is worth less and less over time because the money numbers have inflation in them), and divides by "real" output.

Sounds good, doesn't it? The output is real, the graph must be good. But Friedman's arithmetic is devious and deceptive. You want to complain about Friedman? Complain about that.

I start out by saying I accept the argument that Money determines Prices. I do. But I cannot accept Friedman's graphs. His arithmetic is bad, outrageously bad, and his graphs are definitely deceptive. 

Bad arithmetic does not make good evidence. Far as I'm concerned, yes, money and prices move together. But Friedman offers no evidence of it. His graphs are garbage.

Did he do it on purpose? Oh, I couldn't know that. You might think he had to know the graphs were bad. 

I sometimes think he had to know -- but of course I cannot be sure. I can say that I first came across the MRTO calculation around 1976-77, and I did not figure out why his MRTO went up-and-up until after Money Mischief was published in the 1990s. Took me 20 years to figure it out. And I was a math major.

Hey! The mind works at its own pace.

You want to criticize Friedman, do it for his graphs. Don't do it because the quantity of money and the level of  prices tend to move together.

Tuesday, February 7, 2023

We're blaming the wrong guy for the insurrection

“The Government will do what the people tell them to do. The problem is to get the public to recognise what the true situation is. It is a fallacy to suppose that the way to get problems solved is to get the right people elected. The way to solve problems is to make it politically profitable for the wrong people to do the right thing.”

Unfortunately, Milton Friedman was wrong about what "the right thing" is.

Sunday, February 5, 2023

Theodore Yntema on cost-push inflation, from 1958


“The critical unsolved problem in our
effort to achieve progress and prosperity
is cost-push inflation.”

Today, 65 years after Theodore Yntema, cost-push remains our critical unsolved problem. 

A problem becomes most difficult to solve when people refuse to recognize that it exists.

Introductory info from page 220. Not sure who is speaking; perhaps the Committee Chair:

During the present series of hearings on administered prices in the automobile industry, Mr. Theodore O. Yntema, vice president of the Ford Motor Co. in charge of finance appeared before the subcommittee. I place great reliance on his testimony. Prior to joining the Ford Motor Co. in 1949, he was for more than 25 years a member of the faculty of the University of Chicago.

I love the University of Chicago. I hate the University of Chicago. You would have to be strong-minded to attend school there and still retain your own economic thinking. Unfortunately, I am not that strong-minded. Fortunately, I didn't go to school there.

Below are excerpts from Mr. Yntema's statement, from page 226 of Senate Subcommittee Hearings published in 1958. On blue background are paragraphs taken from Yntema's statement. Below each blue section, on white background, are my thoughts in response to his statement.

Theodore Yntema

The critical unsolved problem in our effort to achieve progress and prosperity is cost-push inflation. Cost-push inflation is generated by organized pressures upward on wage rates and/or the prices of other factors of production, even though labor and materials are not in short supply.

In Mr. Yntema's experience and in his understanding, cost-push is generated by "wage rates and/or the prices of other factors of production". You still see that explanation in current times, very often on the internet. Yntema is correct, as far as he goes, but I think there may also be other things that can generate cost-push inflation. Thus, to think that cost-push is *only* generated by labor cost and/or other factor costs would surely be a problem.

It is, of course, true that cost-push inflation will reduce production and employment and lead forthwith to depression, unless there is an increase in demand made possible by an increase in the quantity or in the velocity of money to support the inflation.

Mr. Yntema's second paragraph is perfect, and it is a perfect response to people who say there's no such thing as cost-push inflation -- to people who say inflation is only created by "accommodation" or the growth of money. I think those people are right about accommodation. My problem with them is, they seem to think that if the Federal Reserve doesn't allow inflation, the cost pressure just goes away. It doesn't just go away. As Yntema stresses, if the cost pressure is not relieved by inflation, it finds a different outlet: It slows the economy. In Yntema's words it will "lead forthwith to depression" unless there is an increase in the quantity or velocity of money.

The choices are not cost-push-inflation or nothing. The choices are cost-push-inflation or cost-push-decline. Paul Volcker chose decline, and, like interest rates, our economy has been on a downward path ever since.

Economists today are unable to explain the long-term decline of the US economy. An explantion is provided when we remember that cost pressure, if not fully relieved by inflation, finds relief by slowing the growth of income and GDP.

Nevertheless, it is important to recognize the difference between demand-pull inflation and cost-push inflation. In a demand-pull inflation, the prime moving force is expansion of demand for goods and services.

In a cost-push inflation, the prime moving force is organized pressure to raise wages and/or prices of the factors of production, even though labor and materials are in adequate supply.

In actual experience, we do not get pure cases of demand-pull inflation or cost-push inflation, but, as we shall see later, some inflations are predominantly of the one type, some are of the other type.

Like Mr. Yntema, I have recognized the difference between cost-push and demand-pull inflation and I have written about it.

Yntema's fourth paragraph ("In a cost-push inflation...") is where I come to disagree with him. Not that what he says is wrong, but again that his explanation is not the *only* way cost pressure can develop.

His fifth paragraph ("In actual experience...") is important. The importance of knowing about the two different types of inflation makes it seem that inflation must always be one or the other, but generally it is a combination of the two.

Sixty-five years after Yntema's statement on inflation, I think I have figured out another aspect of cost-push -- another way the cost pressure arises and forces itself upon prices and wages. I think my work adds to the existing explanation. I think my explanation and the existing explanation of cost-push can work together to create inflation. This is similar to what Yntema describes, where "we do not get pure cases" of demand-pull or cost-push; we get a mixture that is "predominantly" the one or the other.

I have one more observation that is relevant here. Reading Yntema's words, it occurs to me that he does not suggest explanations that may explain things. He asserts explanations with absolute confidence, as though he has not the least doubt. It is certainly a convincing style of writing. And perhaps he had no doubt; I wouldn't know.

Myself, I am the kind of person who doubts everything, most especially the things I know best. There is always a lot of "if" and "maybe" in what I say. I don't like to assert things as if I was absolutely certain, when I can not possibly be certain until after my ideas are accepted, corrected, and built into policy, and I finally see them working. And that's not likely to happen in my lifetime.

But I see that I used the word "only" two different times in objection to Yntema's assertions:

  1. To think that cost-push is *only* generated by labor or other factor costs would surely be a problem;
  2. Yntema's explanation is not the *only* way cost pressure can develop.

I do not trust the word "only" as a method of ruling out other possibilities.

I didn't see Yntema using "only" in a way that I distrust. But he says things most forcefully, as if nothing else need be added. The important little thoughts that I want to add seem to be excluded by the strength of Mr. Yntema's words -- and presumably by the strength of his convictions. So I have an "only" problem.

My convictions are strong, too. But I know I'm just a hobbyist. I know I have no one I can turn to, who can evaluate my work with the skill that I need. And I know that if I had such people to turn to, my interpersonal skills are such that I would soon alienate them. 

Oh, well. As you can see, when I write about the economy I am always careful and hesitant and full of "if" and "maybe". But when I belittle myself, oh, that is when I have complete confidence in what I say.

Amen, brother. In any case, we still need to fix the economy, and I think maybe I can help. Dammit! There's another "maybe".


I have one other thing to discuss. I have a different way that cost-push inflation can occur. It is the growth of one sector of the economy relative to the economy as a whole.

In the old wage-push theory, it is the success of wage earners that disproportionately increases labor cost.

In the old price-push theory, it is the success of price setters that disproportionately increases prices.

In my new excessive-growth-of-finance theory it is the success of finance -- the growth of finance and financial cost -- that increases the cost of output and diminishes demand, creating cost pressure, slowing growth and resulting in inflation.

If excessive labor share can cause cost pressure problems, and excessive capital share can cause cost pressure problems, then surely excessive financial share can cause cost pressure problems.

Now, let's fix this thing.

Friday, February 3, 2023

"Not-strong-enough-to-say-NO" is *not* the problem

From a comment by David, on "Inflation: True or False" by David R. Henderson at the Hoover Institution:

Borrowing creates money out of thin air, which is an expansion of the money supply. The largest borrower/debtor on the planet is the U.S. Treasury. In 2017, the U.S. National Debt was $20 trillion. As if that wasn't bad enough, by 2020, it had grown to $28 trillion... The driver of all that borrowing is some combination of Congress and the White House--primarily Congress, as the Treasury has no option but to borrow to pay for the excess and largess of a Congress that is not strong enough to say, "No."

That seems to be what everyone thinks: Congress or somebody is not strong enough to say "No" to government spending. When you get right down to it, that's probably why people are insurrecting.

Here's the thing: 

  • Cutting government spending will not fix the problem. 
  • Raising government spending will not fix the problem. 

The size of government is not the problem. I know what Reagan said:

"Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy."

I know. But Reagan was wrong about why growth was slow.


People sometimes measure the size of government by the size of government debt. That debt is huge: inexplicably, incomprehensibly, incredibly huge.

The biggest problem with government debt, I think, is that we have lost control of it. We cannot stop the increase.

But the reason we cannot stop the increase is simple: We have the wrong solution.

Everyone thinks we have to reduce government spending. As Rush Limbaugh said:

what actually causes budget deficits [is] spending more money than you have.

But Limbaugh didn't mention income. He only mentions spending and the money we "have".

The problem is with income.

Adam Smith wrote:

Every workman has a great quantity of his own work to dispose of beyond what he himself has occasion for; and every other workman being exactly in the same situation, he is enabled to exchange a great quantity of his own goods for a great quantity or, what comes to the same thing, for the price of a great quantity of theirs.

In the Project Gutenberg version of The Wealth of Nations, the phrase "what comes to the same thing" occurs 19 times. Smith must have thought the phrase important. A quantity of output comes to the same thing as the price of that output. It has the same value. In other words, income equals output.

GDP can be measured as the value of output we produce in a year, or as the value of income we earn in a year. The only difference between the two totals is due to measurement error.

The important thing, and what surprised me most in Econ 101, is that income equals output. So if GDP growth is slow it means the growth of output is slow, but it also means the growth of income is slow. And slow income growth is the kicker.

Reagan wanted to increase the growth of the economy so that income would increase. That is something we all want. How to make it happen is the question.

In my previous post I show this graph:

The graph shows the relation between the federal debt and everyone else's debt, for the US. Our debt is bigger than the federal debt, except for a few years at the end of World War Two. Our debt was more than five times the government debt in 1974 when GDP growth slowed. Our debt was more than five times the government debt in 1929 when the Great Depression started. Our debt was more than seven times the government debt in 2007, and then we had the financial crisis and the Great Recession. When our debt is too much more than the government debt, bad things happen.

Our debt was a bit over three times the government debt in 1919, and 3½ times the government debt in 1993. Our debt was not low then, but it was low enough that the economy could grow with vigor. After 1919 we had the Roaring Twenties, and after 1993 we had what Alan Greenspan called "the New Economy". Both bouts of vigor ended in disaster: high debt and disaster.

Our debt was less than the government debt in 1945, and after the war we had a "Golden Age" that lasted all the while our debt was less than three times the federal debt. We had troubles when the ratio went above three. The "Great Inflation" began around 1965, but our debt kept growing faster than government debt and the economy kept growing. Then in the mid-1970s, productivity growth slowed and GDP growth slowed and income growth slowed.

It was at this point that government debt started to grow faster. It grew slightly faster than our debt for 20 years. The red line wanders slowly downhill during those years. Finally, in the 1990s, our debt was low enough (relative to federal) that the economy could grow with vigor. 

But we always let debt-other-than-federal increase until it makes the economy go bad.

Really, the problem is policy. It's the government's job to make the economic environment a good one for growth. If you want to be angry with government for something, let it be this: not that the federal debt is too high, but that debt-other-than-federal is too high. Their policies encourage that. They should discourage it.

It is the times when debt-other-than-federal is low that economic growth is at its best. But of course the economy grows because we use credit, and our debt increases because we use credit. When our debt gets high enough, it brings trouble to the economy.

The saddest part of all this is that our solution is to reduce the federal debt. What we need is to reduce debt-other-than-federal -- just the opposite of what we are doing.