Theodore Yntema on cost-push inflation, from 1958

 

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

- Theodore Yntema, 1958

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		Arthurian

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.