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| Graph #1: Unemployment Level Bigger is Better, or Click Graph # for the FRED Page |
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I'm not a fan of "diagrams" in economics, but sometimes... This is a screen capture of slide 36 from a SlideShare presentatio... -
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Comparing the labor cost of Nonfinancial Corporate Business (NCB) to NCB profits since 2018. The vertical gray bar during 2020 shows the re...
5 comments:
Scott Sumner: "I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy [in the 1980s]".
As we are still learning, however, to prevent more slowing was not enough.
Wow, I'm the diametric exact opposite of Scott Sumner. I must admit you make a very strong case for 1973 as the year the shit hit the fan. The above graphic in particular, demonstrates beyond question that the stag part of the 1970s stagflation was for real. I still think of 1980 as the year the shit hit the fan. I'm 1965 birth cohort and high school class of 1983, so admittedly I saw the 1970s through the eyes of an innocent child, but my dad (a janitor) was a solid breadwinner throughout the 1970s, until he got laid off in 1982, after which my parents scraped by on part time "agency" jobs with cleaning firms for a couple of years, eventually starting their own cleaning business, which was consistently profitable, but never produced the income of my dad's breadwinner years, which I refer to as the "pre-Reagan era." Granted, Reagan faced the challenge of "stagflation," or unemployment and inflation at the same time, but his decision to prioritize inflation-fighting over unemployment-fighting is something I will NEVER be able to forgive. I understand that for you, the big question in economics is supply push vs. demand pull inflation, but thanks to my historic perspective and social class perspective, while I stipulate that inflation is a real problem, I fear counterinflationary policy FAR more than I fear inflation itself. Inflation erodes people's standard of living. Mass unemployment pulls the whole rug out from families. It's beyond economically suboptimal, it's inhumane. I fear that the odds are strongly against keeping enough balls in the air long enough to prevent the next recession starting before election day 2024, and if the Republicans win in 2024, well, I simply can't bear to contemplate that fate. While I love your thoughtful visualizations of FRED data, the "graphing Reagan" memes have much more emotional resonance for me.
Good link. Thanks.
> "Granted, Reagan faced the challenge of "stagflation," or unemployment and inflation at the same time, but his decision to prioritize inflation-fighting over unemployment-fighting is something I will NEVER be able to forgive."
And you are right not to forgive. To his last days, my dad never forgave Reagan for firing the air traffic controllers and driving unions into the dirt.
In 1977 I wrote:
'The solution to inflation is "less money." The solution to unemployment is "more money." This is a magnificent solution for an either/or problem. But when the problem is "both" the logical solution is to increase and decrease, at the same time, the country's money supply.'
My focus today is still the same: The problem is not inflation OR unemployment, but BOTH. Some 15 or 20 years after 1977 I finally understood that we need less of the costly money (borrowed money with interest cost & principal repayment) and more of the cost-free ("printed") money in its place. That's why now my focus is always on debt and financial cost.
> "I still think of 1980 as the year the shit hit the fan."
I always ask "what caused this problem?" and I always have to go farther back in time looking for an answer.
"Only by reducing the growth of government," said Ronald Reagan, "can we increase the growth of the economy."
We have lately a handful of fools in Congress who see preventing consensus as success. Their goal, as Reagan's was, is to reduce the growth of government. But the cost of government is not the problem -- or at least it wasn't the problem in the Reagan years, nor in the 1970s. Even then, the problem was the cost of finance. The irony is that Congress unfailingly sees "making more credit available to borrowers" as their favorite tool of policy. They know the economy needs money to function. For some reason, however, they think that printing money causes inflation and borrowing money does not -- and they think this, despite the extra cost that comes with borrowed money.
The abnormal growth of the financial sector is a direct result of economic policy that restricts the quantity of money while promoting borrowing and the use of credit. The MMT people tell me "money IS credit". My response: That is how it looks, because we use credit for money!
Debt is credit-in-use. In 1947 there was $3.50 of debt for every dollar of M1 (cost-free) money. In 2007 there was $35.00 of debt for every dollar of M1 money. We can no longer afford to use credit for money.
I'm pretty sure the same thing happened in ancient Rome. And you know how things worked out for them.
(continued...)
Frederic Mishkin writes:
"Both types of inflation are associated with high rates of money growth so they cannot be distinguished on this basis. However ... demand-pull inflation will be associated with periods when output is above the natural rate level, while cost-push inflation is associated with periods when output is below the natural rate level."
Economists' diagrams of inflation tell the same story.
Demand-pull goes with rapid growth, and cost-push goes with slow growth. This is all we need to know.
Despite what everyone says, our inflation is mostly cost-push, not demand-pull. THIS EXPLAINS OUR SLOW ECONOMIC GROWTH. Reagan was wrong. Congress is wrong. But increasing government spending and government debt is not the answer, either. It can help people cope while we solve the problem, sure, but it does not solve the problem any more than Reagan did.
Don't look at finance this way.
Look at it this way.
The abnormal thing that developed in our economy over the last 70 years is financial cost.
And financial cost drives cost-push, just as oil did in the 1970s.
And cost-push slows the economy.
Paul Volcker solved the inflation problem, but not the cost-push problem. The problem remains to this day, and gets worse all the time.
PS: People who focus on inflation to the exclusion of all else drive me nuts. The internet is full of em.
And yes, the graph shown in the "Look at it this way" link shows the big change beginning right around 1980.
https://fred.stlouisfed.org/graph/?g=1coj2
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