Tuesday, June 11, 2024

THROWBACK: Part 1: Nixon for Context


Rule of thumb: If a first-term president's term ends with a good, strong economy, he gets a second term. 

 


In "How Richard Nixon Pressured Arthur Burns: Evidence From the Nixon Tapes" Burton A. Abrams writes: 

In Nixon’s 1962 book, Six Crises, he recounts that Arthur Burns called on him in March 1960 to warn him that the economy was likely to dip before the November election. Nixon writes that Burns “urged strongly that everything possible be done to avert this development. He urgently recommended that two steps be taken immediately...”

Their idea was to improve the economy enough that Vice President Nixon would win the election and take his turn as President when Eisenhower's second term was up. Today this would be called "election interference."

No steps were taken. Abrams continues:

Herbert Stein, who was a member of the Council of Economic Advisers from the start of Nixon’s [first] term and became chairman at the start of 1972, confirms that Nixon blamed a modest rise in the unemployment rate as one of the reasons he lost the 1960 election.

Thus our rule of thumb. Again, Abrams: 

Evidence from the Nixon tapes, now available to researchers, shows that President Richard Nixon pressured the chairman of the Federal Reserve, Arthur Burns, to engage in expansionary monetary policies in the run-up to the 1972 election.

Here, the election interference appears to be driven by Nixon. In their 1960 encounter, it seems to have been Burns's idea. At least, that's how Nixon remembered it for Six Crises.

In both cases, 1960 and 1972, the plan was to improve the economy enough to keep the incumbent (or his party) in power. There is something almost heartwarming about Nixon's interference, because in both cases the idea was to improve the economy. Both times, however, the interference was conceived as a way to assure the election (or re-election) of Nixon. Both times, Nixon was engaged in election interference intended to benefit Nixon.

 

From "Nixonomics: How the Game Plan Went Wrong" by Rowland Evans, Jr. and Robert D. Novak, in Atlantic Monthly, July 1971[1]:

During that difficult decade after his defeat in 1960, aides and close friends had heard Nixon say privately time after time that had President Eisenhower only taken his and Arthur Burns's advice early in 1960 and moved rapidly toward stimulating the economy, he -- not Jack Kennedy -- would have been elected President. The implication, not quite stated flatly, was that Richard Nixon, if he had the power, would never again go into a presidential election with the economy in a state of deflation.

Note 1: As reprinted in Stabilizing America's Economy (The Reference Shelf, Vol. 44 No. 2); edited by George A. Nikolaieff.

Evans and Novak show Nixon fully committed to election interference.

More dirt on Nixon, this from the "Federal Reserve Chairman" section of Wikipedia's article on Arthur Burns:

Nixon later blamed his defeat in 1960 in part on Fed policy and the resulting tight credit conditions and slow growth. After finally winning the presidential election of 1968, Nixon named Burns to the Fed Chair in 1970 with instructions to ensure easy access to credit when Nixon was running for reelection in 1972.

Later, when Burns resisted, negative press about him was planted in newspapers and, under the threat of legislation to dilute the Fed's influence, Burns and other Governors succumbed. Burns's relationship with Nixon was often rocky. Reflecting in his diary about a 1971 meeting attended by himself, Nixon, Treasury Secretary John Connally, the Chairman of the Council of Economic Advisors, and the Director of the Bureau of the Budget, Burns wrote:

The President looked wild; talked like a desperate man; fulminated with hatred against the press; took some of us to task – apparently meaning me or [chairman of the Council of Economic Advisors, Paul] McCracken or both – for not putting a gay and optimistic face on every piece of economic news, however discouraging; propounded the theory that confidence can be best generated by appearing confident and coloring, if need be, the news.


Wikipedia also includes a detail which seems to have been omitted from All the President's Men, the great Alan J. Pakula movie starring Robert Redford and Dustin Hoffman:

At the Watergate break-in of 1972, the burglars were found carrying $6300 of sequentially numbered $100 bills. The Fed lied to reporter Bob Woodward as to the source of the bills. Burns stonewalled Congressional investigations about them and issued a directive to all Fed offices prohibiting any discussion of the subject.

Watergate was just one more example of Nixon tampering with elections. That time, however, it did not include improving the economy. Watch the movie. Watch All the President's Men

Improving the economy as a form of election interference might seem by comparison a good idea. But when winning the election intrudes on economic policy, the economy will lose every time. And the incidental considerations, like lying to Bob Woodward, stonewalling Congress, and prohibiting discussion are but a Nixon Sampler of the damage created by such manipulations.

By the way, Richard Nixon and Donald Trump were pen pals.

 

 

In The Emerging Republican Majority (1969), Kevin P. Phillips identifies "the two principal architects" of the emerging Republican majority: Richard Nixon and John Mitchell. Among that emerged group, then, Nixon's sleazebag behavior is apparently seen as worthy of emulation.

 

 

From Wikipedia's "Arthur F. Burns" article:

Burns served as Fed Chairman from February 1970 until the end of January 1978. He has a reputation of having been overly influenced by political pressure in his monetary policy decisions during his time as Chairman[13]...

Footnote 13 reads:

Bartlett, Bruce (2004-04-28) "(More) Politics at the Fed?", National Review

There is this link:

http://www.nationalreview.com/articles/210446/more-politics-fed/bruce-bartlett

That link is broken. This one works:

https://www.nationalreview.com/2004/04/more-politics-fed-ridhancock/

The link turns up "(More) Politics At The Fed?" at National Review,  attributed to RIDHANCOCK. (Bruce Bartlett is acknowledged in a note below the article. I will refer to the article as the Bartlett article.)

The Bartlett article says:

Nixon wanted to keep monetary policy loose in order to make sure the economy was robust going into the election. This led to the imposition of wage and price controls in August 1971.

That paragraph concludes: 

While everyone knew they would not work for long, the controls reduced inflation enough to keep monetary policy expansive through November 1972, which was all that mattered.

Now, that sounds like Nixon: Getting elected was be-all and end-all.

 

The Bartlett article (dated April 28, 2004) opens with this paragraph:

Rising inflation and interest rates, although still low by historical standards, are starting to get the attention of economists. It is becoming harder and harder to find an economist who doesn’t think the Federal Reserve needs to tighten monetary policy soon. However, Fed officials continue to say that unemployment, low capacity utilization, and strong productivity growth argue against tightening at this time. They may be right. But one cannot help but suspect that politics is also playing a role.

Once you see election interference in Nixon, it is easy to see elsewhere.

The article concludes with these thoughts:

The reason this [Nixon/Burns] history is relevant today [2004] is because the Fed is under increasing pressure to tighten monetary policy. While there is no evidence of White House pressure to keep monetary policy easy, one can assume that it will not be displeased if the Fed avoids tightening before Election Day.

Fed Chairman Alan Greenspan is well respected and no one believes he would knowingly use monetary policy for political purposes. However, the longer he waits to tighten monetary policy, the more people are going to ask whether politics is playing a role.

Once you see it in Nixon, you see it everywhere.

Bartlett (or RIDHANCOCK) was aware of Nixon's willingness to use economic policy for political gain. Because of rising inflation and an unresponsive Fed, Bartlett grew concerned about election interference in the era of George W. Bush and Alan Greenspan. Not that there was evidence of interference. But inflation was rising, and interest rates were not. Bartlett saw the possibility of election interference, and he couldn't look away. 

I can respect that.

 

If you go looking, you can find tales of Nixon and Burns in many places. The other day I came upon three that I had not seen before. They broaden the picture substantially. Here is a quick look:

At AP News, 12 May 2022:

The chronically high inflation of the 1970s has been attributed, in part, to political pressure that led the Fed to forgo steep rate hikes under Presidents Lyndon Johnson and Richard Nixon.

At AP News, 31 May 2022:

In the early 1970s, President Richard Nixon pressured Fed chair Arthur Burns to lower interest rates to spur the economy before Nixon’s 1972 reelection campaign. Nixon’s interference is now widely seen as a key contributor to runaway inflation, which remained high until the early 1980s.

At Business Insider, 11 March 2024:

Richard Nixon pressured the Fed to keep interest rates low before his reelection, which helped cement the disastrous inflation of the 1970s. Ronald Reagan got the message to the central bank on his wants during his presidency, getting his chief of staff to tell then-Fed Chair Paul Volcker not to raise rates ahead of his reelection campaign. Volcker wasn't planning to raise rates anyway. In recent decades, however, most presidents shied away from saying much, until Trump.

Good article, that last. 


This all leaves me wondering about Donald Trump, Fed Chairman Jerome Powell, and the Biden inflation. 

I have no evidence that Trump and Powell talk the way Nixon and Burns talked. I have no evidence that Powell's March 2021 announcement (inflation is coming) was a coded message to administered-price setters to start raising prices. I have no evidence that the Fed's year-long delay before raising interest rates (March 2021 to March 2022) was somehow part of a Republican plan to take Biden down. I have no evidence. That doesn't mean it didn't happen.

Was the post-pandemic inflation created, weaponized, and used by Republicans in an attempt to defeat Joe Biden? Even if this question is spread only by rumor and innuendo, it could still have powerful consequences for the November election: The rumor shows the 2021-2024 inflation to be Trump's fault rather than Biden's. And the inflation has hit Trump supporters -- has hit us all, really -- hard in the pocketbook.

Friday, June 7, 2024

"Will Prices Drop?" -- 2½ pages from Irving Fisher

From Google Books, "Read free of charge". (I looked up temporary inflation.)

If it doesn't show up, click your "reload" button.

 

 


 

 

 



Saturday, May 18, 2024

Argument from authority

From Wikipedia:

Scientific knowledge is best established by evidence and experiment rather than argued through authority as authority has no place in science. Carl Sagan wrote of arguments from authority: "One of the great commandments of science is, 'Mistrust arguments from authority.' ... Too many such arguments have proved too painfully wrong. Authorities must prove their contentions like everybody else." Conversely, it has been argued that science is fundamentally dependent on arguments from authority to progress as "they allow science to avoid forever revisiting the same ground".

One example of the use of the appeal to authority in science dates to 1923, when leading American zoologist Theophilus Painter declared, based on poor data and conflicting observations he had made, that humans had 24 pairs of chromosomes. From the 1920s until 1956, scientists propagated this "fact" based on Painter's authority, despite subsequent counts totaling the correct number of 23. Even textbooks with photos showing 23 pairs incorrectly declared the number to be 24 based on the authority of the then-consensus of 24 pairs.

This seemingly established number generated confirmation bias among researchers, and "most cytologists, expecting to detect Painter's number, virtually always did so". Painter's "influence was so great that many scientists preferred to believe his count over the actual evidence", and scientists who obtained the accurate number modified or discarded their data to agree with Painter's count.

Economics is a minefield of Theophilus Painters. By comparison, the 30-odd years of Painter's dominance in zoology was a golden age.

Sunday, May 5, 2024

The "fall of Rome" begins with Caesar

What our economy needs is Solon and the Great Debt Forgiveness. What our world is getting is Caesar and the Grand Political Reorganization. Rather than turning from financialization we turn toward it.

Sunday, March 31, 2024

Wages were squeezed in the "good" years

Between 1948 and 1981, compensation of employees fell from 25% of corporate business spending to 20%, while interest cost increased from 1% to 7%. Consumption was constrained, and production with it. Finance grew and blossomed.

I'm using corporate tax deductions as an estimate of corporate spending. I'm looking at employee compensation as a percent of corporate spending, to see how wage cost has changed since 1948. The most recent data I find at the IRS is for 2020.

A lot of "interesting" stuff has happened in our economy since 2020, but it won't show up on my graph for a couple years yet. Most people, I think, are interested in the recent events. I'm interested, too, but I don't dwell on the recent crap, because it is crap. If we pick a date (2008, say, the date of the financial crisis) we can say everything that happened since then is crap. Okay, not crap, but results. The economy went bad in 2008 and everything since that time is results: attempts to fix the problem after policymakers were caught by surprise.

I don't focus on results. I focus on causes. If you don't understand the causes, you don't get good results. I care about the causes of the 2008 crisis, the causes of the 1965-1984 inflation, the causes of the productivity slowdown of the 1970s that lasted 20 years. I care about the causes of the so-called "new economy" of the latter 1990s, which was really just a brief remission in the productivity slowdown. I care about all of it. I find that stuff fascinating.

I care about causes: why things were good, and how things went bad. You have to know how things went bad, or you can't fix them. And you have to look at times when the economy was good so you can see how things went bad.

That is the stuff that interests me. So I'm looking at employee compensation, the annual total paid by corporate business, as a percent of corporate business tax deductions. (I don't have the spending data, so I'm using the deductions as an estimate of spending.) Employee compensation started in 1948 at 25% of corporate deductions. By 1974 it was down around 20%. So our paychecks, those of us who worked for corporate business, our paychecks did not keep up with corporate spending. Our paychecks fell behind by five percentage points.

A lot of people got a lot of raises between 1948 and 1974, but all those raises together didn't keep up with corporate spending. To keep up, every $20 we earned in 1974 should have been $25. Every $100 should have been $125. Every thousand should have been $1250. But it was not, because our paychecks didn't keep up with corporate spending.

I dunno what they spent the money on. They spent it on many different things. I don't care about all that. I have a focus. I think the problem with our economy is debt. Now, before you say yeah, that damn federal debt... -- before you say that, let me say this: We've been trying to slow the growth of federal debt for half a century now, with no success. We've reached the point where Congress is getting crotchety about it. They're putting up stiff resistance to government spending. 

They're doing what Milton Friedman said. Friedman said

The problem is not one of knowing what to do.... The problem is to have the political will to take the necessary measures.

That's in chapter 8 of Money Mischief, page 213 in my paperback. Of course, Friedman was talking about inflation. But whatever we want to change about government will only change if we have the political will to make it change. At least, that's what Martin Gross was saying in A Call for Revolution.

And those crotchety congressmen, they do have the will to change things. That's why they're in the news all the time. And it's why they seem so crotchety.

Ironically, Friedman in the same chapter said government borrowing DOES NOT cause inflation:

Higher government spending will not lead to more rapid monetary growth and inflation if the additional spending is financed either by taxes or by borrowing from the public.

So there is a flaw in the solution that focuses on cutting government spending and government debt. To my eye, this flaw extends to the complaints of our crotchety congressmen. Their solution won't work. It hasn't worked in 50 years. Will it work now that they've developed an attitude? I don't think so. The fifty years of failure is not due to a lack of political will. The failure is because the solution we've been trying for fifty years is the wrong solution. The crotchety guys have the wrong solution. If you don't understand the causes, you can't get good results.


As I see it, when we say we want better economic growth, we mean growth of the private sector, not growth of government. That shouldn't have to be said, but it doesn't hurt to say it. The private sector is the economy. And by the way, it is private-sector debt that does harm to the private-sector economy. Business loans are repaid out of the prices businesses charge for their products, so an increase in business debt will push prices up. And household debt service, more and more, eats into consumer income, reducing our purchasing power. Between higher prices and lower purchasing power, business and consumer debt is destroying our economy. Private-sector debt is destroying our economy.

Federal debt? Most of the time, they don't even pay it off. They just roll it over. In "Does the National Debt Matter?" David Andolfatto of the St. Louis Fed said:

Yes, debt has to be repaid when it comes due. But maturing debt can be replaced with newly issued debt. Rolling over the debt in this manner means that it need never be “paid back.”

According to The Atlantic, rolling debt over has been the strategy for a long time:

Unlike after World War I, the US never really tried to pay down much of the debt it incurred during World War II. Still the debt shrank in significance as the US economy grew.

Our massive debt from World War Two -- even that debt, so long ago -- we never really tried to pay it down. But as The Atlantic points out, that massive federal debt did not hinder economic growth. (By the way, private-sector debt was relatively low in those good years after WWII. Private-sector debt back then wasn't a problem for the economy. Today it is.)

The Atlantic says the government doesn't even try to pay down the federal debt. Time magazine, December 31, 1965, said that economists

no longer think that deficit spending is immoral. Nor, in perhaps the greatest change of all, do they believe that Government will ever fully pay off its debt, any more than General Motors or IBM find it advisable to pay off their long-term obligations; instead of demanding payment, creditors would rather continue collecting interest.

Yes, Time's article was about Keynes, the much despised, much loved economist. He was an awesome writer, an awesome thinker. And by the way, it wasn't Keynes's idea to accumulate government debt forever. That idea was from economists of the 1960s -- two decades after the death of Keynes -- who proudly but mistakenly called themselves "Keynesian".

Love Keynes or hate him, it is still evidently true today that creditors would rather collect the interest, as in 1965. And it is still evidently true that the federal government doesn't really try to pay down its debt. That's why the federal debt is so big: We don't pay it down; we just roll it over and pay off the interest.

Speaking of paying the interest on the federal debt, the Peterson Foundation makes an interesting observation:

Even without accounting for interest payments, federal spending has frequently outpaced revenues — causing the government to run primary deficits. Over the past 50 years, annual federal revenues have equaled or exceeded non-interest expenditures only 12 times. 

Only 12 years in 50, according to Peterson, was federal revenue sufficient to pay the annual federal spending other than interest. In the other 38 years, the federal government had to borrow to pay for non-interest expenditures, and borrow more to pay the whole of the interest expense. And even in the 12 years, or most of the 12, it is almost certain the government had to borrow to pay at least some of the interest expense.

In only 12 years out of 50 -- less than a quarter of the time -- did any taxpayer dollars go to pay interest on the federal debt. The federal government doesn't pay down its debt, and three quarters of the time it borrows the money it needs to make the interest payment. Three quarters of the time, taxpayers don't foot the bill at all

Federal debt is not the problem. Private-sector debt is the problem. Cutting government spending will not solve the problem. Reducing government debt will not solve the problem.


Hey, I don't like the way the federal government handles its debt. But I don't complain about the federal debt. I see the debt as a consequence -- a consequence of something in our economy that has gone very wrong, something other than federal spending. It is true, no doubt, that if the government spends more money than it brings in it creates a deficit and adds to the debt. But that's not economics. That is arithmetic. Arithmetic is not the cause of deficits. Arithmetic is not the cause of debt. If you want to understand the cause, you have to go to the economics.

The cost of debt is the problem. But the federal debt is mostly just rolled over, not repaid, so this debt is a low-cost item. And the interest on the federal debt is mostly paid by borrowing the money to pay it, which adds to the low-cost federal debt. The cost of debt is a problem, but the cost of federal debt is not. 

Private-sector debt is the problem. The cost of private-sector debt hits the private sector directly and with full force. The solution is to reduce private-sector debt. Reduce private-sector debt first, so that our economy can improve. And as our economy improves we can balance the federal budget and start paying down the federal debt. 

I don't know why the crotchety guys oppose the growth of federal debt. I oppose it because the federal debt reinforces and supports the financialization of our economy. Financialization is a bad thing.

By the way, as our economy improves, we will need less and less of the things the government spends more and more money on. We will need less and less of that spending. In that environment, federal spending can be reduced painlessly, without crotchety curmudgeons in Congress.

In the meanwhile I would ask you to remember that the Keynesian idea was to use government debt to improve economic conditions -- for example, to make recessions short and to restore vigor and prosperity to the economy. That plan doesn't work anymore because the excessive level of private-sector debt does so much harm to the economy. But it is important to recognize that the federal debt is incredibly large. And it is important to see that the immense size of the federal debt is simply a reflection of the immense size of the economic problem in the private sector.

It is not federal debt that is destroying our economy. Private sector debt is destroying our economy. Our debt. But I don't blame us. I blame economic policy. Policy is the cause. Policymakers think using credit is always good for economic growth, and they think that accumulating debt is never harmful. That thinking has to change.


My graph today shows the "compensation of employees" paid by corporate business, as a percent of corporate business spending. (Again, I am using total corporate business tax deductions as a measure of corporate business spending.) The graph also shows the cost of interest paid by corporate business, as a percent of corporate business spending.

In the early years of the graph, 1948 to 1981, the graph shows a fall in employee compensation and an increase in the cost of interest:

Graph #1: Compensation of Employees and Monetary Interest Paid
as Percent of Corporate Business Spending

I use the 1981 date because that was the peak of interest rates. Rates rose before 1981, and fell after. I use the 2008 date because that was the time of the financial crisis.

Employee compensation fell five percentage points, from 25% of corporate business spending in 1948, to 20% by 1974. It stayed near the 20% level for 40 years, and only shows uptrend since around 2012.

Interest cost rose from 1% in 1948 to near 5% in 1974 and reached 7.4% in 1981. Interest cost averaged 7.0% for the 1981-2008 period; employee compensation averaged 19.9% for that same period.

From the 1948 start-of-data to the 1981-2008 period average, interest cost gained 6 percentage points while employee compensation lost 5 percentage points.

If the cost of interest falls by a dollar and corporate spending on employee compensation increases by a dollar, the total corporate cost is unchanged.

If the interest cost business pays is substantially reduced, a substantial amount of revenue will be freed up for other uses like better pay and better profit. Reducing interest cost is a simple matter of policy. Existing policy is built upon excessive reliance on credit and on the wrong-headed notion that excessive debt is only a problem when it is government debt. Unfortunately, wrong-headed notions cannot fix our economic problems.

In 30-odd years after 1948, employee compensation drops 5 points, from 25% to 20%. Interest cost increases 6 points, from 1% to 7%. If interest cost had remained at the low 1% level, employee compensation could have remained at the high 25% level, and corporate profits would have increased by one percent of corporate spending.

Economic policy increased interest rates in the 1948-1981 period. And economic policy encouraged the availability and use of credit. In other words, policy encouraged the growth and increased the cost of private-sector debt. The graph shows the result: interest costs went up, and compensation of employees went down. That's a bad policy, if ever there was one. But it's not too late to fix it.

Saturday, March 30, 2024

Wages, Profit, and the Cost of Interest

The first graph below compares employee compensation paid by corporate business to the interest cost paid by corporate business. Employee compensation was more than 25 times as much as interest cost in the late 1940s. 

There was little business debt back then, and interest rates were low. But corporate business debt was growing, and interest rates were rising, so interest cost grew faster than labor cost. Much faster. Relative to the cost of interest, the cost of labor fell markedly. That's what the graph shows in the early post-WWII decades.

Graph #1: Employee Compensation versus the Cost of Interest for Corporate Business

The growing cost of interest drained revenue from corporate coffers. Business found wage increases less and less affordable. That's the economics of those early decades.

By 1981 when interest rates stopped rising, employee compensation was only 2.4 times the cost of interest. Rates started coming down, then, but corporate business debt was still growing. The growth of business interest cost slowed to about the same rate as the growth of employee compensation, so on the graph the ratio remained low and fairly stable through the 1980s and '90s and up to the 2008 financial crisis. 

Since the financial crisis, employee compensation has been gaining on interest cost, but not because our paychecks have been swelling. It's because interest rates went low.


Here's a similar graph showing a similar pattern. This time the graph compares corporate business profit to the interest cost paid by corporate business:

Graph #2: Profit versus the Cost of Interest

The patterns are similar mostly because the growth of interest cost is the same on both graphs. Not so much because profits are similar to wages. As you can see, the second graph starts in the 1940s at about $10, profit about ten times the size of interest cost in the late 1940s. For the first graph it was over $25, employee cost more than 25 times the size of interest cost. So employee cost must have been about 2½ times the size of corporate business profit in those early years.

But if you really want to compare employee cost and corporate profit, we need one more graph. I put the compensation-to-interest-cost line and the profit-to-interest-cost line together on this new graph, and indexed them so they both start at the same level in 1947:

Graph #3: A Comparison of Corporate Business Costs
Employee Compensation relative to Interest Cost (blue)
and Business Profit relative to Interest Cost (red)

The indexing gives both lines the same value in 1947, so we can see how they differ in later years. They run close together, start to finish, because the patterns are similar. Because of the indexing, we don't see the one being 2½ times the other. But we can verify the pattern similarity. And we can see that profit runs lower than compensation for almost all the years, even though they start at the same level on this graph.

It also appears that profit has been rising faster than compensation since around the time of the post-covid inflation. 


Profit is what remains after the costs called "deductions" are subtracted from business receipts. If interest cost is reduced by a dollar, other things equal, profit increases by a dollar. 

Of course, if the cost of interest falls by a dollar and corporate spending on employee compensation increases by a dollar, corporate costs are unchanged. But that would violate our "other things equal" assumption. 

My point of course is that if the interest cost business pays is substantially reduced, a substantial amount of revenue will be freed up for other uses like better pay and better profit. Reducing interest cost is a simple matter of policy. Existing policy is built upon excessive reliance on credit and the wrong-headed notion that excessive debt is never a problem (unless it is government debt). Unfortunately, wrong-headed notions cannot fix our economic problems.


Friday, March 29, 2024

The damage was done by 1980

Revisiting mine of 26 July 2013, the second graph from that post. Here updated:

Compensation of Employees relative to Interest Paid in the US economy
This graph at FRED

Employee compensation falls from 6½ times the cost of interest (in 1960) to about 2 times the cost of interest (in 1980). Compensation remains low until the financial crisis. It is now in the neighborhood of 4 times the cost of interest -- less than two-thirds the 1960 level.

The damage to compensation was done before 1980. The ratio rises since the financial crisis, not because compensation rises but because interest rates fall.


Where, oh where did the money go--
An interesting question, no?


Thursday, March 28, 2024

Overwhelming evidence

Milton Friedman didn't like too much money. But he also didn't like too little money. In chapter 2 of Money Mischief he wrote:

There is strong evidence that a monetary crisis involving a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression.

Insufficient money can cause a depression. If the "monetary base" grows too slowly it can cause a major downturn. That happened twice in the past hundred years:

Graph #1: Growth Rate of the Monetary Base
The downtrend before the Great Recession runs from 2001 to 2008
This graph is from 2014, when each series at FRED could have its own start- and end-date.
This graph replaces mine from 10 Feb 2021.

 

Graph #2: Federal Debt 1970-2023 and the 2001-2023 Exponential Trend
From mine of 7 March 2024
The "below trend" data before the Great Recession runs from 2004 (or before) to 2008-09.


Graph #3: The Quantity of Transaction money per Dollar's Worth of Output
The low before the Great Recession runs from 2004 to 2009.


Fiscal and monetary policy cooperated, creating a substantial decline in the quantity of transaction money, from the record low of 2000-01 to a level at which our economy could no longer function.

 "... substantial decline in the quantity of money is a necessary and sufficient condition for a major depression."

The evidence is overwhelming.

Thursday, March 14, 2024

Employee Compensation as a Percent of GDP

Two questions:

1. Why does no one say the Biden economy is good?  One reason: As a percent of GDP, employee compensation has never been lower:


2. Is that Biden's fault?  No. Employee compensation has been all downhill for half a century. That's not Biden's fault.

 

Third question: What is to be done?  The first three steps in solving a problem are

  1. Correctly understand the problem.
  2. Correctly understand the cause of the problem.
  3. Correctly understand the cause of that cause.

Hint: Low employee compensation is not the problem. It's a result.

Tuesday, March 12, 2024

A Political Note

For those on CNN and MSNBC who repeatedly wonder why no one appreciates how great the Biden economy is...

and setting aside my ordinary response BECAUSE THE ECONOMY ISN'T GREAT...

there is this statement from J. M. Keynes, quoted by Milton Friedman in chapter 8 of Money Mischief:


There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction ...


Keynes said it, and Friedman quoted it. That makes the statement twice as valuable, no matter which side you're on.

Sunday, March 10, 2024

Don't brag about our economic growth, make it worth bragging about

My wife insists on watching CNN and MSNBC. I find the shows tiresome because their arguments are often weak. For example, a Biden supporter comes on the show and says the U.S. economy is doing better than any other country. I don't believe it. Last I checked, China's economic growth rate had fallen from 10% to 6%. That may be slow for China, but 6% annual growth is about twice the U.S. rate. 

But even if it is true, it is not a strong argument. A strong argument would be to compare recent U.S. economic growth to our own past growth, and point out how well we are doing now. But we cannot do this because, by that standard, we are not doing well.

To see how good our economy is now, I compare our current performance to the high points of our past performance. The red line on the graph below shows the trend of those high points:

Annual US Real GDP Growth Rate and the Trend of Peaks  1948-2023

I connected the 1955 peak (7.1% growth) to the 2018 peak (3.0% growth), then extended the red line out to 2023 and back to 1948. Three above-trend peaks are easy to spot:

  • 1950-1951: Probably due to Korean war spending
  • 1984: Reagan's "Morning in America"
  • 2021: Real GDP growth in the year after the covid shutdown

In addition, U.S. economic performance surpasses the trend of peaks briefly in the mid-1960s, and again in the latter 1990s. Other than that, all the peaks are at or below the trend line. Even the 2023 data (which is preliminary and will likely change) is below the trend of peaks. If I was Biden, I would be embarrassed that my people are bragging about how good the Biden economy is. His people are probably losing him votes. 

By the way, the trend line itself shows a downtrend nearly as long-lived as Biden. This downtrend is clearly not Biden's fault. Maybe he should say as much, and add that he wants to turn the trend upward in the next four years. 

That trend can't go much lower. It fell five percentage points in less than 80 years, and is now near 2.5%. If the trend continues another 40 years, it will be approaching zero growth. Zero GDP growth means the only way to get a raise is to take income from someone else. That's not how things are done among a civil people.

There are better ways to run an economy, other than expanding credit and accumulating private-sector debt until the economy wants to die. "Perhaps the U.S. needs another, more modern Keynes..."



I checked: They dunno 2023 yet. But for 2022, China's real GDP grew 2.99%. So, 3 percent in 2022. The U.S. GDP grew 1.9% in 2022, and 2.5% in 2023. In 2021, the bounce-back year after the covid-shutdown recession, U.S. GDP grew 5.8% while China's economy grew more than 8%. 

"Which country is doing better?" is the not the question to ask. Better would be "How do we fix this?"

 

To my good eye, comparing US growth to that of other nations makes for a weak argument. Comparing our current economic growth to that of our own past makes a much stronger argument. But Biden can't do that until he makes the trend turn upward. And the trend will not show growth improving until we start making better economic policy decisions.

Don't brag about our economic growth, make it worth bragging about. All we need is the right plan.

Thursday, March 7, 2024

Federal Debt Held by the Public, 1970:Q1 - 2023:Q3

So I happened to look at Federal Debt Held by the Public at FRED:

Graph #1: https://fred.stlouisfed.org/series/FYGFDPUN

It curves up a little from 1970 to 1990. It curves down a bit then in the 1990s, the Clinton years, as you may remember. Then, since 2001, it goes up for a short decade, and UP for a long decade, and then SCREAMING UP to end-of-data.

You may have heard some of that screaming in Congress in the past couple years.

Hey, I'm writing this because the federal debt in the current millennium is eye-catching (to say the least). My first reaction, looking at the years since 2001, was That's gotta be exponential. So I had FRED show the "natural log" values:

Graph #2: https://fred.stlouisfed.org/graph/?g=1hHJY

Now it doesn't go up and UP and UP. Shown as log values, it's almost a straight line going up from the low point in 2001, to end-of-data in 2023.

When log values show a straight line it means the rate of growth is constant. That's "exponential" by definition -- a constant rate of growth, and a constant doubling time. On this graph, since 2001, it looks pretty straight. It suggests that the growth rate of the federal debt has been nearly constant since 2001 -- something that is hard to see on the first graph. There is a bit more curve in the Obama years than before or after. But there was more fixing of the economy to do at that time, what with the financial crisis and all.

After 2020, the slope of the line looks about the same as the slope from 2001 to 2008. So, the rate of federal debt growth might be about the same in the Biden years as it was in the George W Bush years.

Sure, there is more debt after 2020 than there was by 2008. That's what happens when debt grows. You get more of it.


I wanted to put an exponential curve on that first graph, to see how it fits the plotted data. FRED doesn't let me do that. So I brought the data into Excel and did it there:

 
Graph #3: The red line is an exponential curve based on
data for the 2001:Q2-to-2023:Q3 period

The red line shows the "trend" since 2001; data from before 2001 was not used to create the red line. It shows the 2001-2023 trend of "held by the public" federal debt. If the red line matches the blue in the 1970s it is by chance, or due to the constancy of human nature maybe -- or my eye is off -- but it is not due the arithmetic making them match.

The lows of 2005-2008 (which probably contributed to starting the 2008 financial crisis), of 2016-2020, and from 2022 to end-of-data, together offset the high of 2009-2015 (a high which probably prevented a collapse of the banking system). (Dates approximate.)

And it is interesting to see that the very large debt increase of 2020 did no more than bring the federal debt back up to the trend.

Again, these dates are approximate: From 1975 to 1995, debt held by the public rose more and more above the trend. In other words, all through the Reagan years, and the first Bush, and the Clinton years before the 'New Economy" of the latter 1990s, the growth of federal debt ran increasingly above trend.

The next graph uses the same data as graph #3, but shows the "natural log" values of that data (as with graph #2):

Graph #4: The red line is an exponential curve gone straight
because the graph uses log values.

Based on what I see in these graphs, it still holds good that:

  • The below-trend federal debt growth of 2005-2008 probably contributed to starting the 2008 financial crisis. There was also the low growth of M1 money in the same years, and the low growth of base money in those same years as well. As Milton Friedman points out in Chapter 2 of Money Mischief, "a substantial decline in the quantity of money is a necessary and sufficient condition for a major depression." We almost had one in 2008.
  • The high federal debt growth of 2009-2015 probably prevented a collapse of the banking system.
  • And, again, the very large, covid-related debt increase of 2020 did no more than bring the federal debt back up to the trend. Graph #1 clearly shows the size of that increase and #3 shows the return to trend.

The graphs also show that all through the Reagan years, and the first Bush, and the early Clinton years (before the 'New Economy" of the latter 1990s), the growth of publicly held federal debt ran increasingly above the trend. People often talk about how the federal debt "exploded" after 1980 -- how it grew so much faster than GDP. Well, debt did grow faster for some years  after 1980 than before, but most of the difference we see on the graph is because the rate of inflation was coming down after 1980.

At the lower rates of inflation, nominal GDP increased at a lower rate, so the rapid growth of the debt was easy to see. Debt did grow faster after 1980 than before, but most of that was due to inflation coming down -- to disinflation -- not to accelerated debt growth. Anyway, as the graphs show, above-trend growth of debt started in the mid-1970s. So some, but not all of the rapid debt growth was due to Reagan spending like a madman. I know nobody wants to hear it, but that's how it is.


One more graph:

Graph #5: Five-Year CAGR Growth Rates
Each plotted point shows the end of a five-year period
and the compound annual growth rate for the period

Now I see that federal debt growth was all over the place. Some things are recognizable:

  • "Morning in America" around the time of the 1984 peak;
  • The federal budget falling toward balance, 1995-2001;
  • The response to the 2008 financial crisis, 2008-2013.

I find it interesting, too, that federal debt growth seems drawn to the 10% level: briefly, after 1975; momentarily after 1980; for the five years from 1990 to 1995; and since 2020. It is as if some policymaker said "I dunno, let's see what happens at ten percent." It is most strange to see such things in our economy. It doesn't fill me with confidence.

Nor does my interpretation of logged data fill me with confidence... So much for the growth rate of the federal debt being nearly constant since 2001.

Tuesday, March 5, 2024

"Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds" (2012)

Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds by Robert J. Gordon. 2012

http://www.nber.org/papers/w18315
https://www.nber.org/system/files/working_papers/w18315/w18315.pdf


Among the paper's "basic points":

Future growth in real GDP per capita will be slower than in any extended period since the late 19th century, and growth in real consumption per capita for the bottom 99 percent of the income distribution will be even slower than that.

But only if we fail to solve the problem.

Monday, March 4, 2024

"What Do We Know About Economic Growth? Or, Why Don't we Know Very Much?" (2001)

What Do We Know About Economic Growth? Or, Why Don't we Know Very Much? by Charles Kenny and David Williams, 2001.

https://faculty.nps.edu/relooney/KennyGrowthSurvey.pdf


From the Conclusion:

There are, we think, a number of conclusions and implications which follow from the analysis we have presented here. First, a review of the available evidence suggests that the current state of understanding about the causes of economic growth is fairly poor... What we are arguing is that we are in a weak position to explain why some countries have experienced economic growth and others not.

If even the views of experts offer a fairly poor understanding of the causes of economic growth, then what would it hurt to consider the views of a hobbyist like me?

Sunday, March 3, 2024

"U.S. Economic Growth at the Industry Level" (1999)

"U.S. Economic Growth at the Industry Level" by Dale W. Jorgenson and Kevin J. Stiroh. 1999

https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=4e673908976625fa1c3173ad1652027f94d8505b

 

From the opening:

The U.S. economy has expanded rapidly in recent years with total factor productivity – the source of growth most closely identified with technological gains – rising sharply since the mid-1990s. This strong aggregate performance and the well-documented explosion of investment in computers and other high-tech equipment have led many to believe that the U.S. has experienced a permanent, technology-led growth revival.

Technological innovation is not a sufficient condition for sustained vigorous growth.

Saturday, March 2, 2024

"Declining American economic growth despite ongoing innovation" (2018)

Declining American economic growth despite ongoing innovation by Robert J. Gordon. 2018

https://bpb-us-e1.wpmucdn.com/sites.northwestern.edu/dist/6/5500/files/2021/04/Declining_growth_innovation.pdf

 

From the Introduction:

This paper starts from the proposition that GDP growth matters, not just productivity growth, because slower GDP growth provides fewer resources to address the nation’s problems...

Again, the importance of economic growth.

Friday, March 1, 2024

"Sustaining US Economic Growth" (2002)

Sustaining U.S. Economic Growth by J. Bradford DeLong, Claudia Goldin, and Lawrence F. Katz. July 2002

https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=d1728708e168b16af77022cd9a6a466fbf3bc227

 

From the Introduction:

With rapid economic growth, social and economic problems become far less of a burden. A fast growing economy is a rich economy. A rich economy is one in which people have more options and better choices: the people can—through their individual private and collective public decisions—decide to consume more, lower tax rates, increase the scope of public education, take better care of the environment, strengthen national defense or accomplish any other goals they might choose. For an economist these are sufficient reasons to consider growth a good thing. A fast-growing economy is one in which people will have greater wealth, higher incomes, and more of the necessities, conveniences, and luxuries of life.

Moreover, in America at least, slow economic growth appears to heighten political gridlock, and thus reduce the quality of political decisions.

Consider that last part a prediction.

Tuesday, February 27, 2024

Checkable Deposits and Currency held by the Bottom 50%

Graph #1: Held by Bottom 50% as a Percent of Total Held by 100%

Pretty sure the last drop-off (after 2019) is due to an insanely massive increase in M1 money arising from a 2020 change in Regulation D: The Fed started counting savings as part of transaction money. Probably increased "checkable deposits". I say this because all of the shares they report

  • Bottom 50%
  • 50th to 90th
  • 90th to 99th
  • Top 1%
  • Top 0.1% (not used in the graph above)

show a big increase (in millions of dollars, not percent of total) since 2020. 

But obviously the bottom 50% got a smaller share of that increase, as the line goes down on Graph #1. In other words, they had little in savings before the regulation change.


So, ignoring the years after 2019, looks like the paupers' share fell from 13 or 14% in the 1990s, to 12% in the naughts, to 10% after the 2009 recession. And it looks like Biden is going to get the blame for this shit.

(I don't do politics. I do my best not to have a preference. But I would like to see the old coot try a little harder.)


PS: FRED offers an interesting table: Levels of Wealth by Wealth Percentile Groups (but only since 1989).

The table includes breakdowns by

  • Total Assets
  • Nonfinancial Assets
  • Real Estate
  • Consumer Durables
  • Financial Assets
  • Checkable Deposits and Currency
  • Time Deposits and Short-Term Investments
  • Money Market Fund Shares
  • Debt Securities
  • US Government Securities and Municipal Securities
  • Corporate and Foreign Bonds

and too many more for me to list.

Might be useful.


Tuesday, February 20, 2024

Another day older and deeper in debt

For me the story is a simple one: Economic growth has been slowing for half a century because the inflation is cost-push. Demand-pull grows the economy; cost-push slows it. The cost pressure arises not from the examples that are unfailingly used on the internet (wages and oil) but from excessive use of credit. In this, I guess you could say I agree with those who hold the "debt supercycle" accountable, with those who say we have "too much finance", and with those who speak ill of financialization.

By the way, our vast government debt is part of the problem, but it is the least worrisome part. It is private-sector debt service that consumes private-sector income and slows private-sector growth. Since Keynes, government debt has been a rescue system for the private sector economy, and the first thing to realize is that the incredible size of the federal debt, as we apparently need that much rescuing, is evidence of how bad things have become in the private sector.

The second thing to realize is that the solution we have applied to the problem for the past fifty years has not worked, and this failure is evidence that we misunderstand the problem.

The cause of the excessive growth of finance is economic policy: human nature, and economic policy. The policy part of the problem is that for far too long we thought using credit was good for growth, and that the resulting accumulation of debt was not a problem. The human nature part is that we are too willing to borrow. 

When we borrow, we get money to spend. That's the use of credit, and it is indeed good for the economy. It boosts spending. It boosts the economy. But when we borrow money we take on debt. And debt must be repaid. Repayment takes money out of the economy, reduces spending, and slows economic growth. There is no free lunch: The boost we get by borrowing money comes with a drag on the economy that takes effect when we repay the debt. 

The debt supercycle is good in the early stages when debt is low. It is harmful in the late stages when debt is high. This is why our economy was great for a generation after World War Two, then pretty good for a generation, and bad in the years since. 

These days are late in the debt supercycle. We didn't know. We let the problem fester until we had the 2008 financial crisis. Our economy was slow for a decade after that. In recent years things seem to be improving -- but that is only because our use of credit has been increasing again. It's human nature: We are too willing to borrow money. But of course you can't change human nature. We need policy to protect us from ourselves -- but no! We need policy to protect the economy from human nature, to reduce our debt and keep it low so that our economy can improve. We need the opposite of the policy we have.

Our economy is bad because debt costs money and we have a lot of debt. Because the economy is bad, repayment of debt has become more difficult. We have... no! Policy has put us in a hole that is almost impossible to get out of. And since we can't get out of that hole, our economy cannot recover. Policy must stop encouraging us to be in debt. Policy must start encouraging us to get out of debt. And, as the problem is still so very bad, policy should begin by helping us get out of debt. Then, as the economy recovers, policy can prune back that help. But it must forever keep the policies that encourage us out of debt.

What we should shoot for, really, is the optimum level of debt, the level that best promotes economic growth. If you never thought about that, I have two blog posts you might want to read. First, some preliminary thoughts on the topic, in Two Thought Experiments. Second, some tentative targets for policy, in Establishing Parameters for Debt.

Saturday, February 17, 2024

The free community and the totalitarian state

I'm looking at How to Pay for the War, the 1940 book by J. M. Keynes.

I'm posting this not because of war concerns, but for Keynes's observation of one difference between the free community and the totalitarian state. It seems somehow relevant.

First this, for context:

Is it better that the War Office should have a large reserve of uniforms in stock or that the cloth should be exported to increase the Treasury's reserve of foreign currency? Is it better to employ our shipyards to build war ships or merchant-men? Is it better that a 20-year-old agricultural worker should be left on the farm or taken into the army? How great an expansion of the Army should we contemplate? What reduction in working hours and efficiency is justified in the interests of A.R.P.? One could ask a hundred thousand such questions, and the answer to each would have a significant bearing on the amount left over for civilian consumption.

Now the political observation, from page 7:

In a totalitarian state the problem of the distribution of sacrifice does not exist. That is one of its initial advantages for war. It is only in a free community that the task of government is complicated by the claims of social justice.

Sunday, February 4, 2024

Blustering our way to World War Three

I oppose World War Three.

Somebody has to be first to NOT react to the other guy's aggression. Somebody has to go first. Is the US not big enough to go first?

Our reaction leads to their reaction. Their reaction leads to our reaction. Each time, the reaction is a little bigger, a little bolder. Each morning the news is a little worse. The only way this can end is badly -- unless we choose to stop it.

Friday, February 2, 2024

Inequality, financialization, and economic decline

"Inequality, financialization, and economic decline"
PDF, 24 pages
by Pasquale Tridico and Riccardo Pariboni, 2017

From the Abstract:

The objective of this article is to argue that the labor productivity slowdown experienced in recent years by several advanced countries can be explained, following a Kaldorian-Classical approach, by a weak gross domestic product (GDP) performance and by a decline in the wage share. Moreover, drawing inspiration from recent post Keynesian literature, the authors identify the ongoing worsening in income equality and the increase in the degree of financialization as other major explanatory factors of sluggish productivity.

Should your nation, empire, or civilization survive all other calamities, financialization is sure to bring it down. Financialization makes transactions increasingly expensive. It increases the factor cost of money, reducing both nonfinancial profit and the wage share. 

The fall in profit leads to the "weak gross domestic product (GDP) performance" noted in the Abstract. And the decline of the wage share makes it so that "labor cannot support life", as Simkhovitch said in "Rome's Fall Reconsidered".

Also, financialization (in the form of growing debt) is a significant source of income inequality.

Thursday, February 1, 2024

The Economic Decline of Empires

A Google Book: The Economic Decline of Empires
Edited by Carlo M. Cipolla

I show here the first 2½ paragraphs of the Editor's Intro:

If I didn't think it important, I wouldn't post it.

If you want to prevent the decline of the US as a nation, or as an empire, or as a civilization -- whichever way you see it -- you need to act before it is too late. You, too, should start a blog that no one reads.

Tuesday, January 30, 2024

One measure of inequality

From USA Today of 24 Jan 2024:

The average American household has $62,410 in savings, per the Federal Reserve.

However, the median American household has just $8,000.


Note: The Fed link shows "transaction accounts" by default, not savings. But it looks like that site would be useful, if I could figure it out. For now, I'm just going with the quote from USA Today.

Sunday, January 28, 2024

What President Hoover said

According to one account, Herbert Hoover, when queried a short time after he left office if there was anything he should have done while President that he had not done, replied: "Repudiate all debts."
From Franklin D. Roosevelt and the New Deal, 1932-1940 by William E. Leuchtenburg

Friday, January 12, 2024

The Arthurian Plan

I have to begin by saying that demand-pull inflation encourages economic growth, and cost-push inflation causes growth to slow. But by the time I get the thought out, half the internet is hollering THERE'S NO SUCH THING AS COST-PUSH INFLATION and the other half didn't hear me, doesn't believe me, or just doesn't care. For or against, then, they all go back to preparing for the next insurrection.

If we could just fix the damn economy we wouldn't need insurrections. But no one stops to think about that.

Let me say it again: cost-push slows the economy. It means we get less income per dollar's worth of effort.

Now, maybe it is true there is no such thing as cost-push inflation, because we only get inflation if they print too much money. But here's the thing: It isn't the inflation that slows the economy, it's the cost-push. It's cost pressure that slows the economy. If policy prevents the inflation but fails to relieve the cost pressure, the economy slows anyway.

If policy prevents inflation but doesn't relieve the cost pressure, the economy slows anyway.

Maybe the cost pressure first arose with financialization in the 1980s and 1990s. Maybe it first arose during the Great Inflation of the 1960s and 70s. Maybe it first arose in the 1950s, or even before. The point is that the cost pressure has been a problem for a long time, and economic growth has been slowing all the while.

Economic growth has been slowing all the while.

Paul Volcker quashed inflation in the early 1980s, and we thought he had solved the problem. But the cost pressure problem was not solved. Then, in 2012, the Federal Reserve adopted something called the two-percent target. Now that sounds innocent enough, until you realize it means their goal is to have two percent inflation every year. 

The standard story is that Volcker quashed inflation. The fact is that the Federal Reserve tried for 30 years, and then gave up on quashing inflation.

Hey, two percent inflation isn't bad, I'll give you that. But two percent isn't zero. Two percent inflation is not stable prices. It is rising prices. It is inflation. Economists call it "stable inflation." I call it hypocrisy. 

They gave up on quashing inflation. At the end of 1982 the CPI was 97.7. At the end of 2012 it was 231.2. At the end of 2023 it was 308.9. Prices have more than tripled since Volcker quashed inflation. And because of cost pressure, the economy has been slowing all the while.

If it is cost-push inflation -- or even if it is just cost pressure, without inflation -- it slows the economy. It slows job creation. It slows the production of output. And it slows the growth of income. That's the killer, slow growth of income. That is the root cause of our present dissatisfaction, I think, and the root cause of insurrection and of the longing for insurrection.

As for myself, I would prefer to fix the economy. All we have to do is solve the cost-pressure problem. To me, that's an easy thing to do. The problematic cost is the cost of finance. We have to reduce the cost of finance. We have to reduce the bills.

Let me say it a different way: We need faster income growth, faster GDP growth, faster job growth, and better jobs. But none of that will solve the problem unless we reduce the growth of financial cost.

That's the whole plan, in a nutshell.

 

Let's say we make it economic policy to cut the growth of household debt in half. It has to be policy or the plan won't work, because under existing policy the increase in household debt gets bigger almost every year. It has to be policy, and the new policy has to reduce the growth of household debt.

The easiest way to do this is to make it policy to increase employee compensation by a comparable amount. For every extra dollar of income we get, policy encourages us to borrow a dollar less. So our spending can stay about the same, our debt increases more slowly, and we have smaller finance charges to pay. And that is how the plan works.

As you may notice, the new policy I propose is just the opposite of existing policy. Existing policy provides funds by expanding credit and fights inflation by restricting the quantity of money. The proposed new policy accepts the view that the quantity of money should grow along with output, that borrowing money should be minimized to reduce financial cost in our economy, and that the proper way to fight inflation is by restricting the growth of credit rather than the growth of money.

Our existing policy has been around for a long time. In the early days after World War Two it worked well. Back then it worked because we didn't have a lot of debt and our financial costs were low. The old policy worked so well that economists and policymakers stuck with it, forever encouraging us to use more credit. That was the mistake.

The existing policy didn't treat debt as a problem, because in the early days we had little debt and it wasn't a problem. Things are different now. These days, we can't afford to live. It is time for policy to stop encouraging credit-use at every turn. It is time for policymakers to admit that we now need less reliance on credit and more reliance on the dollar -- more reliance on income.

There was a time when encouraging the use of credit was good policy. This is no longer that time. This is the time to discourage the use of credit and to encourage the growth of income.

 

If you step back and look at this picture of the economy you will notice that if we adopt the new policy and it works, and we stick with it, then a day will come when we have too much money and not enough use of credit. We will eventually be tempted to abandon the policy that here is called "new" and to go back to the policy that here is called "existing". That is not the best solution.

The best solution is to seek the point of optimum balance between money and the use of credit. The point of optimum balance gives the best economic growth. It is tricky, because continually increasing the reliance of credit will cause our economy to grow until we are far beyond the point of optimum balance. That is what gets us into trouble, as it did in 2008. What we need is to find the point of optimum balance between money and credit, and stay there, so that our economy can perform well over the long haul.

It can be done. We just need the right plan.