Kamala and the Cost Tradeoff

If I read my notes correctly, Symone at MSNBC's The Weekend (1 Sept 2024, 9:30 AM±) said Kamala wants higher-paying jobs for more Americans.

Sounds good to me. We've been underpaid for decades. But K must consider and confront Republican criticism of her call for higher pay. The R will say INFLATION. You know they will. They will tie Harris to Biden. They will tie her to the so-called "Biden inflation". Trump is doing that already. The R will make harsh criticism. K will need a powerful rebuttal. 

The R view will be something like this: Labor cost is a big part of the cost of output. So an increase in wages can be expected to lead directly to an increase in the price of output. 

It's like a reflex. But there is more. In addition to labor costs, a business has "non-labor" costs. The non-labor costs consist largely of purchases from other businesses. Embedded in those costs is the cost of labor at those other businesses. Thus, business costs consist to a large extent of the sum of direct and indirect (embedded) labor costs. So the R have a very strong argument when they say K's focus on better wages will cause inflation. 

All else aside, wage increases that drive prices up are self-defeating.

Kamala needs an economic plan that can prevent the drubbing the R are more than willing to give. K also needs a way to raise wages without creating inflation. Here is my plan: To create higher-paying jobs, Kamala should take advantage of a cost tradeoff: The increasing cost of labor should be offset by reducing the cost of finance. 

Between 1949 and 1981, there was a cost tradeoff we have not yet recovered from. Corporate interest costs increased by about 6½ percent of corporate spending. During those same years, corporate compensation of employees decreased by almost 7 percent of corporate spending. This cost tradeoff was good for corporations, but not for their employees.

Employee Compensation and Interest Cost relative to Corporate Deductions

There was plenty of inflation in the 1948-1981 period, inflation that drove corporate spending up. So those numbers, the 6½ percent interest-cost increase and the 7 percent wage-cost decline, are much bigger (in dollars) than the numbers suggest.

To boost wages without causing inflation, K can engineer a cost tradeoff where increased labor costs are offset by slower growth of finance, slower growth of debt, and slower growth of interest cost. Kamala can offset the rising cost of wages by reducing the scope and cost of finance.  

The amount of interest paid, barring complications, depends on the interest rate and the size of the debt on which interest is paid. Interest paid rises and falls with the rate of interest and the quantity of debt.

Corporate interest cost, the red line on the graph, rises along with interest rates and the quantity of debt from 1948 to 1981. Since 1981, however, interest rates have been generally falling while the quantity of debt has been generally rising. So the red line tends to run flat, with lows only at extreme lows in the interest rate: 5 years in the early 1990s, 5 years in the early 2000s, and most of the time since 2008.

My plan is, and Kamala's plan must be, to rejigger economic policy in every nook and cranny so as to turn incentives-to-be-in-debt into incentives-to-pay-down-debt. The tax deduction for interest paid, for example, is good for those who are in debt. So, that tax deduction makes debt higher than it would otherwise be. We must change that tax deduction. We must replace it with a tax deduction (or a tax credit) for making extra payments against loan principal. This will help people and businesses pay down debt. It will make debt lower than it would otherwise be.

The objective is to bring debt down for people and for businesses.

By relying less on credit and more on income, businesses will reduce their financial costs. They will be able to use the freed-up funds to increase wages without increasing overall business costs, without squeezing profit, and without the need to raise prices. The change in policy will make the red line on the graph come down, so corporations have more money available to spend on wage increases, and more money left over to boost their profit.

Consumers will see living standards improve as businesses increase wages without increasing prices. In addition, the new policy of increasing reliance on income (and reducing reliance on credit) will lead to less borrowing, less debt, and smaller debt service payments for consumers. With finance taking a smaller bite out of our disposable income, more income will be available to spend and to save -- and this is in addition to our higher income arising from the business interest-cost savings.

As we come to rely less on credit and more on income, the quantity of money will have to rise. But as long as money grows at a replacement rate (as credit-use falls), inflation should be comparable to what it was for many years before the so-called Biden inflation: generally acceptable. And because income comes to us without the cost of interest, inflation should be lower than what we had for those many years before the Biden inflation. Or economic growth higher. Or both.

Kamala's new policy will augment labor share, increase aggregate demand, and boost economic growth. It will also help reduce private-sector debt, which is the necessary precondition for reducing the federal debt.

Go Kamala!

The employee compensation data comes from BEA Table 1.13 row 4:
    Domestic Business: Corporate Business: Compensation of employees

The data on interest paid comes from BEA Table 7.11 row 3:
    Monetary interest paid: Domestic Business: Corporate business

The data for total deductions of active corporations comes from several sources.
Recent data from three sources:

• Tax Policy Center: Corporate Tax Items, 1998 to 2020
• Tax Policy Center: Corporate Tax Returns, 1990 to 2013
• IRS: Statistics of Income, SOI Tax Stats - Table 5 - Returns of active corporations

Older data from multiple sources:

• Historical Statistics (Bicentennial Edition), Series V 132, 1948-1970 
• Statistical Abstract, various editions: SA1976-06 Table 844, SA1980-06 Table 948, SA1984-05 Table 907, SA1988-05 Table 846, SA1992-05 Table 834, SA1996-17 Table 835

The most recent data on corporate deductions at IRS (as of 5 Sept 2024) is for 2020.

My Excel Spreadsheet: Corporate Cost Components (7 Sept 2024).xls at Google Drive

Compound loss upon compound loss

You've heard of compound interest: You get interest on your money, plus you get interest on the interest. Gosh! Debtors are remarkably generous to creditors. What a lovely world this must be.

My topic here is compound loss: It works like compound interest, but in the other direction: Less instead of more, and less on top of less. It isn't about the money we get. It's about the money we don't get.

You've heard of "Potential GDP". Brookings defines it as

an estimate of the value of the output that the economy would have produced if labor and capital had been employed at their maximum sustainable rates—that is, rates that are consistent with steady growth and stable inflation.

Note, however, that "maximum sustainable" employment does not mean we all have to work 80 hours a week. I have seen people say "economic equilibrium" occurs when no one wants to change the existing conditions. No one wants more profit, for example, and no one wants to work less hours. That concept probably applies to Potential GDP.

Whatever. I just call it "best-case GDP". Here is the graph:

Graph #1: Potential GDP

It goes up. The graph shows a pretty smooth upward curve, except it goes up faster than usual in the latter 1990s.

Here's the same data, shown as "Percent Change from Year Ago" values:

Graph #2: High on the Left, Low on the Right: Potential GDP Growth is Slowing!

To my eye, two things stand out on this graph. One is that conehead-looking high spot in the latter 1990s. That's how the good years of the latter 1990s look, when you look at Potential GDP growth.

The other thing that stands out on this graph is the strong downhill trend. Except during the latter 1990s, it is all downhill from start to finish: From above 5 percent annual growth in the early 1950s, to above 4 percent in the 1960s, to 2 percent or less in recent (and future) years. Best-case GDP is not as good as it was 50, 60, 70 years ago.

You might think economists would spend their lives studying the latter 1990s to learn everything they could learn about those years, so as to duplicate that high-performance era and, well, avoid that wide gray recession bar and the lower-than-usual low that came a decade after the conehead high. That's pretty much what I do. Study the economy. Not economics, but the economy. This, my hobby. This, my life.

 

Here is a graph of Real GDP as a percent of Potential GDP:

Graph #3: It goes up and down, but the overall trend is down.
In other words, GDP is growing even more slowly than Potential GDP.

Real GDP is sometimes higher, sometimes lower than Potential. But the overall trend is down: As time goes by, Real GDP comes out to be less and less of Potential GDP. The growth of Potential, today, is half what it was in the 1960s, and Real GDP cannot even keep up with that. This is compound loss.

A linear trend line on this data in Excel shows Real GDP growth close to 1 percent faster than Potential GDP growth in the early years. In recent years, Real GDP growth is almost 2 percent slower than Potential. This relatively small loss means Real GDP growth has slowed 2.58 percent more than Potential GDP growth, which has fallen by 50 percent since the 1960s.

GDP is a measure of income. The slowing growth of Potential GDP is the slowing growth of best-case income. Best-case income growth today is half what it was in the 1960s. Real GDP growth cannot even keep up with that. And Real GDP growth is Real Income growth. 

As time goes by, we get less and less of the income we would have in a "best-case" world. The income growth in our less-than-perfect world decreases even faster than the income growth of our best-case world. This is compound loss.

And speaking of income, the next graph shows Compensation of Employees as a percent of GDP. Remember, Potential GDP growth is slowing, and GDP growth is slowing even faster. But on this graph, employee compensation has fallen rapidly as a share of GDP, for more than half a century:

Graph #4: Employee Compensation: Wages, Salaries, and Benefits as a Percent of GDP

From a high of 58 percent of GDP in 1970, it is all downhill to less than 52 percent today. Well there is the one big increase there, in the latter 1990s. But it did come back down right quick. 

We're getting paid 6 percent less of GDP now than we got in 1970. And GDP doesn't keep up with Potential GDP. And Potential GDP is growing at half the rate it was growing in the 1960s. We are dealing here with compound loss upon compound loss.

FOMC Inflation Predictions, 2021 & 2022

The gray line that reaches 9 percent inflation shows the CPI monthly since March 2020, the same month the Fed reduced the interest rate to zero to help fight covid. The black line that almost reaches 7 percent is the PCE Price Index (FRED series PCEPI) shown at quarterly frequency. The other 8 lines show inflation predictions made by the Federal Open Market Committee:

Graph #1: Click the image to see it bigger, or click "Graph #1" to see it at ALFRED

The four lines that start in 2021 show the four sets of predictions made by FOMC during 2021. I'm using the same color sequence that FRED uses:

• Color 1: Blue: Here represents the March prediction set.
• Color 2: Red: Here represents the June predictions.
• Color 3: Green: Here represents the September predictions.
• Color 4: Purple: Here represents the December predictions.

The four prediction sets made during 2022 use the same colors in the same sequence.

The Fed calls them projections, not predictions. The notes explain a lot:

Projections of personal consumption expenditures (PCE) inflation rate are fourth quarter growth rates, that is, percentage changes from the fourth quarter of the prior year to the fourth quarter of the indicated year. PCE inflation rate is the percentage rates of change in the price index for personal consumption expenditures (PCEPI).

The FRED Notes identify the FRED PCEPI dataset. So I went with that dataset for the black line on the  graph above, even though it is their monthly series. I changed the frequency to quarterly using average aggregation; of the available options, this made the best match to FRED's quarterly series PCECTPI.

I didn't quote the whole Notes text. You can see it in the flesh at FRED or ALFRED.

Each prediction set includes 3 or 4 data values, one for the year of reporting and the rest for the following years. You'll notice that no matter the value of the first prediction, in subsequent years the predictions typically move toward the Fed's 2 percent inflation target. I suppose "projection" is a better word for this than "prediction".

The CBO does something similar when it figures Potential GDP:

CBO assumes that any gap between actual GDP and potential GDP that remains at the end of the short-term (two-year) forecast will close during the following eight years.

That's from a 20-year-old CBO paper. It may be out of date. But the methodology for both CBO and the FOMC seems to be Fret not. Things will go according to plan.

And yes, that methodology works surprisingly well in a normal economy. But when the economy downshifts from 3 percent annual growth to 2 percent annual, and there is financial crisis, and people start talking about "the new normal", well, that's when better methodology is needed.

The transcript of Jerome Powell's 17 March 2021 press conference (where he repeated his inflation warning of 4 March 2021) has Powell saying:

The median inflation projection of FOMC participants is 2.4 percent this year and declines to 2 percent next year before moving back up by the end of 2023.

That sentence has been stuck in my head since I first read it. So I dropped what I was doing this morning when the series title "FOMC Summary of Economic Projections for the Personal Consumption Expenditures Inflation Rate, Central Tendency, Midpoint" turned up in FRED search results for federal spending. (Hey, I didn't put it there. I found it there!)

Looking for that Powell quote just now in the transcript, I found "FOMC" four times:

• "Today the FOMC kept interest rates near zero..."
• "... forecasts from FOMC participants for economic growth this year..."
• "FOMC participants project the unemployment rate to continue to decline..."
• "The median inflation projection of FOMC participants..."

The FOMC covers a lot of ground. 

 

So anyway: The last of the four 2021 projections -- December -- was for 5.35% PCE inflation in the fourth quarter of 2021. FRED's PCEPI data for the fourth quarter was 5.86%. The monthly PCEPI for December 2021 was 6.18%. The monthly CPI for December 2021 was 7.18%. And the Federal Funds interest rate was zero.

The first data value from each of the 8 FOMC projection datasets on the graph is shown in this table:

Year:	2021	2022
March:	2.30	4.40
June:	3.3	5.15
Sept:	4.15	5.50
Dec:	5.35	5.7

Note: In the table, the first data value in the March 2021 projection is given as 2.30 percent. Jerome Powell in the 17 March 2021 transcript gives the value as "2.4 percent this year". Maybe the difference is a typo. The FOMC projection Powell describes is the same March 2021 projection presented in the table.

Every projection in 2022 was higher than the corresponding projection in 2021. And in both years, the March projection is the lowest, and each subsequent projection is higher than the one before. The Federal Open Market Committee apparently did not think inflation would go down. 

It is their job to make inflation go down. But they did not think inflation would go down. This irritates me. They were right, of course: Inflation did not go down until they started raising the interest rate. But remember, it was in March 2021 that Chairman Powell warned of inflation, and it was a year later, in March 2022, that the Federal Open Market Committee finally started raising the interest rate.

The PCE measure started coming down after Q2 2022. And the CPI measure started coming down after June 2022. In both cases, inflation was coming down since midyear. And still the FOMC projections, even the September and December projections, were for rising inflation all thru 2022. I don't understand their thought process.

It almost looks like they wanted inflation raging.

Human nature

When you have a drink, the first thing you lose is your resistance to having another drink.

The second thing you lose is your resistance to blogging about it.

The "base year"

I have a good feel for what a "base year" is. It is used a lot when "nominal" (actual-price) data is  converted to "real" (the-prices-never-change) data. For example, I use it when I divide the rising price level out of nominal GDP to get the "real" values -- values that exist because the economy actually grew, not because prices happened to go up. The "base year" is the year where the real GDP and the nominal GDP are the same. There is always one year like that for "real" data. If you look at a FRED graph of inflation-adjusted data (like Real GDP)  the vertical axis will be labeled something like "Billions of Chained 2017 Dollars". 2017 is the base year for that data. On a graph that shows both "real" and "nominal" GDP, the lines cross in the base year, because the values are equal in that year.

So I have a pretty good feel for the base year, but it comes from doing arithmetic. When I wanted a definition in words, I looked it up. The featured snippet comes from Investopedia, and it says "A base year is the first of a series of years in an economic or financial index."

The first of a series of years. I wish! If the base year was the first year for real GDP, the graph would show real GDP hanging low while inflation pushes nominal GDP up and up and up, like this:

Graph #1: The blue line is real GDP. The red line shows the result of inflation.

To make this graph, I took the shows both "real" and "nominal" GDP graph noted above, divided the real values by 1191.124 (the 1929 value of Real GDP in the FRED data), and multiplied the real values by 104.556 (the 1929 value of nominal GDP in the FRED data. Basically, I took the real data and scaled it down to make the first value -- the 1929 value -- equal to the nominal 1929 value.

Yes, I think the base year should, as a rule, always be the first year of the data on a graph. But that seldom happens. In fact, for Real GDP they move the base year frequently. At ALFRED they list the "units" used for the Real GDP in their archive:

• Billions of 1987 Dollars
• Billions of Chained 1992 Dollars
• Billions of Chained 1996 Dollars
• Billions of Chained 2000 Dollars
• Billions of Chained 2005 Dollars
• Billions of Chained 2009 Dollars
• Billions of Chained 2012 Dollars
• Billions of Chained 2017 Dollars

There is a move to a more recent base year every three to five years. Actual low prices become a more and more distant memory. This is how economists work. Standard practice, apparently.

The search that turned up the Investopedia definition also turned up one that I like better: this one, from  europa.eu:

In the calculation of an index the base year is the year with which the values from other years are compared. The index value of the base year is conventionally set to equal 100.

the year with which the values from other years are compared: yes.
the first of a series of years in an economic or financial index: no.

the base year is conventionally set to equal 100: yes
it is typically set to an arbitrary level of 100: no.

Oh, and both Investopedia and the europa (EuroStat) site think in terms of the price index having a base year. I think in terms of inflation-adjusted data having a base year. They are right. The data does have a base year, but it inherits the base year from the price index used to strip inflation out of the numbers. I can live with that.

Real GDP per Capita

Looked up Real GDP per Capita annual at FRED. Got 1225 search results.

Filtered for Geography Type: Nation and for Geographies: United States of America. Now, 7 search results.

Omitting the results that pertain to subsets

• Real DPI per Capita
• Metropolitan Portion
• Consumption Share
• Investment Share, and
• Government Consumption Share

I am left with two datasets:

Constant GDP per capita for the United States and

Real GDP per Capita in the United States (DISCONTINUED) 

The one is in 2010 dollars and the other is in 2011 dollars, so I can't even compare them easily. And I hafta start by comparing them. So I put em on a graph.

The discontinued series ends in 2011, and both of them start in 1960. I was 11 years old in 1960. We should what, ignore those early years? WTF. 

So I looked up an old post of mine and read:

At FRED, this Real gross domestic product per capita page links to Table 7.1, which identifies FRED series B230RC0Q173SBEA as the relevant population measure for the per capita calculation. FRED calls that measure "Population". But when I search FRED for population, I get 107,803 results. So I call it "B23". I checked my arithmetic. Yes, that's the right population data for per capita GDP.

I took FRED's Real Gross Domestic Product series and divided it by the "B23" population measure, then corrected the units, and got my own version of Real GDP per Capita, with data that goes back to 1947. FRED offers 824,000 datasets from 114 different sources, and I have to make my own Per Capita GDP.

Maybe there's some detail I don't know about, a detail that explains why the data before 1960 is not valid. But I don't know about any such detail, so I'm good for now. I put my version on the graph with the others. Here's the graph:

Graph #1: Three Measures of GDP per Capita. Mine is the Green one.

Usually I make the lines thicker before I reduce the image size to fit the blog. Didn't do that this time because the green and red lines are so close together. To see the graph bigger click the image. Or click Graph #1 in the caption to see it at FRED.

The Covid Time

Graph #1: Household Borrowing (blue) and the CPI

Graph #2: Nonfinancial Corporate Business Profit (blue) and the CPI

Graph #3: Federal Spending (blue) and the CPI

Excerpts: A "short" story

From Tom Cotton Admits Trump, Not Biden, Caused Inflation at Intelligencer, 2 December 2021:

Trump selected Powell in large part because he deemed his predecessor, Janet Yellen, too short to effectively handle monetary policy.

The part about Yellen links to The World’s Best Bureaucrat at Intelligencer, 27 October 2020:

Trump has the perspective of both a real-estate developer who likes to borrow money and a politician who knows low rates will juice the economy as he seeks reelection. So when he faced the choice about whom he should nominate to run the Fed, some of the names that might have been obvious choices for another Republican president — such as economist John Taylor and former Fed governor Kevin Warsh — were too out of step with Trump on monetary policy, because they were too likely to raise interest rates.

The president could have renominated Obama’s choice to run the Fed, Yellen, whose views on monetary policy are closer to Trump’s. There is precedent: Reagan, Clinton, and Obama all renominated Fed chairs who had originally been chosen by a predecessor of the rival party. But Yellen is a Democrat, and she was Obama’s pick, and Trump is notoriously suspicious of “Obama holdovers,” and also she is only five feet tall. I mention her height because in 2018, the Washington Post reported that Trump had repeatedly remarked to aides that Yellen seemed too short to run the central bank.

The part about the Washington Post links to Trump thought Yellen was too short to be Fed chair. That’s not how any of this works at The Washington Post, 3 December 2018:

Janet L. Yellen was the most qualified Federal Reserve chair we’ve ever had and maybe the most successful Federal Reserve chair we’ve ever had. But, in part because she was also the shortest Federal Reserve chair we’ve ever had, she wasn’t reappointed by President Trump.

That’s not a joke, or at least not a deliberate one. Trump, according to The Washington Post, seems to believe that the Fed is a lot like a roller coaster: You have to be so tall to go on it. In particular, he thought that the 5-foot-3-inch Yellen was too short to do the job that she’d been doing so well the previous four years. Which, along with wanting to make his own mark on the central bank, is why he broke with what had been a fairly long-standing bipartisan tradition of keeping on a Fed chair no matter which party had originally nominated them as long as they still wanted the job and seemed good at it.

Here, the part about the Washington Post links to Trump slams Fed chair, questions climate change and threatens to cancel Putin meeting in wide-ranging interview with The Post at The Washington Post, 27 November 2018:

Trump considered reappointing Yellen to the post, and she impressed him greatly during an interview, according to people briefed on their encounter. But advisers steered him away from renominating her, telling him that he should have his own person in the job.

The president also appeared hung up on Yellen’s height. He told aides on the National Economic Council on several occasions that the 5-foot-tall economist was not tall enough to lead the central bank, quizzing them on whether they agreed, current and former officials said.

Oh, yeah -- and this note, just below that last Washington Post article: 

Correction: An earlier version of this story misstated the height of former Federal Reserve Chair Janet L. Yellen. She is 5-foot-tall.

The End.

From "People also ask" (unedited)

Inflation and Prices

At The New Yorker, 11 Feb 2023, "Does the President Have Control Over Inflation?":

On Tuesday night, President Biden used his State of the Union address, in Congress, to touch on a range of pressing issues, including infrastructure, insulin prices, Roe v. Wade, Chinese surveillance, and the war in Ukraine. But he chose, early on, to address one topic that Americans feel especially strongly about. “Here at home, inflation is coming down,” Biden said, to waves of applause. “Gas prices are coming down. Food prices are coming down.” He added, “Inflation has fallen every month for the last six months.”

I shouldn't say, because Biden's quotes are taken out of context. But it looks like President Biden does not know what inflation is: He says inflation is coming down. Then he gives two examples of prices coming down. Then he says again that inflation is coming down. The way the paragraph presents Biden's words, "inflation" and "prices" are interchangeable terms.

Maybe it is Biden who misunderstands the terminology. But three separate quotes from Biden are joined up in that paragraph, so maybe it is the author of the New Yorker article that misunderstands the terminology. Or maybe the author just dumbed things down for the rest of us. Dunno. But here's the thing: If prices are going up, that's inflation. If inflation is going up, that means prices are going up faster than before. And if inflation is coming down, prices are still going up.

Inflation coming down is not the same as prices coming down. Inflation means prices are going up. The prices can go up faster (if inflation goes up) or they can go up slower (if inflation comes down), but either way the prices are going up.

Oh, and at the Federal Reserve they talk a lot about "stable inflation". That sounds like stable prices, but it is not the same. Stable inflation means prices are going up at about the same rate (maybe 2 percent every year) every time you check. But stable prices means prices are NOT going up, and inflation is ZERO.

Many problems...

There are many problems in our world today. Most people -- people who present the news, for example, and people who receive the news -- most of them seem to think the problems are political.

I think the problems are economic. So I googled the economic problem. You can probably guess what the search turned up: Scarcity.

Almost everything Google turned up was a restatement of what Lionel Robbins said about scarcity, something he said in 1932, before there was such a thing as macroeconomics.

I asked about the economic problem because I think there is one central, overriding problem, one root problem from which our many problems grow. 

Google answered: Scarcity.

It reminded me of "the motto of Mr. Crockett's company: Many problems, one solution." But the central problem of our time is not scarcity. It is excessive private-sector debt. 

The one solution is to reduce that debt.

Trump created the Biden inflation

Recently we looked at this graph. I like the colors, so I'm showing it again:

Graph #1: Blue is the interest rate. Tan is inflation. Brown is blue behind tan.

The purpose of the graph is to compare inflation to the interest rate, because the interest rate is the tool used by the Federal Reserve to control inflation. Inflation increased for a whole year with the interest rate at zero, before the Fed raised the interest rate. 

The graph only shows a few years. It would be difficult to see what the graph shows, if it showed a lot of years. But I can show it a different way: I can subtract the blue data from the tan. I can subtract the interest rate from the rate of inflation. This way we get only one line on the graph, a line that shows how much the rate of inflation is above (or below) the interest rate. This graph:

Graph #2: The Rate of Inflation less the resistance provided by the Interest Rate

The graph is a hobbyist's version of the Federal Reserve "reaction function": It shows how hard the interest rate is pushing down on inflation.

The tallest spike on the graph, on the right, after the year 2020, shows the so-called Biden inflation. It shows that the rate of interest (which was then zero) did not push inflation down at all. The graph shows how very unusual policy was in response to that inflation. Policy was never more lenient. No spike ever went so high.

The early years on the graph, until 1980, show rapid increase at every recession. The biggest (highest and widest) of these spikes comes late in the 1974 recession. But even that spike is small, compared to the Biden spike.

After 1980 on the graph the plotted line goes low, because the interest rate went very high due to the policies of Paul Volcker. It takes a long time for the line to come back up to the zero level. This shows a long period when the interest rate was significantly more than the rate of inflation.

When we get to the Great Recession of 2008-09, interest rates drop to zero, so even 2 percent inflation puts the plotted line above the zero level.

Recovery from the Great Recession was lengthy and slow. Late in 2015 the Fed at last had enough confidence in the economy to start bringing the interest rate up from zero to something closer to normal. Then in 2020 the coronavirus hit, and the Fed dropped the interest rate back to zero.

A year later, in March 2021, Fed Chairman Jerome Powell warned that we would be getting some inflation, some "transitory" inflation he said. That same month, inflation started climbing. 

Interest rates remained at zero for a year after Powell's warning.

The interest rate started going up in March 2022. The tall spike on the graph peaked in March 2022, and started to come down as interest rates went up. Not a coincidence.

Interest rates at zero offer no resistance to inflation. As the first graph shows, when the Fed finally started raising the interest rate in March, inflation peaked three months later, in June. By July inflation was coming down. It was not difficult to stop the rise of inflation. There was no lengthy process involved. 

There was a whole year when the Fed chose to do nothing instead of raising the interest rate. So inflation went up and up. And then, because inflation went up so high, it took a year to come back down. But when they finally did decide to raise the interest rate, there was no difficulty getting inflation to go down instead of up.

So the question is: Why did the Fed refuse to raise the interest rate for a whole year? I blame Trump. This wasn't Biden's doing. It was election interference by Donald Trump. 

By the way, Biden supports Federal Reserve independence. Trump doesn't. Trump wants to stick his finger in there to make things go his way. I think he already did. I think Trump created the Biden inflation.

A Nixon Chronology

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

In Nixon’s 1962 (p. 309-310) 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: by loosening up on credit and, where justifiable, by increasing spending for national security.”

The 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. But no steps were taken, and Nixon ultimately lost to John F. Kennedy. Abrams writes:

But when then-Vice President Nixon took this recommendation to the Eisenhower Cabinet, “there was strong sentiment against using the spending and credit powers of the Federal Government to affect the economy, unless and until conditions clearly indicated a major recession in prospect.”

This excerpt ends as they all should, with economic policy actions reserved for economic rather than political purposes. But then, this one wasn't Nixon's decision.

From the National Review article "(More) Politics At The Fed?", dated April 28, 2004, which Wikipedia's "Arthur F. Burns" article attributes (in footnote 13) to Bruce Bartlett:

Richard Nixon was acutely aware that Fed tightening in late 1959 brought on a recession that began in April 1960. As the nominee of the incumbent party, Nixon took the blame for slow growth. In his book Six Crises, he complained bitterly that the Fed had, in effect, thrown the election to John F. Kennedy, whose most potent campaign pledge was that he would get the economy moving again.

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.

The purpose of economic policy, in Nixon's view, was not to promote the general welfare, but to make things better for Nixon.

From Politico, 10 October 2020: "The Time Nixon’s Cronies Tried to Overturn a Presidential Election"

[Nixon's] top aides and the Republican Party, almost certainly with Nixon’s backing, waged a campaign to cast doubt on the outcome of the election, launching challenges to Kennedy’s victories in 11 states."

It didn't work, that time.

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

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.

From The Chennault Affair  at The LBJ Presidential Library

Fifty years ago this year, on Oct. 31, 1968, President Lyndon B. Johnson announced a halt to the bombing of North Vietnam in hopes of encouraging peace talks to end the Vietnam War. At the time, Johnson knew a secret. Some in the Nixon campaign were secretly communicating with the South Vietnamese Government in an effort to delay the opening of the peace talks. They offered the prospect of a better deal for South Vietnam if Nixon became president...

When he learned of the back-channel communications, President Johnson called the effort "treason."

From “This Is Treason” at The LBJ Telephone Tapes:

Three days before the 1968 presidential election, President Johnson contacted Senate Minority Leader Everett M. Dirksen [R–Illinois] to inform him that the White House had received hard evidence from the Federal Bureau of Investigation that the campaign of Republican presidential candidate Richard M. “Dick” Nixon was interfering with Johnson’s efforts to start peace talks to end the Vietnam War. In this call, Johnson referred to contacts between Nixon’s campaign and South Vietnamese president Nguyễn Văn Thiệu that urged Thiệu to thwart any such negotiations.

From the National Review:

When Nixon became president in 1968, he vowed that he would not let the Fed do it to him again. At his earliest opportunity, he appointed a trusted aide, Arthur Burns, to the chairmanship of the Federal Reserve. His job was to make sure that money and credit stayed easy through the 1972 election.

As Wikipedia has it:

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.

Abrams writes:

Evidence from the Nixon tapes, recently made available to researchers, clearly reveals that President Nixon pressured Burns, both directly and indirectly through Office of Management and Budget Director George Shultz, to engage in expansionary monetary policies prior to the 1972 election.

And then there was the election interference called "Watergate", with Nixon's people breaking into Democratic headquarters and getting caught in the act. I refer to the "Smoking Gun" tape section of Wikipedia's Nixon White House Tapes article:

Nixon announced his resignation on the evening of Thursday, August 8, 1974, effective as of noon the next day.

 

Finally, from "Trump and Nixon were pen pals in the ‘80s. Here are their letters" at Politico:

The last letter in the Trump-Nixon series is dated Jan. 26, 1993. Trump writes to Nixon not long after his 80th birthday to thank him for a birthday photo and says, “You are a great man, and I have had and always will have the utmost respect and admiration for you. I am proud to know you.”

Birds of a feather.

What if Trump really did create the Biden inflation?

If you were convinced that Trump had created the Biden inflation, what would you think? Was it worth it?

Trump would say of course it was worth it, because it made people angry and unlikely to vote for Biden.

But what about the Trump supporters? Was it "worth it" to them, to do this to Biden? I think most of them would say No, not worth it. 

Their lives changed. Like the rest of us, now they worry about having enough money to eat every day and pay the rent.

You don't do that to the economy. You don't create 9 percent inflation just so the other guy will lose the election. And you don't do that to people, whether they vote or not.

If Trump did delay the rise of interest rates and did really create the Biden inflation -- and if people knew of it -- Trump lovers and Trump haters would be on the same side, and Trump would lose the election. It would be a landslide loss.

If we don't find out about it and Trump wins the election, that doesn't make it okay.

Blue is the interest rate. Tan is inflation.

Inflation went above the 2 percent target early in 2021. The Federal Reserve waited a year before raising interest rates.

Graph #1: Blue is the interest rate. Tan is inflation. Brown is blue behind tan.

Why the year-long delay? Clearly, inflation continued to grow worse until they raised the interest rate. Clearly, inflation started to go down soon after the interest rate started to go up. Why the delay?

Was it election interference by Donald Trump?

Profits doubled since the pandemic

Graph #1: Nonfinancial Corporate Profits, Q1 2012 thru Q1 2024

Chairman Smith, second try

I got distracted yesterday and ended up at my favorite topic -- misunderstanding the economy. I'm back now, trying to focus on Chairman Jason Smith's statement on the Biden inflation. I have to begin by restating something I said, wow, almost a month ago now.

On the graph below, blue shows "Headline" CPI inflation and red shows "Core" CPI inflation. The two follow roughly the same path, but the blue line shows a lot more up-and-down motion than the red line does. The blue line, in other words, is more volatile.

Headline and Core inflation have their differences. But often when Headline inflation is rising, Core is rising also. And often when Headline is falling, so is Core. Sometimes the two follow the same path, but blue is much more jiggy than red. The jigginess is volatility. And then sometimes, Headline inflation shows a substantial drop or substantial increase, or both in turn, while Core makes nothing but small steps. Again, there is less volatility in Core than in Headline.

The red line is less "jiggy" because Core PCE is less "volatile". Core PCE is less volatile because they leave out the most volatile data -- food and energy. The stats people want to take some of the noise out of the numbers -- or at least that's what I would want to do -- so they omit that volatile data.

Graph #1:  Headline (blue) and Core (red) CPI Inflation since 1980

Before I made the graph and actually looked at it, I thought that Core PCE understated inflation. It does not. It understates changes in inflation. Usually, with Core PCE, the highs are less high and the lows are less low. Usually, but not infallibly, Core PCE smooths out the data. It's all there on the graph. All I had to do was look.

When inflation is in the news, it is because inflation is increasing. When inflation goes high, if we compare Core inflation to Headline on a graph, Core will often appear to understate the inflation, because the highs of Core inflation are less high than those of Headline inflation.

When inflation goes low, Headline inflation (the more volatile one) goes down rapidly. Core inflation (the less volatile one) goes down more slowly. At such times, Core inflation appears to overstate the inflation, because it understates the decline. 

As a rule, Core inflation understates the changes. The highs are less high, and the lows are less low.

//

Chairman Smith's statement ends with half a dozen bullet points under the heading "Key Background". The last of these bullet points is

• Inflation has become so deeply ingrained in the economy that when removing food and energy this month’s core inflation number of 5.3 percent is even higher than the topline figure.

I want to restate that, for clarity:

This month’s core inflation number of 5.3 percent is even higher than the headline number.

I am left with several considerations:

1. Smith mentions "removing food and energy" from the inflation data. This removal is done by the people who provide the stats. Food and energy prices are seen as more "volatile" that other prices. Removing these more volatile prices from the calculation leaves the less volatile "Core" data that the Chairman mentions. So the jiggies of Core inflation are smaller than the jiggies of Headline inflation.

2. I figure what Smith calls a "topline" number is the one that I've seen called the "headline" number. "Topline" sounds like a decent synonym. To avoid confusion, I prefer not to use synonyms. Except, of course, "jiggies" for "volatile".

3. I don't know what the Chairman means by "deeply ingrained" inflation. I suppose he means that inflation expectations are no longer anchored at 2 percent (as Jerome Powell might put it) and that people expect higher inflation. I don't know if the statement is true or not (and I won't guess), but it is how I interpret Chairman Smith's words.

4. Smith's statement doesn't say whether he's looking at PCE inflation or CPI. But the statement is dated 15 June 2023. By that date the May data was probably available for the Chairman's use. A FRED search for headline inflation turns up 6 datasets, including Core PCE and Core CPI:

• Core PCE (FRED PCEPILFE) for May 2023 is given as 4.68783 percent. That rounds to 4.7 percent, which does not match Smith's 5.3 percent.
• Core CPI (FRED CPILFESL) for May 2023 is given as 5.33225 percent, or 5.3 percent when rounded. This is the data Chairman Smith was looking at.

5. Smith says Core CPI was "even higher than" Headline CPI for May, 2023. Headline CPI (FRED CPIAUCSL) for that month was 4.12069 percent, which rounds to 4.1 percent. Core CPI for that month, at 5.3 percent, was certainly higher than Headline CPI. Chairman Smith is right about this. And I get a Milk-Bone for my painstaking effort here. 

You can have half, for reading these tedious notes.

//

Now that I know what Chairman Smith is saying, and the data he used, I can evaluate what he said. As I read him, he says

Inflation has become so deeply ingrained in the economy that the core inflation number is even higher than the headline figure.

His statement strongly suggests that in his view Core inflation is almost never higher than Headline inflation. That's what I used to think. As I said above: Before I made the graph and actually looked at it, I thought Core PCE understated inflation. If Core understated inflation, it would be unusual for Core to be higher than Headline. But Core doesn't understate inflation. It understates changes in inflation. 

It is not unusual for Core inflation to go below Headline. Core is below Headline when it understates rising inflation. 

It is not unusual for Core inflation to go above Headline. Core is above Headline when it understates falling inflation. It's all right there on the graph.

It is likely that we are most concerned about inflation when inflation is rising. So it is probably true that usually, when we look at inflation on a graph, we see Core understating the increase. But if we should look at a spot on the graph where inflation is falling, or falling rapidly, we would very likely see Core inflation understating the decline. We would very likely see Core inflation higher than Headline inflation because Core understates the decline.

I got the Excel data for Graph #1 above, and subtracted the Headline values from the Core values. I put the results on a bar graph. When Core is greater than Headline, the result is above zero. When Core is less than Headline, the result is below zero:

Graph #2: Core CPI is Greater than Headline CPI when the bars are Above Zero

This graph shows 534 months of data, from January 1980 to June 2024. 295 of those months are above zero (Core is greater than Headline). 239 of those months are below zero (Core is less than Headline). For this sample, Core inflation is more often above Headline inflation than below it. It happens during disinflation, when the rate of inflation is falling. Core goes above Headline when it understates falling inflation. It happens often.

I only figured this out a month ago. But I'm a hobbyist, studying the economy for my own satisfaction. It troubles me that Chairman Jason Smith of the House Ways and Means Committee doesn't know it.

On Graph #2, most of the 1980s show the blue bars above zero, meaning Core inflation was higher than Headline inflation. This was during the Volcker disinflation. Headline inflation came down rapidly. Core understated that decline every month from July 1981 to July 1987.

And again, every month from March 2023 to end-of-data show the blue bars above zero, meaning Core inflation was understating the decline of Headline CPI. I guess we'll have to call this the Biden disinflation.

Core inflation understates changes in Headline inflation. It's a pretty good rule. I just wish the Chairman of the House Ways and Means Committee understood it.

//

The Core inflation Smith mentions for May 2023 was higher than the Headline number. Chairman Smith seemed to think this most unusual. But it is often true that Core inflation is higher than Headline inflation.

Looking at the May 2023 data, Chairman Smith said Core inflation was higher than Headline inflation because inflation "has become so deeply ingrained" in us. Maybe he meant we expect inflation to be higher than 2 percent. Or maybe he just meant we expect inflation, always.

We do expect inflation, always, because we always have inflation. Granted, we don't always have 9 percent inflation. Usually it is much lower. But almost always, we have inflation.

Core inflation was higher than Headline in May 2023 -- in fact, higher in every month from March 2023 to the most recent data, June 2024 -- but not because inflation is "deeply ingrained". Core inflation has been running higher than Headline inflation because Headline inflation has been coming down. Headline inflation has been coming down, and Core has been understating that change. So Core inflation  has been higher than Headline inflation. It is not unusual, and it is not because inflation is "so deeply ingrained."

This is the Biden disinflation, remember. Inflation is coming down. and Core understates that change. So Core inflation has been running higher than Headline inflation. Just like the Volcker disinflation.

Chairman Smith

I'm looking at this article, dated 15 June 2023: "Chairman Smith: Biden’s Failed Economic Policies Forcing Fed to Choose Between Chronic Inflation or Risk of Recession"

Chairman Smith is Jason Smith, Chair of the House Ways and Means Committee. The Committee "shapes fiscal legislation". Here are the opening sentences of the article:

WASHINGTON, D.C. – Despite prices continuing to rise and inflation having increased 15.5 percent since President Biden took office, the Federal Reserve has been backed into a corner by the Biden Administration’s failed economic policies and forced to choose between pausing interest rate hikes or moving forward with another increase, which would further squeeze our weakened economy and risk recession.

Chairman Smith released the following statement in response to the Federal Reserve’s decision to pause interest rate hikes:

“President Biden’s reckless actions have put the Federal Reserve between a rock and hard place. The Fed is having to choose between hiking interest rates to combat the inflation crisis caused by reckless Democrat spending, risking the health of our overall economy, or pausing those rate hikes and hoping prices do not continue to spiral out of control...

That last paragraph pretty well describes what people seem to feel about the inflation of recent years: caused by reckless Democrat spending. Even Democrats feel that way, if we judge by the way the Dems on TV have failed to offer an equally strong alternative cause of what is commonly called "the Biden inflation".

I want to point out that Chairman Smith's phrase "caused by reckless Democrat spending" is an assumption. It seems strong because people accept that explanation. But the Chairman sticks the phrase into that sentence with no examination of relevant facts.

I want to point out also that failing to examine the relevant facts very often leads to misunderstanding the cause of the problem being examined. And misunderstanding the cause of the problem very often leads to solutions that do not work. 

Federal deficits are a case in point. Everyone thinks the federal deficits are caused by excessive government spending, and that this spending and those deficits are the reason our economy is in such bad shape. But federal spending and deficits are the result of our long economic decline, not the cause of it.

We have been struggling to overcome the federal deficits now for 50 years or more, with very little success. The reason for our lack of success is that we misunderstand the problem. It is not federal debt that slows the economy, but excessive private debt. Yet not once in 50 years have we tried to reduce private debt. Oh, sure, Biden has tried to forgive student debt, while Congress and the Court have undermined his efforts. But Biden's efforts address such a small part of private debt that even if he succeeded there would be no noticeable improvement in our economy. Anyway, Biden's plan for debt forgiveness is offered as a way to help people out, not as a way to improve the economy by reducing excessive private debt. Biden misses the point entirely.

Biden's plan for debt forgiveness is a way to help people cope with a bad economy. It isn't a plan to fix the economy. This tells me that Biden and his advisers misunderstand the economic problem. They fail to see that it is not government debt, but private debt that holds our economy down.

It was the same with Bill Clinton. Clinton spent the 1990s reducing federal deficits and finally, it is said, balanced the budget. Household debt picked up the slack, increasing more rapidly in the 1990s than before, and more rapidly yet in the 2000s -- until the 2008 financial crisis brought that all to a sudden halt.

That sudden halt was evidence of misunderstanding.

Before we decide to blame Democrats in general, along with Biden and Clinton, let us pause to remember that Bill Clinton and Newt Gingrich worked together to come up with the plan to balance the federal budget. The Democrats, under Clinton, adopted the Republican strategy. Unfortunately, the Republican strategy is based on a misunderstanding of the economic problem.

Democrats don't have a clue about the economy. Democratic policy is always and everywhere a way to help people cope with a bad economy. Coping is not the same as fixing.

Republicans do have a clue about the economy. They seem to want to return to the policies of the 1800s. Unfortunately, those policies no longer work. The economy changes. The economy evolves. Economic thought must evolve with it, or it is Fall-of-Rome for us.

This little piggy has bad policy.
That little piggy has none.

On measuring inflation

From CNBC, 28 June 2024:

The Fed focuses on the PCE inflation reading as opposed to the more widely followed consumer price index from the Labor Department’s Bureau of Labor Statistics. PCE is a broader inflation measure and accounts for changes in consumer behavior, such as substituting their purchases when prices rise.

While the central bank officially follows headline PCE, officials generally stress the core reading as a better gauge of longer-term inflation trends.

So now I know: Headline PCE is "preferred" but Core PCE is "better".

The CPI runs higher than the PCE measures, and the Fed doesn't like it at all.

That part about the PCE measures accounting for changes in consumer behavior, well isn't that special. It means when prices get so high that we can no longer afford to buy meat, they take meat out of the inflation calculation. This is the preferred way to keep inflation down.

Well, at least the irony is good.

An alternative to will-he-or-won't-he

I am so tired of Democrats in the news, wasting their days bickering about whether Biden should stay in or get out of the November election. It would be far more productive to directly attack Donald Trump.

Trump created the Biden inflation, just as Nixon created the early-1970s inflation, by convincing enough of the voting members of the FOMC to delay raising interest rates. Call it election interference.

Asked if he created the Biden inflation, Trump would of course deny it. But Trump lies. He lies all the time. And he lies to make himself look good. So I have no choice but to believe that the truth would make Trump look bad.

It was never Biden's inflation

 

"... the federal funds rate had never been so low with inflation so high at a point when the Fed began increasing rates."

Economic Brief No. 23-26, Federal Reserve Bank of Richmond

The Biden inflation was created by Donald Trump. All Trump had to do was delay the increase of interest rates after Jerome Powell's March 2021 warning that inflation was coming. 

I don't know how Trump did it, but I know he did it. Rates did not increase for a year after Powell's warning.

15 March 2020: Covid is in the air. The Federal Reserve ("the Fed") lowers the interest rate to zero.

4 March 2021: Fed Chairman Jerome Powell starts the clock. At the WSJ Jobs Summit, Powell said:

So right now inflation is running below 2%, and it's done so since the pandemic arrived. We do expect that as the economy reopens, and hopefully picks up, we will see inflation move up...

17 March 2021: At the press conference, Powell said pretty much the same:

Over the next few months, 12-month measures of inflation will move up... as the very low readings from March and April of last year fall out of the calculation. Beyond these base effects, we could also see upward pressure on prices if spending rebounds quickly as the economy continues to reopen, particularly if supply bottlenecks limit how quickly production can respond in the near term... The median inflation projection of FOMC participants is 2.4 percent this year and declines to 2 percent next year...

 15 April 2021: The Bureau of Labor Statistics reported:

Consumer prices increase 2.6 percent for the 12 months ending March 2021

Already in March of 2021, when Powell said he expected 2.4% inflation, he got more than expected. And all the rest of the inflation we've had since then has been above the 2.6% number.

March 2022: One year after Powell's inflation warning, the Fed begins raising the interest rate. They were a year too late. The interest rate was at zero. Low rates encourage inflation, and you can't go lower than zero. The one-year delay before raising rates was a highly effective way to create inflation and turn voters against Joe Biden.

June 2022: Just three months after the Fed finally began raising interest rates, inflation peaked. It took very little effort to break inflation's upward momentum. That's why I say printing money was not the direct cause of this inflation. The delay in raising interest rates was the cause.

It took a year for inflation to fall from 9 percent to 3 percent. Since June 2023 inflation has been stable at around 3.3 percent. In sum, it is now three years and four months since Jerome Powell warned us of inflation. It is two years and four months since the Fed decided to do something to fight the inflation. The one-year delay was a very effective strategy for turning voters against Joe Biden.

"Attack. Attack. Attack," wrote the New York Times. "Delay. Delay. Delay. Those two tactics have been at the center of Donald J. Trump’s favored strategy in court cases for much of his adult life..."

It worked with monetary policy, too: Attack and delay. Trump created the Biden inflation.

Download and share my 12-page PDF: "The Plan, Parts 1 and 2"

Coordinating for Prosperity

I watched the new John Oliver the other day, S11E15, June 16 2024, "Trump's Second Term". And I watched it a second time.

He ran a clip from a promotional video for Project 2025, a conservative manifesto I guess you'd call it. The line in the video that caught my ear was this:

"... to end Washington's bureaucracy and restore American prosperity..."

as if ending the bureaucracy will restore prosperity.

It was the word "prosperity" that got my attention. If you're talking prosperity, you're talking about economic performance. You're talking about the economy.

These Project 25 guys, they think they know how to fix the economy. But it sounds like they are still thinking what Reagan thought:

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

After 40 years, these people have learned nothing. Reagan was wrong about why economic growth is slow.

Growth is slow because we have too much private debt.

 

Hey, we don't want the government to grow, right? We want the private sector to grow. That's where the money is, and the jobs and all. So the Project 25 guys want to "end Washington's bureaucracy" and "reduce the growth of government". But other people say government should spend more, to help the private sector grow. The two sides couldn't be more at odds.

As these other people often point out, Reagan grew the federal debt. But if you look at the debt of all US sectors, or of domestic non-financial sectors, or of the private non-financial sector, or of households alone, you'll notice that debt growth slowed in the mid-1980s, and slowed again around 2008 due to the financial crisis of that time. 

And if you look closely at household debt,

Graph #1: US Household Debt, 1946-1980

• you will see it slowing from 1946 to 1955 (the line curves downward), 
• running at a constant rate from 1955 to 1965 (the line runs straight), and
• slowing down from 1965 to 1970 (the line curves down relative to 1955-65).

So there was also a slowdown of debt growth in the mid-60s, at least for household debt.

It is all these slowings of debt growth that have slowed our economy. Slower growth of debt means a slower increase in borrowing and spending -- and a slower increase in spending is pretty closely tied to slower economic growth. 

Also, the lines on the FRED graphs only go up, which means our debt is always increasing. Maybe increasing faster sometimes and slower at other times, but always increasing. So debt service is also always increasing, at least in the big picture. Increases in debt service take money away from current spending, and therefore contribute to making our economy run more slowly.

I attribute the slow growth of our economy entirely to our accumulated debt. Most people ignore that line of thought. I will settle on a compromise if you will, and say accumulated debt and other factors have combined to slow our economy.

In the latter 1960s debt growth slowed, and in the mid-80s, and again after 2008. Three warnings, the economy has given us. Three warning we have ignored. We're not too bright, are we.

Speaking of which, the Project 25 guys seem to think that cutting back on government bureaucracy (and on government spending and government debt, I presume) will lead us to "prosperity". Their word: prosperity.

It's funny, you know, there is a connection between government debt and prosperity. But that connection does not require us to reduce government debt. Nor does it require us to increase government debt. It requires that private debt be low enough (relative to government debt) that private debt can grow fast enough that the economy grows at the rate that we want.

It requires that private debt be low enough (relative to government debt) that private debt can grow fast enough that the economy grows at the rate we want.

When I Google times of US prosperity, three periods come up: the "Roaring '20s", the 1947-1973 "golden age", and the "new economy" of the mid-to-latter 1990s. All three of those periods of prosperity were times when private debt was increasing relative to public debt:

The Tides of Prosperity (Click image for a less cluttered view)

The other times, when private debt was falling relative to public debt, are not times noted for prosperity.

It's not that we have to increase the federal debt or reduce it. It's not that we have to increase or reduce private debt. What we have to do is coordinate the two measures of debt.

When private debt gets too high, relative to public debt, prosperity cannot continue. The problem (as I see it) is that excessive financial cost hinders growth. I don't know how economists have missed that detail, but it seems they have.

When private debt gets low enough, prosperity is able to resume. When it does, it seems to become self-supporting. But the growth of private debt always out-paces the growth of our economy. And the federal government tends to use times of prosperity to minimize its financial obligations. So the private-to-public debt ratio rises until prosperity can no longer be sustained.

When private-sector financial cost becomes excessive, prosperity fades.

One thing that does not show up on the Prosperity graph is the growth of debt. Debt only increases. The private-to-public debt ratio sometimes rises and sometimes falls, but debt only increases.

Suppose that we want prosperity, but we also want the federal debt to be less than it is. Okay, then we have to do something to make private-sector debt less than it is. And private-sector debt has to decrease faster than federal debt, to bring the ratio down until prosperity resumes.

So we have to bring private-sector debt down. And that is difficult to do.

It is difficult to do because our policies promote the use of credit. Because of policy, the use of credit grows fast, unnaturally fast. And the use of credit creates debt, so our debt also grows unnaturally fast. We have to come up with policies that encourage and accelerate the repayment of private-sector debt.

We have policies that encourage credit use and the growth of debt. To offset the effect of those policies, we need policies that encourage the repayment of debt. Such policies will lead to prosperity and, if we do it right, to long-term prosperity. 

You heard it here first.