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.

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