Average work-week?

I remember being surprised to read that in the middle ages people worked about the same amount of time that we work today. That's nothin. Check this out:

Since the 1960s, the consensus among anthropologists, historians, and sociologists has been that early hunter-gatherer societies enjoyed more leisure time than is permitted by capitalist and agrarian societies; for instance, one camp of !Kung Bushmen was estimated to work two-and-a-half days per week, at around 6 hours a day. Aggregated comparisons show that on average the working day was less than five hours.

Debt is not a component of aggregate demand

Wikipedia's Aggregate demand article, under Debt, says

A post-Keynesian theory of aggregate demand emphasizes the role of debt, which it considers a fundamental component of aggregate demand;

I wish they wouldn't say it that way. Debt is not a "component" of aggregate demand. The rest of the sentence is better:

the contribution of change in debt to aggregate demand is referred to by some as the credit impulse. 

This part of the sentence refers to the change in debt. That's correct. An addition to debt is a measure of "extra spending" created by new use of credit. A reduction in debt would imply money being returned to the lender, and a reduction of spending. 

The sentence that comes next shows why it is incorrect to emphasize "the role of debt" in aggregate demand:

Aggregate demand is spending, be it on consumption, investment, or other categories.

Aggregate demand is spending. You can't spend debt, so debt cannot be a component of aggregate demand. 

Debt is what remains after you borrow money and spend it. Or as I prefer to say it, debt is what remains after you use credit.

The Age that Sucks

Proofreading yesterday's post after posting it -- shame on me -- I had another thought.

One might argue that the Minsky-Keen date for the end of the post-WWII golden age, 1966, stands out as a high point in the pattern of the "Average Annual Hours Worked" graph:

Graph #1

That being the case, one might wonder if a comparable point in the pattern -- the high point in the year 2000 -- marks the end of a somewhat less "golden" age and the beginning of the age that sucks. You hear people talk sometimes of "the end of the American century". This could be that -- and, oddly, precisely on schedule.

Interesting, I think, because it puts the start of the 2007-2010 disruption (and related problems) at the year 2000 and explains, for example, the inexplicable 2.0% average Real GDP growth of the 2001-2019 period.

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Why the decline in hours worked?

To be sure, average annual hours worked depends at least in part on the preferences of labor. But the guy whose preference is to work less that the boss wants is soon not working at all.

The decline in average annual hours worked was no doubt in part a result of labor union efforts. But after the Air Traffic Controllers got fired, union efforts have had little to do with it:

The share of workers covered by a collective bargaining agreement dropped from 27 percent to 11.6 percent between 1979 and 2019, meaning the union coverage rate is now less than half where it was 40 years ago.

The percentage of unionized workers dipped even lower in the private sector, from about 20 percent in 1983 to 6.2 percent of workers in 2019, a far cry from the 35 percent union membership high mark last seen in 1954.

A big part of the decline in average hours worked can be attributed to employers' preferences, which depend on economic conditions. When economic conditions deteriorate, average hours fall.

Nah, that can't be

At FRED, a search for labor force turns up almost 27,000 datasets. 30 pages of results. Halfway down the first page I was distracted by a shiny object: Average Annual Hours Worked by Persons Engaged for United States:

Graph #1

First thing that caught my eye: the big drop at the start.

I blinked and looked again: After being interrupted by the 1953-54 recession, a sharp drop in average hours worked, from 1955 to 1958.

Maybe you know where my mind goes next: Samuelson and Solow (1960): What James Forder said: "The question they were addressing was that of the explanation of the inflation of the 1950s – particularly the period 1955-57".

Any relation between the drop in hours worked and inflation? possibly cost-push inflation? possibly wage-push? Wage demands could have been rising to compensate for the fall of hours worked. Could be. What else does the graph show? 

A longer big decline, from 1966 to 1982, almost the whole of the "great inflation".

Well that's weird. Wage demands spurring inflation despite four recessions? That's hard to fathom. But it is odd that both big drops in "hours worked" occur at times when inflation was a problem.

Hm, there is one more interesting drop on the graph, from 2000 to 2009. Here's inflation during that time:

Graph #2: Three Measures of Inflation, 2000-2009

An argument could perhaps be made.

It wouldn't mean that wage costs are always what drives inflation. It might mean only that wage demands are a coincident indicator or a contributing consequence.

When we see persistent declines in hours worked, it seems we also find increasing inflation.

Both sides now

They're still counting votes in Georgia, but CNN seems to think things will soon be settled.

I think the only thing that gets settled is: Most people get more convinced that things will get worse, one way or the other.

Politics is the problem. No, not politics: People being politicized is the problem, because now everyone thinks our troubles have political roots. 

Our problems appear to be political because we have taken sides that we didn't need to take on political issues that didn't even need to come up.

Our problems, at root, are economic. You have to peel the onion pretty far down to see it, because things have been getting worse for such a long time. But the original problem, which still waits to be solved, is economic in nature. Economic growth is slow and has been slowing since Paul Volcker ran the Fed or maybe since the mid-1970s. Or maybe since the mid-1960s or before; a long-term problem in any case, impacting people for two generations and counting.

When economic growth is slow, jobs are harder to come by. Income is harder to come by. There is greater incentive for crime and corruption. Unresolved, the problem gets worse.

I remember Newt Gingrich, in To Renew America, hypothesized a world of better economic growth, and wrote:

In this world of merely 1 percent higher growth, the Social Security Trust Fund never runs out of money for as far as the current model can look into the future.

That, from the 1990s when Social Security was a big issue. Add one percent to the average growth rate, and the problem would be solved. The same is more or less true today: More jobs, more income, less need for "government interference" (or "government help" if you prefer) in the economy. Less need for that kind of help makes the "secondary" problems (arising as consequences of the initial problem) easier to solve. Smaller problems, less interference, less objection to the interference, less partisanship, more cooperation. It all works together.

Less need for Obamacare, for example. Doesn't "less need for it" help solve that problem? They came up with Obamacare because people couldn't afford health care. (We call it a "health care" problem. It is mostly an affordability problem.) But getting the government to pay for health care (or forcing us to  pay) doesn't solve the problem of rising cost.

If there is a cost problem, the solution is to find and fix the cause of that problem, not to get someone else to pay the rising cost. Besides, there is a good argument to be made that throwing money at a problem makes the problem more expensive.

If you threw money at me, I'd take it. That's how it works.

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The initial problem? The rising cost of finance, perhaps as long ago as the 1950s. The rising cost of finance, embodied in our growing reliance on credit, created cost-push pressure. Cost pressure creates inflation, or slows growth, or both. The more we fight inflation, the greater the slowing of growth. Eventually, the slowing takes on a life of its own and inflation doesn't even try anymore. And here we are today.

Did I leave anything out?

A glance at corporate profits

Download the PDF

It is pretty well recognized that corporate profits in recent years have been high:

Graph #1: Four Measures of Corporate Profit, relative to GDP

They're jiggy, but these measures of profit move pretty much together, and after the year 2000 profits do go high. Sure, profits have fallen some since 2012, but in total, corporate profits are still above 10% of GDP, as the red and blue lines show.

The red is annual data that begins in 1929. The others show quarterly values that begin in 1947.

To summarize what Graph #1 shows: Red and blue represent all of corporate profit. Green represents corporate business profit. The purple line represents nonfinancial corporate business profit. 

Nonfinancial business makes and services things.

The space between the blue and green lines represents the profit of corporations that are not businesses. The space between green and purple represents financial corporate business profit. 

Financial business makes and services money.

Here's the hierarchy: 

corporate profit, which consists of

profit of non-business corporations, and
corporate business profit, which consists of

financial corporate business profit, and
nonfinancial corporate business profit, which consists of

profit arising from nonfinancial activity, and
profit arising from financial activity

As you may notice, this hierarchy is organized by type of business, not by type of profit. To my mind, it is important to view profit by type of profit. Specifically, I want to know the profit arising from the production of goods and services by nonfinancial corporate business, as opposed to the profit arising from their financial assets. If that information is available, I am unaware of it.

However, a good portion of the assets of nonfinancial corporations are financial assets: near a quarter of their assets in the 1950s, near half today.

If we assume that the financial-to-total ratios for profit and for assets follow the same "rising from near a quarter to almost half" pattern, we can estimate the shares of nonfinancial corporate business profit attributable to financial and nonfinancial activity.

Then we can take the financial profit out of nonfinancial corporate business profit, and add it to financial corporate business profit. In other words, we can take the given data, which is categorized by type of business, and re-categorize it by type of profit. A significant and useful improvement.

Including the profit of non-business corporations noted earlier, we end up with three categories of profit. So we can figure the three components of total corporate profit:

• non-business profit,
• financial profit, and
• nonfinancial profit
  

each of which I show here as a percent of the total:

Graph #2: The Components of Corporate Profit, 1951-2020 (Stacked Graph)

Nonfinancial profit falls from two-thirds to one third of total corporate profit. The profit arising from financial and non-business corporate activity doubles, from one-third to two-thirds of the total. (Click the "Graph #" text to see the graph at FRED.)

Corporate profit may have been high in recent years, but for the nonfinancial corporations that produce the goods and services we regularly consume, profit is low. If unemployment is as a rule too high and economic growth too slow, it is because nonfinancial profit is low.

Cost-push and the dual mandate

This is about the economy before covid and, I expect, the economy after covid.

At the Adam Smith Institute: Inflation is not a cost-push phenomenon

The first two paragraphs:

Many economic commentators used to believe (and some still do) that inflation could result from rises in the input costs of production. An increase in the price of raw materials or in the wages paid to workers would have to be passed on, it was supposed, leading to a rise in the price of the finished product. If enough goods were thus affected, this would bring about the general rise in price levels which is popularly called inflation.

If the money supply is unchanged, then price rises for some products will be matched by lower prices elsewhere. If people have to pay more for their essentials, for example, following increased prices brought about by higher input costs, then they will have less money to spend on non-essentials, the demand for which will go down.

When the price of essentials goes up, some spending moves out of non-essentials and into essentials. The demand for non-essentials goes down. Producers cut back the production of non-essentials, and some workers lose their jobs, or work fewer hours. There is less employment in the non-essentials sector of the economy.

But there is not more employment in the essentials sector. Costs went up, and prices went up, but demand didn't go up. We're lucky demand didn't go down, and that's only because the essentials are "essential". Employment stays the same in the essentials sector, and falls in the non-essentials sector. There is a net loss of output and employment. The economy has slowed because of the higher input costs.

There are three more paragraphs in the article at the Adam Smith Institute. But they don't address the problem of declining demand. They don't address the problem that rising cost pressure leads to a slowing economy. They address only the problem of inflation.

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Inflation is an unacceptable solution to the problem of rising cost. The other solution, equally unacceptable, is slow growth. The dual mandate of the Federal Reserve is to achieve "maximum employment and price stability". The one goal is price stability, as opposed to inflation. The other goal is maximum employment, as opposed to slow growth.

Both inflation and slow growth contradict the mandate. Both are unacceptable. And yet, policymakers do a good job of keeping inflation to a minimum, while employment is potluck.

But on second thought, maybe that's a flawed evaluation. When unemployment falls to a 50-year low, nobody knows why. And inflation? Inflation has been contained, running below 2% for some years. Running below the 2% target for some years, as if policymakers are unable to raise inflation to the target.

"The core problem stems from the fact that neither central bankers nor anyone else knows what causes inflation." -- Daniel L. Thornton

Maybe it's not that policymakers do a good job of keeping inflation to a minimum. Maybe economic growth is so slow that inflation simply refuses to rise to target.

Maybe, instead of trying to contain inflation and trying to boost growth and employment, maybe policymakers should concentrate on the problem of rising cost, the problem that has long been the source of inflation and slow growth.

I know. It's not in the mandate. But that is no excuse.

"Toynbee maintained that the fate of civilizations is determined by their response to the challenges facing them." -- Stefan Zenker