Prices are going up now because price setters think it will work, now

Or because it *is* working, now.

 
Reading all the time on cost-push inflation, I find sometimes statements identifying inflation as a general increase in prices. "Prices change all the time," I read the other day, "but inflation is a general increase in prices."

Prices change all the time. They're always testing the water. If they sell more than they expect at the higher price, the new low price that comes next will be higher than the old low. They're testing the water. All the time. 

If prices can go up, they will.

A thought from a couple years back:

Value is what a thing is worth. Price is what you have to pay to get it. These days, there seems to be little connection between value and price.


I like Adam Smith's idea that the value of the labor that goes into making something is the measure of the "exchangeable value" of the thing. It's an important concept because it ties monetary value to real output. I don't see "supply and demand" doing that. Not any more.

Supply and demand is just an arrangement. It's the way things happen to be, these days. When you can buy a hardened washer for your lawn tractor for $2 or $3 in one place and $12 or $14 in another, price no longer signifies something meaningful. It's just what we have to pay to get a thing. And please don't explain to me that the $14 "includes shipping". That's just another example of the exorcism of meaning from the concept of price. (Anyway, they tell you shipping is free!)

On top of that, we've got everyone from Universal Basic Income supporters to Helicopter Drop theorists saying it might be a good idea to throw money at people as a way to make the economy work better. I have to say (number one) that throwing money at people has nothing to do with the way the economy works.

I have to say (number two) that if we're throwing money at people so people can buy things, then we've got consumers with income that has no relation to what they've given up in exchange for that income.

So we've got consumers with income that is doesn't match up with work done, buying from producers setting prices that don't match up with the costs of production.

The economy exists in the exchange of value. When things are exchanged at prices that have no significance, the price system no longer conveys useful information.

And I should add:

Some people say that's a result of inflation. I say it encourages inflation.

When there is no connection between prices and costs, on either side of transactions, rampant inflation becomes a real possibility. And the obvious way to shut it down? Tight, tight money.

Does that solve the problem? No. It only stops the inflation.

Why now?

Because the covid recovery may be strong enough that prices can go up a little faster for a while. And because, with the minimum wage about to double, price setters want to take immediate advantage of the opportunity to even things up.

Prices are going up now because price setters think it will work, now.

Why I had to compare the GVA and GDP price indexes

I took a look at Nonfinancial Corporate Business GVA relative to GDP:

Graph #1: GVA of Nonfinancial Corporate Business relative to GDP

Trend upward from 1947 to 1981. Trend downward from 1981 till now. Just like interest rates. 

Just like interest rates. Now that's interesting. Not sure why the similarity. Maybe it's because the rate of interest and the rate of inflation follow similar paths??? I'll poke around the edges of this until there's something interesting to grab on to, or until I get tired of trying -- whichever comes first. But not today.

I see a big increase there, tall and wide, starting third quarter 1954. And I see the ratio above 0.52 from second quarter 1955 thru third quarter 1957. Looks like high output. I'll have to see how that relates to the 1955 surge in Labor Force Participation, and low productivity and all. But not today.

Dunno why, but the next graph I made was the same data except real-to-real instead of nominal-to-nominal. Should come out exactly the same, I was thinkin.

It didn't:

Graph #2: Real GVA of Nonfinancial Corporate Business relative to Real GDP

 Trend upward from 1947 to 2000 (instead of to 1981), and then but slowly down.

I knew right away: It had to be that the GVA price index is not the same as the GDP Deflator price index. (I ran into this kind of problem before.) But in this case there seems to be a huge difference between the two deflators.

And of course I had to do the "big difference" post, just to be sure it wasn't my glitch. But that wasn't today, either.

The unit of output

If you're driving, you probably have a preferred speed in mind: so-many miles per hour. If you're working you probably earn a definite wage-per-hour or salary-per-year or take-home-per-week. The units of time are specific and well-defined. You know what an hour is, and a week, and a year.

What is cost "per unit of output" ? Output may be well-defined, but it is hardly specific; and what in god's name is a unit of output? 

Okay, let's say "a unit" is one of them. Does that help? If we talk about one unit of output, do we know what it is? I don't think so. 

Are all the units of output the same? No. Only in the imagination, if at all.

"The production of one unit"

Long ago I quoted Kaminska of FT:

unit labour costs — the labour cost attached to the production of one unit — are staying positively muted

I showed the graph, and said

Kaminska seems to think the graph shows labor cost. How does she describe it? "The labour cost attached to the production of one unit". Oh right, right: "One unit".

We're talking about the whole economy here, all the output produced in our economy. Could be a Ford. Could be a TV dinner. Could be a cup phone. Do you know what "one unit" of output is? Do we all agree on it? I don't think so.

 

My old boss used the word "unit" so much that I would listen for it and try to figure out if there was some secret meaning that I was overlooking. Nah. He just meant the assembly we were working on, in the steel shop. But since then, the word "unit" always gets my attention when someone uses it. Kaminska, for example.

"Unit labor cost" came around again recently, in another old post. At interfluidity, a clarification of the meaning of the phrase:

Unit labor costs are nominal wages per unit of output.

 And now we can no longer avoid the question: What is a "unit of output"?

I think it means what my old boss meant -- one of those things we make, when we make output. Any one of them, as if they are all equal and interchangeable. But I remember Keynes:

But it is a grave objection to this definition for such a purpose that the community’s output of goods and services is a non-homogeneous complex which cannot be measured, strictly speaking, except in certain special cases ...

Keynes was right. But that doesn't stop us from trying to tally output. It doesn't stop us from talking about "units" of output. Google Search says it finds two million links for the quoted phrase "per unit of output". The first among these -- at EconData Online -- offers this definition:

The interpretation of labor cost per unit of manufacturing output (hereafter called unit labor cost) is straightforward--it is the cost of worker compensation and benefits per unit of manufactured output.

"Labor cost per unit of output" is "worker compensation and benefits per unit of output". They define labor cost for me, but they don't define a "unit of output".

I'm not gonna check them all, but I expect all two million sites would do the same. We're supposed to just pretend we know what a unit of output is. And yes, I usually do that, too.

 

Well here's somethin. At NBER, from the out-of-print volume Capital and Output Trends in Manufacturing Industries,1880-1948:

Man-hours per unit of output — the reciprocal of "labor productivity" — are reduced whenever labor is replaced by other factor inputs ...

Labor productivity is output per hour. The reciprocal is hours per unit of output. To figure something "per unit of output", divide something by output. 

Sure. I knew that. But it still doesn't tell me what "a unit of output" is. I know what an "hour" is, and a "week", and a "year". But I don't really know what an "output" is, or a "unit of output". I know it was recently produced. I know somebody paid for it. And I know you can somehow divide by it. But I don't know what it is.

And that's all we're gonna get.

• Wikipedia: "In economics, average fixed cost (AFC) is the fixed costs of production (FC) divided by the quantity (Q) of output produced... Average fixed cost is fixed cost per unit of output." Division, again.
  
• OECD: "In broad terms, unit labour costs show how much output an economy receives relative to wages, or labour cost per unit of output. ULCs can be calculated as the ratio of labour compensation to real GDP." Division, again. So maybe a "unit of output" is a dollar's worth of real GDP? Nah, I don't think so. A dollar's worth is value, or worth. It isn't output.
  
• Google: "In order to show you the most relevant results, we have omitted some entries very similar to the 109 already displayed." 

Well that was quick.

I know about dividing by GDP. The word "per" tells me to divide, and anyway economists always divide by GDP. But if you're going to talk about "a unit of output" you need something more tangible: a widget that you can eat or drive to work or use to build a house. Something you can wear. Something you can read. Something you can relax on, while watching football on it. 

All of the above. A unit of output is the universal product: There is no such animal. And the word "widget" is used to represent it.

Calculating the Number of Units of Output

I found this old note that I left on my desktop:

net interest??
gross interest cost adds to the price of output
how much does it add, i wonder...

i can use "total labor cost"
divided by "labor cost per unit"
to get the "number of units" produced!!

and then divide business gross interest cost
by the number of units produced
to figure the interest cost per unit of output.

No shit.

I put a few graphs together at FRED. That's the trick that forces me to think about relations between data sets. And I came up with a short cut: NCB interest paid, divided by GVA NCB, equals the interest cost per dollar's worth of output.

Graph #1: NCB Interest Cost per Dollar of GVA

The interest cost was less than two cents per dollar of nominal output in the early 1950s, three cents in the early 1960s. Around five cents in 1970, and six in the mid-1970s when the economy slowed -- unless it slowed around 1966 (as Minsky and Keen describe) when interest cost went above three cents per dollar of output.

NCB interest cost reached nine or ten cents per dollar of output in 1980. Eleven before the 1991 recession, near nine for the next two recessions, and five or six cents now, per dollar's worth of output.

Since 1970, cost peaks are obvious and related by timing (and by cost, certainly) to recessions. Even in the 1950s, these recession-related peaks are visible. (And there is a pretty rapid increase around 1955-57, at the time of that pesky "creeping" inflation.)

The peaks are undoubtedly related to the rising interest rates that precede recessions. But even if we trim off the peaks and look at what remains, the line plots a mountainous path. That mountain of cost is due not so much to the rate of interest as to the mountain of debt that Nonfinancial Corporate Business accumulated over the years.  Interest rates have been trending down since 1981 and are now about as low as they were in the early 1950s. But the interest cost is still well above what it was in the 1950s.

 

Yeah, but this is all interest cost per dollar's worth of output. I want to see it per unit of output. So much for my shortcut.

FRED offers a data series named Gross value added of nonfinancial corporate business, a nominal measure of the output of NCB business.

They offer another series, named Price per unit of real gross value added of nonfinancial corporate business. How they figure that, I do not know. But price per unit is price per unit. Note that it gives the price per unit of real gross value added, but the "price per unit" price is nominal.

To divide the first series (Gross value added) by the second (Price per unit) I follow the old schoolboy's rule: Invert and Multiply. So then I'm multiplying GVA (dollars) by the number of units and dividing by Price (dollars). By the division, dollars cancel dollars and I'm left looking at the number of units produced.

That's what Graph #2 shows:

Graph #2: Number of Units of Real GVA Produced by NCB

Dollars cancel dollars, and we are left with "Billions" as our vertical axis units.

The plotted line runs from a little below 1,000 to something over 9,000. But the vertical axis units are "billions". So the plotted line shows increase, from a little below 1000 billion units produced in 1947, to something over 9000 billion units produced in 2019.

In other words, from a little less than one trillion units of output in 1947, to more than nine trillion in 2019.

As a point of information, for NCB business the nominal value of the GVA in 2019 was $10,579.340 billion (or $10.57934 trillion). The number of units of output NCB business produced that year was 9.40488 trillion units. The price per unit comes to half a penny more than $1.12 for each unit of output produced (by NCB business) in 2019. About as much as a dozen eggs.

It's simply amazing, isn't it, that such things can be calculated.

So I took the ratio from Graph #2, the number of units of output, and took the "monetary interest paid" by NCB business and divided it by the number of units, to get interest cost per unit of output:

Graph #3: NCB Interest Cost per Unit of GVA

Looks much like Graph #1, except it never goes downhill. There seems to be a floor, somewhere around 5½ cents per unit of output.

5½ cents of $1.12½. That's just about 5% of the price of every unit of output we bought from nonfinancial corporate businesses in 2019. Just for interest on their debt. And that's the floor, the low estimate.

The big difference between GDP and GVA

The big difference is the price index.

I took nominal GDP and divided it by real GDP to get the deflator, the GDP price index.

I did the same with nominal and real Gross Value Added to get a GVA price index.

And then I went back to the list of data I usually use for labor productivity and figured the same for business sector output and for nonfarm business sector output: nominal relative to real.

I got a graph with four lines:

Graph #1

The highest line, blue, my calc for the GDP Deflator.

The highest line shows the most price increase. The lowest line (red) shows the least price increase.

Red is my calc for the GVA price index (for Nonfinancial Corporate Business, NFB  NCB). Nominal relative to real. I indexed these lines, all four of em, where they start (1947/01/01) so I can see how they change as the years go by. (By default they are indexed near the end of the series (presently 2012) so they all meet in that year, run very close for a decade or more before and after that date, and show their differences in the early years, which I think is bullshit.)

The two lines in the middle: Green is the business sector price index. Purple is the nonfarm business sector price index.

Not shown: The Consumer Price Index, which runs higher than the blue line, and the PCE Price Index, which runs close to the blue. (I didn't check that today, but it's what I remember from when I did check it.) Not sure why the consumers' "basket of goods" always inflates more than the business basket does. Not even sure the "basket of goods" description applies to anybody but consumers.

Hey -- if consumer inflation always runs high, and business inflation low, shouldn't "cost of living adjustments" be higher for consumers than for businesses? Seems to me. If inflation is 2% we should get 3%  wage hikes and they should get 1% price hikes. Yeah.

This is the first time I've looked at the GVA price index. It certainly is lower than the GDP deflator. Ah yeah, they probably hold their prices down by holding wages down. One hand slaps the other.

Some things are important. Google's social conscience is not one of them

 

"Discover Woolaroo: preserving global languages"
"Celebrate Asian Pacific American Heritage Month"
"Learn about entrepreneurship, equity, and style in YouTube's first ever #BeautyFest"
(Every day we care about something different)

-- https://www.google.com/

 

 
I don't know why I write. I just know I have to write.

Micro is about each of us. Macro is about all of us. What's always good for each of us is not always good for all of us. The worse things get, the less it matters (to each of us) and the more it matters (to all of us). And the decline of society accelerates. 

"Civilizations die from suicide."

My conservative friend Richie once told me he had a simple rule: If it lowers his taxes, he's for it.

Richie was short-sighted: What's best in the short run may be costly in the long run. Henry Hazlitt warned of this; I don't have Economics in One Lesson handy, but Hazlitt said the greatest flaw in economic thought is the failure to think through the consequences.

Found it. Mises has it:

In addition to these endless pleadings of self-interest, there is a second main factor that spawns new economic fallacies every day. This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

 Hazlitt reduces it to "a single sentence":

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Seems about right.

Mare is good. Way better than I expected. Mare of Easttown. Some of the characters get a little too caught-up in their own troubles, but there's not much of that. Kate Winslett's Mare is believable.

I like shows where the economy sucks and you can tell because of the effect it has on life. I fell in love with Hinterland for exactly that. Mare of Easttown presents it well, too. So does Nomadland, come to think of it -- extremely well. 

I dunno if people get that about these shows, that showing how bad the economy is is kind of the main point. Coping with it as best you can, that's what makes the story. But the overriding, underlying problem in these stories is the bad economy.

The story is always told from the "each of us" side. Never from the "all of us" side. Yeah, sure, in Nomadland we see a tenuous group of people, a group that could perhaps evolve over time into one of those survivor enclaves like we saw in the old Mad Max movies. 

But those are old now, the Mad Max movies. Time has passed. Our economy has deteriorated further. We are closer to the edge, where zip codes are retired and life as we know it is over. The stories these days no longer look beyond that precipice and toward recovery.

We're closer to the edge today, and the stories peer over the edge and down upon the troubles below.

If you don't understand the point of stories like Nomadland and Mare, it's because you don't realize just how close we are to the edge.

To realize that -- that's what's important.

Not what I was looking for, but worth a look

 

From the Occupational Outlook Handbook, 1959 edition

The three columns of data on the right show percent of population for each income range. The largest group of women earned between $3000 and $3999 in 1957; the largest group of men, between $4000 and $4999.

That table comes up because I found it. (It's not one of a series on a topic, I mean.)

I was reading Charles L. Schultze in Employment, Growth, and Price Levels: The effects of monopolistic and quasi-monopolistic practices (September 1959). Schultze says:

The rise in salary costs per unit was not only due to an increase in salary rates -- which rose by about the same amount as wage rates -- but also by the rising ratio of salaried output to employment.

In context, that statement looks to me to be a crucial part of his "demand shift" argument, so I wanted a look at the numbers that Schultze was talking about: wage numbers and salary numbers, separately.

Apparently there is no such thing anymore. It's all "wage and salary" now, numbers combined, as if the three words were one.

This corruption of thought is far too common. I've been similarly troubled by "supply and demand" and by "money and credit". Such word combinations cannot be described as "portmanteau" because they do not expand the vocabulary. They reduce it. They reduce our ability to think about things. How can one evaluate Schultze's demand-shift hypothesis if data on wages and salaries are no longer presented separately?

How can one understand that the source of our economic problems is that we have come to use credit for money, when people think only in terms of "moneyandcredit"?

"Not conservative enough"

A headline at The Hill: Republican says Stefanik not conservative enough to be GOP leader

In an essay titled Liberalism and Labour, given as a speech in 1926, Maynard Keynes said:

As things are now, we have nothing to look forward to except a continuance of Conservative Governments, not merely until they have made mistakes in the tolerable degree which would have caused a swing of the pendulum in former days, but until their mistakes have mounted up to the height of a disaster.

He said it in 1926, three, almost four years before the crash of 1929 and the Great Depression.

He knew. Somehow, he knew.