A quick look at household debt

The graph shows Dollars of Household Debt per Dollar of Principal Repaid:

Graph #1: Household debt per dollar of household debt repaid  1980-2021

In 2007, shortly before the financial crisis, the debt we ("households") owed was 25 times the principal we repaid that year. Maybe that doesn't sound insurmountable to you. But at that level, with an interest rate of anything over four percent, interest adds more to our debt than we are paying back.

Cost push inflation ... Cost push ... Cost pressure

Financial cost -- essentially, debt and interest cost -- is the source of the cost pressure which leads to inflation and slow growth. And the more we use tight money to fight inflation, the worse things get. Tight money is not the proper response to cost pressure.

Economic policy is the engine that drives the growth of finance and financial cost. Policy encourages it. We think our pro-finance policies are good. We think those policies help the economy and we are unwilling to change them. Our unwillingness to reverse those policies is the reason we have been unable, since the 1970s, to eliminate the upward pressure on prices and wages and the downward pressure on growth.

There can be no way out of this problem until we change our thinking about the benefits of finance.

Look: The effects of finance are nonlinear. When we have little debt, as in the 1950s and 60s, the benefits of finance outweigh the costs. But when we have too much debt, as in the 1970s and after, the costs of finance outweigh the benefits.

It's pretty simple, really. When you have too much debt, it does more harm than good.

You'd have to wrinkle your nose when you say it, to convey Sumner's disgust

Scott Sumner at EconLib, 5 January 2022:

"The dirty little secret of wage/price controls is that the government’s actual objective is to control wage growth, and the price controls are a fig leaf added to make the policy seem more “fair”, thus making it more politically feasible."

Even completely wrong statements can get points for clarity. But my first reaction --
Well, my first reaction was "Sumner's disgust".

My second reaction was "If his statement wasn't so political, I  might agree". But on second thought, no.

My third reaction is this. The government's actual objective is to control the value of the dollar. The way it goes about that task, or so I've read maybe three times, is by controlling wage growth. This is more or less what Sumner says.

But things are not as simple as Sumner indicates. I will say again the same thing I have said 100 times before: The government's objective should NOT be "to control wage growth", nor "to control the value of the dollar". The government's objective even at this late date should be to understand the source of the problem -- to understand why the upward pressure on wages and prices was so powerful that we were unable to push inflation down to zero. (I refer to four decades of "low" inflation from 1983 thru 2020 when the price index rose from 100.0 to 261.6.)

I guarantee you that if and when the source of the problem is correctly understood, eliminating the upward pressure on wages and prices will be a much easier task.

Oh, and the rising inflation of the last couple years? Caused by "supply chain" issues, they say. I think the cause of this rising inflation is that we never really solved the inflation problem that has troubled our economy since the 1970s. And the covid disruption was enough to upset the tenuous price stability we had "achieved" since the '80s.

The way the cookie crumbles

Below the footnotes of the 1968 article "The Threat of Wage and Price Controls" at fee-dot-org, there is this brief thought from Irving S. Olds:

The Price of Price Controls

The whole recorded history of man is strewn with the wreckage of the great civilizations which have crumbled under price controls; and in forty centuries of human experience, there has never been — so far as I can discover — a single case where such controls have stopped, or even curbed for long, the forces of inflation. On the contrary, in every instance I can find, they have discouraged production, created shortages, and aggravated the very evils they were intended to cure.

IRVING S. OLDS

Caught my attention because of the end-of-civilizations thing. But the emphasis on price controls is misplaced.

I looked the guy up:

Irving Sands Olds (1887–1963) was an American lawyer and philanthropist. He served as chairman of the board and chief executive officer of U.S. Steel from 1940 to 1952, and was partner at White & Case.

CEO of US Steel. Perhaps his remarks on price controls were in response to the wage & price "guideposts" of the Kennedy era, which were established after the US Steel price hike of 1962. Kennedy had been told US Steel would not raise prices.

Ten years earlier, Truman had nationalized the steel industry, and the Supreme Court shot that down.

I make three brief points, and focus on the third:

1. Civilizations don't crumble because of price controls. 
2. Civilizations don't crumble because of the inflation that gives rise to price controls.
3. Civilizations crumble because that unrelenting inflation is cost-push, the kind of inflation that undermines economic growth.

Civilizations crumble when economic growth is undermined because, like a shark, civilization must keep moving forward or it will die. Toynbee said as much (page 10):

"Why did the Barbarians ultimately break through? Because, when a frontier between a more highly and a less highly civilized society ceases to advance, the balance does not settle down to a stable equilibrium but inclines, with the passage of time, in the more backward society’s favour."

So did Quigley (page 141):

"After  centuries  of  expansion  our  society  is  now  organized  so  that  it  cannot  subsist;  it  must  expand  or  it  will  collapse."

And Keynes, in his toast to economists:

"economists, who are the trustees not of civilization, but of the possibility of civilization."

Perhaps old Irv Olds was just saying the same, but I don't think so.

Lindblom

"I think highly of the social reformer — not, of course, the crank with his panacea but the imaginative thinker who combines a concern for the general welfare with a conviction that man within limits can intelligently plan his social structure."

- Charles Lindblom in Unions and Capitalism (1949)

An insufficiently studied phenomenon

Inflation is probably the most-studied topic in all of economics. How inflation gets started must be the least-studied topic.

"a better dream"

In "Wage Policy in Recovery" by H. B. Shaffer (June 21, 1961) under the heading "Risks in Reviving a Protectionist Trade Policy" we read:

Competition from foreign producers encourages affected business and labor groups to press for higher tariff barriers and more rigorous import restrictions of other kinds to protect the domestic market. Yielding to such pressure, to any significant extent, would run counter to the longstanding American policy of encouraging freer trade among non-Communist countries, would invite reprisals restrictive of American sales abroad, and would complicate U.S. participation in the General Agreement on Tariffs and Trade (Gatt) and in the Organization for Economic Cooperation and Development, a newly formed 20-nation economic alliance scheduled to begin operations next September.

What Shaffer is reporting as the source of this problem, as I see it, is "the longstanding American policy of encouraging freer trade". Free trade, in other words, is not good enough; it has to be "freer" -- and we have to encourage that.

We can not abandon the policy or even tone it down a bit because that would interfere with our freer-trade plans for the General Agreement on Tariffs and Trade and the OECD. The reason we cannot tone down those plans, in other words, is that we don't want to. 

That was in 1961. But things haven't changed much since then. We use policy to "encourage" certain things, and those things generally come about. If our economy grows worse as a result, perhaps it is because the people who decide what to encourage do so based only on what is best for themselves.

Or maybe they're just wrong.

I am reminded of a better plan proposed by Hayek:

Neither an omnipotent super-state, nor a loose association of “free nations” but a community of nations of free men must be our goal.

I am reminded also of the strategy that would let the Hayek plan succeed:

... if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours.

 

Free trade, as we know it today, promotes the merging of nation-states into economic communities like the European Union. Such communities in principle are "lovely". But we are finding out the hard way that economic community is not enough to make the plan work. Political unification is also required. So, behind the scenes, the culture is modified until people begin to think in terms of the super-state, to think in terms of "Europe" rather than "France", to think of themselves as Europeans rather than Frenchmen. People are being manipulated to facilitate the progress of the super-state. 

The super-state is promoted as "better for the economy". That is a crock. If you can't fix the economy of a nation-state, you damn sure will not be able to fix the economy of the super-state. If we cannot learn to provide ourselves with adequate employment by our domestic policy at the nation-state level, surely we will never achieve it at the super-state level.

The whole concept of the super-state, in my uneducated opinion, is the product of the mealy minds of the already super-wealthy whose further accumulations are in some small degree hindered by national boundaries and the economic policies they contain. The concept is supported by lesser wealth-holders with unrealistic dreams of super-size wealth, and by those with neither wealth nor a better dream to turn to.

The "omnipotent super-state" that Hayek rejects, I should add, is the same as the "universal state" of Arnold J. Toynbee and the "universal empire" of Carroll Quigley.  This super-state appears late in the Cycle of Civilization, shortly before the Dark Age which brings the cycle to completion.

Is this dire prediction? No. It is only a way of looking at the world. I suppose we could just wait to see if it turns out again to be true -- unless you have something better to do, like calling for change in the policies that promote our continuing decline.