econcrit

Monday, March 29, 2021

I couldn't find data on "nice" families ...

Graph #1: Median relative to Mean since 1953

Sunday, March 28, 2021

How come nobody says "THAT'S WHY GROWTH IS SLOWING!"

I'm still working on posts for my "Terms of the Times" series. It's slow going. Everything about the economy is related to everything else, and I'm trying to find a path through it all. I often go off on a tangent. I'm starting to cut these tangents off and, rather than deleting them all, posting some of them so you know I'm not dead yet. Anyway, this is one of them.

It is starting to make sense to me, finally, this focus on cost-push inflation as "the decrease in the aggregate supply of goods and services stemming from an increase in the cost of production". It is the most important difference between cost-push and demand-pull, this phrase "decrease in aggregate supply" that they now use in definitions of cost-push inflation.

Of course I've known for a while now that rising cost hinders growth:

The growth-side problem is rising cost. Rising cost inhibits growth. And it turns out that creating some inflation compensates for rising cost and gets us a little growth.

But I started out with an older definition of cost-push inflation, such as you can still find at policonomics:

Cost-push inflation occurs as a response of agents raising prices to maintain their profit margins if there are higher production costs.

The old explanation makes it clear that the problem is rising cost and falling profit. But it took me a while to figure out that cost problems hinder economic growth. I'm never quick, coming to realizations like that on my own. These days, they put it right there in the definition, as Investopedia does, the decrease in aggregate supply stemming from an increase in the cost of production.

Never quick. I know they're not making things up. I know that the decrease in aggregate supply -- the slowdown of economic growth -- results from the cost pressure. But my response to the revised definition, for the longest time, is: No.

Even now, when Investopedia defines cost-push inflation as "decrease in the aggregate supply" I want to say No. I want to say inflation is not supply. Inflation is prices. Inflation is prices going up, not supply going down. Yes, I know, price and supply are related. But no, inflation is not a change in supply.

God, there are still people who say inflation is an increase in the quantity of money. When I came to it, inflation was already an increase in prices, the general level of prices. People who grew up with the older view than mine object to thinking of inflation in terms of price, apparently because it severs the connection where increasing the money causes the increase in prices. Or maybe because bringing up the older definition seems (to those people) a strong argument that says the money inflation causes the price inflation.

And here I am, just like those guys, grumbling about a revised definition.

Here's a question. If they do all the work for you now, so you don't have to realize for yourself that cost-push inflation slows the economy, how come nobody says "THAT'S WHY GROWTH IS SLOWING!" How come there are a million explanations of slowing growth, and none of them identify cost pressure as the problem?

This whole evolution of the old "cost-push" idea into the "supply side" inflation driven by "supply shocks", this has to have originated with supply-side economists. And apparently it was adopted by the descendants of the post-war Keynesians. Okay.

But how come these days they all say cost-push makes the economy slow, and none of them say WOW THAT MUST BE WHY OUR ECONOMY IS SLOW! or even MAYBE THAT'S WHY...

I dunno. Maybe the reason goes something like this?

They define "inflation" as not just a jiggle in prices, but a "sustained" increase.
They change the name from "cost-push" inflation to "supply side" inflation.
They define supply side inflation as caused by "shocks".
They observe that supply shocks are "temporary".
They conclude that supply shocks do not cause inflation because inflation is "sustained".
Far as I can tell, they never consider the possibility that cost-push might arise from something other than shocks. And
They never consider the possibility that "sustained" cost-push could exist.

Hey, you can define cost-push inflation out of existence, if you want to. But that doesn't make cost pressure go away,

I know some economists talk about "conflict" inflation and "built-in" inflation and "inflation expectations". These are ways to take a temporary inflation and turn it into sustained inflation. Not sure, but I think these discussions come mostly from the descendants of the 1960s Keynesians and from Marxists or "Marxians" (I sure do wish the names of things didn't keep changing) -- and these are the economists that should be most willing to accept the idea of sustained cost-push inflation.

Well, certainly, if a temporary supply shock leads to built-in inflation, then you've got sustained inflation. But the cause of this sustained inflation is not the same as the cause of the temporary inflation that started it. And I don't see that the sustained inflation that results is necessarily cost-push or supply-side inflation. I don't see that, at all.

I dunno. I've not looked into these things enough. But it seems to me that if you are concerned about the cost pressure that underlies cost-push inflation, you're wasting your time when you adopt a story that wanders away from the cost-pressure story just so you can explain "sustained" inflation.

To each his own, I suppose.

Saturday, March 27, 2021

Comparing Households & Nonfinancial Corporate Business: Interest Paid

Graph #1: Interest paid by households, relative to interest paid by NCB

Now that's a spike!

At the 1.0 level, the two measures of interest are equal. At 2.0, household interest paid is twice the level of interest paid by nonfinancial corporate business.

The starting value (in 1946) is 0.94191, or 94 percent. Household interest costs were almost as much as NCB interest costs.

At the peak in 1956 the value is 1.99490, or 199.5 percent: Household interest costs are twice the level of NCB interest costs.

It occurs to me that this initial spike is related to a spike in household borrowing and spending. Can't really tell from this graph. But that spike in spending would likely have had a lot to do with economic recovery and "golden age" following the second World War. At the time, a lot of economists were expecting secular stagnation. That didn't happen.

Again, this isn't the right graph to see it, but I'm also thinking that the 1946-1956 spike in interest cost was at least partly responsible for creating a rising cost of living, and perhaps for helping to create the inflation of 1955-1958 that Samuelson and Solow (1960) could not explain.

Two things to look into, for another day.

And another: How did interest costs manage to fall so fast, between 1965 and 1970? But again this is the wrong graph. Maybe what looks like a big drop in household interest cost was really a big increase in nonfinancial corporate business interest expense.

Another day.

Friday, March 26, 2021

By the time the insurrections start, the end is near

Real GDP relative to Potential GDP (quarterly data):

Like the Second Graph from the 25th, but in Excel and with a Hodrick-Prescott Added

The differences between Real and Potential GDP are small: Generally 4% of Potential or less. Thus the blue line is mostly between 0.96 and 1.04. But this ignores the obvious downtrend which tells us things are getting worse.

Before the mid-1970s the blue line spent a lot of time above the 1.02 level and very little time below the 0.98 level. Thus in the early years the trend lines are high.

Since the mid-1970s, blue has spent very little time above 1.02. And the time spent below 0.98 is longer -- the "V"-shaped lows are wider at the 0.98 level than they are in the early years -- and the lows are frequently lower than in the early years. Thus in the middle and later years, the trend lines are lower.

Since I had the spreadsheet open, I started counting "good" and "bad" economic performance. I used the same measure I used above: two percent or more above Potential is "good" performance; two percent or more below Potential is "bad".

The counts of mid-range performance (within ±2% of Potential) were high in all three time periods, ranging from 48 to 70. It's the data to the left and right on the graph, the low performance and high performance data counts, that really shows what happened.

Looking at "high" performance, on the right, it turns out that 1949-1973 has almost as many quarters of high performance as it has "mid-range" performance. The 1974-1994 period had one single quarter of high performance. The 1995-2019 period had two, and that's it.

The rest of the data is on the left, shown by the "low" performance bars. High numbers for 1974-1994 and 1995-2019, both. A low number for the early years, 1949-1973.

Don't be deceived by the mid-range bars. All three time periods have high counts of mid-range performance. But look what happened with the high and low performance data: For the 1949-1973 period it was mostly high performance. For the other periods, almost everything was low performance. Mid-range and high for 1949-1973; mid-range and low after 1973. That's the difference.

In The Causes of Inflation Frederic S. Mishkin wrote:

... demand-pull inflation will be associated with periods when output is above the natural rate level, while cost-push inflation is associated with periods when output is below the natural rate level. It would then be quite easy to distinguish which type of inflation is occurring-if we knew what the value of the natural rate of unemployment or output is. Unfortunately, the economics profession has not been able to ascertain the value of the natural rate of unemployment or output with a high degree of confidence.

Mishkin says it would be easy to tell whether inflation was cost-push or demand-pull if we could trust the numbers we have for Potential GDP. But we can't trust that data, he says. Maybe so, but that doesn't stop the Fed from relying on Potential GDP when they use the Taylor rule or when they make policy decisions based on the Phillips curve and stuff like that.

Real GDP is in decline relative to Potential GDP, and it looks like the decline has been persistent and deepening since 1949. That doesn't look random to me. Nor does it look like a whole series of estimation errors. I think Potential GDP data is fairly trustworthy. And I think Real GDP persistently below Potential is telling us something we'd rather not know.

Real GDP is in long-term decline relative to Potential GDP. On top of that, if you go back to the first graph in yesterday's post, Potential GDP is also in long-term decline. So GDP is declining relative to something that is in decline, and this "something" just happens to be our best estimate of best-case GDP.

Conclusion: GDP is in a troubling decline. Gradual, yes, but troubling. And GDP is largely below Potential, meaning we should expect inflation to be cost-push inflation. So we have a cost pressure problem that contributes to further decline.

Now let me remind you what I've been writing about lately in my "Terms of the Times" series: cost pressure, which is usually called cost-push inflation because of the effect it has on the price level. But I've also been saying that the problem with cost pressure is not so much the inflation as it is economic decline. Cost pressure creates economic decline. You saw the graphs, right? Something is driving GDP growth down.

Mishkin says cost-push inflation is associated with periods when Real GDP is below Potential. The trend lines say Real GDP has been below Potential since the mid-70s. Mishkin might not want to bet on it, but maybe all the inflation we had for the last 45 years was cost-push inflation and it has been slowing the economy for 45 years. This is the warning that emerges from Mishkin's observation.

As I would say it, cost pressure creates economic decline unless the pressure is fully relieved by inflation, probably on purpose, by policy. As economists and their diagrams say it, cost pressure creates economic decline anyway, whether or not the pressure is relieved by inflation.

The only people who don't say cost pressure creates economic decline are the people who get fired-up when they hear the syllables "cost-push" and immediately get loud and vocal on the problem of inflation. But that doesn't mean there's no economic decline. It means they overlook the decline that cost-push creates because they got fired-up before they thought the problem through to the end. And, unfortunately, the harder you fight inflation the greater the economic decline you get from the cost pressure, because the pressure isn't getting relieved by inflation.

I'll say this one more time and then I'm gonna go take a nap. If cost pressure exists, GDP growth is in decline for sure. And if you restrain the inflation at all, and maybe even if you don't, the decline deepens.

The solution, however, is *NOT* to accept inflation as the "least worst" option.

The solution is to figure out the source of the cost pressure -- HINT: the excessive cost of excessive finance -- and reduce that cost. Now you might think, as I think, that the Federal Reserve tried to reduce the cost of finance in 2008 by reducing interest rates to absolute zero. But the low rates only had immediate impact on *NEW* borrowing, and there was plenty of old, existing debt, plenty of it, enough that finance was still excessively costly. And it still is.

The Fed still hasn't done anything to relieve that problem. Nor has Congress. So the cost pressure remains. Economic decline continues. And we still have inflation.

Thursday, March 25, 2021

GDP: Going downhill, even relative to going downhill

Two graphs from Terms of the Times (2c)

If you take Real Potential GDP from FRED, show it as "percent change from year ago", cut it off at 2019 to eliminate the covid year and the prediction out to 2031, bring it into Excel, and put a linear trend line on it, this is what you get:

US Potential GDP Growth Rate:

Source: FRED data, Excel Graph & Trend

You say to yourself: Potential GDP growth -- best case GPD growth -- sure is going downhill. The trend line shows a drop from something over 4% annual growth in 1950, to something over 2% now. And the trend line is based on data that ends in 2007, to eliminate the downer effects of the "Great Recession" and all that came after it.

Then you start to wonder how GDP compares to this "best case" scenario.

I went back to FRED, got Real GDP and Real Potential GDP, both in billions, and made a graph of the ratio, Real GDP relative to Potential. Brought this data into Excel and duplicated the graph. I added a linear trend line (based on data thru 2019 this time), made both the plotted line and the trend line red, and erased the background and the axes to make a useful overlay.

I brought the FRED graph into Excel, put the overlay on top of it, and stretched and moved the overlay until my red plotted line lined up with FRED's plotted line. I love doing stuff like that when I should be working. Anyway, here is the result:

US Real GDP relative to Potential:

Source: FRED with Excel overlay in red

My red plotted line matches FRED's blue plotted line, within a pixel or so. That's how I know I have the trend line in the right place.

Notice that my plotted red line stops at the high point on the right, just before the covid-inspired collapse that FRED's line shows. My trend line is not influenced by the covid collapse.

The trend line is above 1.00 (Real GDP more than Potential) in 1950, and below 1.00 (Real GDP less than potential) in 2019. Real GDP used to be above potential, and now it is below. And remember what the first graph shows: In 1950, potential GDP growth was great, and now it sucks.

Tuesday, March 23, 2021

Terms of the Times (3a): Before the Great Inflation

The Great Inflation from 1965 to 1984 is the climactic monetary event of the last part of the 20th century.
- Allan H. Meltzer

Truman

1952 steel strike:

The 1952 steel strike was a strike by the United Steelworkers of America (USWA) against U.S. Steel (USS) and nine other steelmakers. The strike was scheduled to begin on April 9, 1952, but US President Harry Truman nationalized the American steel industry hours before the workers walked out. The steel companies sued to regain control of their facilities. On June 2, 1952, in a landmark decision, the US Supreme Court ruled in Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579 (1952), that the President lacked the authority to seize the steel mills.
The Steelworkers struck to win a wage increase. The strike lasted 53 days and ended on July 24, 1952 on essentially the same terms that the union had proposed four months earlier.

Eisenhower

Wikipedia:

The presidency of Dwight D. Eisenhower began at noon EST on January 20, 1953, with his inauguration as the 34th president of the United States, and ended on January 20, 1961...
There were three recessions during Eisenhower's administration—July 1953 through May 1954, August 1957 through April 1958, and April 1960 through February 1961, caused by the Federal Reserve clamping down too tight on the money supply in an effort to wring out lingering wartime inflation.

Three brief notes on inflation, from The Eisenhower Encyclopedia,

Ike saw Senator Taft give a speech in the late 1940s asking Americans to eat less to lower food prices. Liberals criticized the speech, but Ike agreed with Taft “one-hundred percent.”
Ike sawed off pieces of wood at rallies during the 1952 election to show the effect inflation had on money. (Baier, Three Days in January)
Ike ended the Korean War in July 1953. The war’s end caused the government to decrease its armament purchases. Unemployment rose from 2.6% to 6.1% by September 1954. Arthur Burns, an economic advisor, said Ike should cut taxes and expand public works programs to reverse the economic downturn. Secretary Humphrey objected. Ike sided with Burns and pushed for a $7 billion tax cut. He also signed legislation extending unemployment benefits for four million workers. This deficit spending ended the small recession in less than a year. (Gellman, The President and the Apprentice)

and two on steel:

Ike criticized Truman’s seizure of the steel mills during the 1952 Steel strike. (Ambrose, Eisenhower: Soldier and President)
Ike initially wanted to stay out of the 1959 Steel Strike, saying, “These people must solve their own problems.” He finally evoked the Taft-Hartley Act to force the workers to return to their jobs. (Gellman, The President and the Apprentice)

Steel strike of 1959:

The steel strike of 1959 was a 116-day labor union strike (July 15 – November 7, 1959) by members of the United Steelworkers of America (USWA) that idled the steel industry throughout the United States. The strike occurred over management's demand that the union give up a contract clause which limited management's ability to change the number of workers assigned to a task or to introduce new work rules or machinery which would result in reduced hours or numbers of employees. The strike's effects persuaded President Dwight D. Eisenhower to invoke the back-to-work provisions of the Taft-Hartley Act. The union sued to have the Act declared unconstitutional, but the Supreme Court upheld the law.

The union eventually retained the contract clause and won minimal wage increases.

Kennedy

Background from The Los Angeles Times:

Kennedy used a tactic his economic advisor, Walter W. Heller, called “jawboning” to urge business and labor to behave responsibly. In Kennedy’s time, that meant pay increases shouldn’t exceed productivity gains--and price hikes shouldn’t exceed increases in wages.
As Heller explained, “jawboning” used “the power of public opinion and presidential persuasion"--the bully pulpit--and Kennedy did it with words and deeds.
In his [January 11] 1962 State of the Union, Kennedy declared, “Our first line of defense against inflation is the good sense and public spirit of business and labor--keeping their total increase in wages and profits in line with productivity. There is no statistical test to guide each company and each union. But I strongly urge them--for their country’s interest and their own--to apply the test of the public interest to these transactions.”
Soon, Kennedy’s call was questioned. U.S. Steel Corp. substantially increased its prices ...

Introduction :

Kennedy, since the Inaugural Address and beyond, had been asking Americans and American business to exercise restraint to enable the United States to meet it's obligations and strengthen it's economy. The Steel Workers of America agreed to hold off their demands for higher wages if the Steel Companies, on their part, would not raise the price of steel. The workers kept their end of the bargain, the companies did not, ordering a price increase after a strike was averted. This dishonest and irresponsible act angered Kennedy, as is made clear in the [ April 11 ] speech.

Background from People's World:

The Democrat, after just a year in office, was concerned about potentially rising inflation. His administration set an informal but well-publicized target of having wage increases and price hikes match productivity increases. Meanwhile, Steelworkers’ bargaining over a contract with the nation’s steel companies was getting nowhere.

The administration intervened. It didn’t want a rerun of the 4-month steel strike of 1959 under GOP President Eisenhower. Labor Secretary Arthur Goldberg, a longtime union counsel, mediated the talks. The two sides reached agreement on March 31.

The pact, with ten of the nation’s 11 steel companies, called for an increase in fringe benefits worth 10 cents an hour in 1962, but no wage hikes that year. Then-AFL-CIO President George Meany said that in the pact, the union “settled on a wage increase figure somewhat less than the Steelworkers thought they would get.”

Kennedy praised the contract as “obviously non-inflationary” and said both the USW and the steel firms showed “industrial statesmanship of the highest order.” The agreement also implicitly said the companies would not raise prices, as that would be inflationary.

But on April 10, Roger Blough, CEO of U.S. Steel, the largest of the firms, with 25% of the market, met Kennedy in the Oval Office and told him the company was immediately raising prices by $6 a ton – and that other steel companies would follow. Six did. The 3.5% hike enraged the president. What he said in public was biting – but he was even more caustic in private.

In an April 11, 1962 press conference, Kennedy called the price hikes “a wholly unjustifiable and irresponsible defiance of the public interest.” He criticized “a tiny handful of steel executives whose pursuit of power and profit exceeds their sense of public responsibility.” The execs had “utter contempt” for the U.S., Kennedy said. ...

News Conference 30, April 11, 1962:

THE PRESIDENT: Good afternoon. I have several announcements to make.

Simultaneous and identical actions of United States Steel and other leading steel corporations, increasing steel prices by some 6 dollars a ton, constitute a wholly unjustifiable and irresponsible defiance of the public interest...
The facts of the matter are that there is no justification for an increase in the steel prices. The recent settlement between the industry and the union, which does not even take place until July 1st, was widely acknowledged to be non-inflationary, and the whole purpose and effect of this Administration's role, which both parties understood, was to achieve an agreement which would make unnecessary any increase in prices.

Steel output per man is rising so fast that labor costs per ton of steel can actually be expected to decline in the next twelve months. And in fact, the Acting Commissioner of the Bureau of Labor Statistics informed me this morning that, and I quote: "Employment costs per unit of steel output in 1961 were essentially the same as they were in 1958. " ...

Some time ago I asked each American to consider what he would do for his country and I asked the steel companies. In the last 24 hours we had their answer.

Seems to me there was a lot of concern about inflation in those early years, before the period called "the Great Inflation." Much of that concern was focused on cost-push. In Part 1 of this series we saw the great focus on "cost-push" between the early 1950s and the early 1970s, and since the early 1970s its decline, with the rise of focus on "supply shocks". In Part 2 we observed the evolution of terminology, in new concepts and changing definitions arising with this change in focus.

In Part 3 we have already looked at the situation before the persistent and repeated rise of inflation that began in the mid-1960s. My further plan is to look into the differences between cost-push and demand-pull inflation, and the changes in economic thought on the subject -- in particular, the focus of economic thought on "temporary" versus "sustained" cost-push.

And I want to explore the once and future concept of sustained cost-push inflation.

Saturday, March 20, 2021

Terms of the Times (2c): Long-term economic decline

The whole long-term problem of declining economic growth could be due to cost pressure that we overlook because we took the "cost-push" concept and flushed it down the toilet.
- Arthurian

US Real GDP Growth Rate: