Samuel Milner:
Unwilling to wait decades for the political decline of New Deal liberalism, the core industries of post–World War II America repurposed collective bargaining as a means to reduce the costs of organized labor.
from the Abstract of "The Problem of Productivity: Inflation and Collective Bargaining after World War II" at ResearchGate.
Profit as percent of GVA for Financial and Nonfinancial Corporate Business:
 |
| Graph #1 at FRED |
GVA is like "GDP by sector".
In the 1950s, cost-push inflation was sometimes attributed to low productivity.
In The Wage-Push Inflation Thesis, 1950-1957 Lowell E. Gallaway (1958) wrote:
Simply stated, the wage-push inflation thesis holds that money wage rates have increased more rapidly than physical productivity and, consequently, have exerted upward pressure on costs and prices.
In Time magazine, 15 July 1957, we read:
General Motors set up the first automatic "annual improvement factor" increase in wage contracts in 1950
...
The upward trend of wages was due not only to the scarcity of labor but also to the spread throughout industry of the G.M. idea of automatic increases. This ran counter to traditional business practice because it placed emphasis on a long-term rise in productivity and kept wages rising even when productivity temporarily stopped rising (as it did last year) or business temporarily slackened (as in steel and autos this year).
Note that they knew already in 1957 that productivity "stopped rising" in 1956.
Note also that a decline in productivity will increase labor cost to business, just as wage hikes do. It would be an easy mistake to blame wages, if the problem was low or falling productivity. But you couldn't fix that problem by holding wages down, not in the 1950s, and not since the 1980s.
In the Kennedy years, productivity was sharply in focus. In 1996 the L.A. Times recalled that President 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.
And again:
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.
Networker writes:
Kennedy, since the Inaugural Address and beyond, had been asking Americans and American business to exercise restraint to enable the United States to meet its obligations and strengthen its 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 following speech.
Then, from Kennedy's April 11 1962 speech:
... there is no justification for an increase in 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 noninflationary, 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.
In his very next sentences, again, productivity was central:
Steel output per man is rising so fast that labor costs per ton of steel can actually be expected to decline in the next 12 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."
It's a good speech. Kennedy was angry. He called for "a higher sense of business responsibility for the welfare of their country".
It's not like Kennedy didn't know about productivity and cost. He knew. He was focused on it. And he tried to keep prices from rising.
It didn't work.The above is taken from mine of 21 April 2021. In that post my focus was the cost of interest and its impact on wage hikes:
Debt was accumulating. The cost of finance was rising. Surely, by the time interest on household debt was taking more than 5% of employee compensation, people considered it part of the cost of living. Surely, rises in our paychecks had to cover the rises in our interest payments.
Annual household interest costs were above 5% of employee compensation by 1960. And with household interest cost growing faster than GDP from 1946 to 1986, wage hikes that covered the cost of interest would surely have looked like inflationary increases. Looked inflationary, and were inflationary.
Wage earners were trying to cover their costs. It was cost-push inflation, due to the rising cost of finance. It looked like inflationary wage increases for a reason, yes. But finance didn't get the blame. Wages did.
I should add that as long as we continue to ignore the cost of finance, we will never solve our economic troubles.
In the present post my focus is on the cost of finance for Nonfinancial Corporate Business (NCB), our creators of output.
Nonfinancial corporate business is NCB, not NFC. NFC is an NFL football thing.
The problem was not simply that the steel companies ignored Kennedy's jawboning in 1962. The problem was rising cost -- specifically, the rising cost of interest. In the mid-1950s, the interest paid annually by nonfinancial corporate business was less than two percent of the value of output they generated (as measured by Gross Value Added). In 1962 it was almost three percent.
 |
| Graph #1: Interest Cost as a Percent of GVA for Nonfinancial Corporate Business |
Interest cost is even higher when we compare it to profits. Annual Interest paid as a percent of NCB profits before tax amounted to 9.5% in 1955. By 1962 the interest cost had more than doubled, to 19.2% of before-tax profits:
.png) |
| Graph #2: NCB Interest Cost as a Percent of NCB Profits Before Tax |
NCB interest cost as a percent of after-tax profits increased from 17.5% in 1955 to 34.3% in 1962.
Businesses keep track of their costs. When U.S. Steel increased
prices in 1962, angering Kennedy, they knew their interest costs were
rising. Even if wage hikes were held down to match productivity gains,
U.S. Steel needed a price increase to cover their rising interest
costs.
But the negotiations, apparently, were all about productivity and the cost of labor.
The 1960 paper by Paul Samuelson and Robert Solow and the issue it addressed were the topic of James Forder's 2010 paper Economists on Samuelson and Solow on the Phillips Curve:
The question they were addressing was that of the explanation of the inflation of the 1950s – particularly the period 1955-57 – and the implications it had for macroeconomics. Mild though that was later to seem, this 'creeping inflation' as it was called was, at the time, a source of much anxiety.
This graph shows the years 1948 to 1978. The blue line shows inflation using the "urban" data that seems to serve as a "nationwide" measure. The red line shows the interest rate that the Federal Reserve raised or lowered to control inflation:
 |
| Graph #1: Blue is Inflation, shown as "percent change from year ago" of the CPI. Red is the "Federal Funds" interest rate for which the Federal Reserve set targets. |
After the end of the second World War, it took a few years to get inflation stabilized. But inflation (blue) did quiet down to below 1% by the end of 1952. The Federal Funds rate (red) doesn't appear on the graph until July 1954, but we can reasonably assume interest rates rose enough to reduce early-1950s inflation and create a recession in mid-1953: My proxy for FedFunds rises from the end of the 1949 recession to the start of the 1953-54 recession.
The red line shows the FedFunds rate following the same pattern after the 1953-54 recession: persistent increase from the end of one recession to the beginning of the next; rates only fall as the ensuing recession slows the economy and starts to bring inflation down.
The graph shows the Federal Funds interest rate rising almost immediately as the 1953-54 recession ends. The graph shows that the interest rate kept going up even as prices fell for a whole year: The blue line (inflation) went below zero in September 1954 and didn't surface again until September 1955. As Lorraine Lee rightly says, "counterinflationary policy is basically severe austerity."
The increase in the blue line between 1955 and the 1957-58 recession was the inflation that Samuelson and Solow were writing about in 1960, the "creeping inflation".
And again, almost immediately after the 1957-58 recession, the Fed started raising the interest rate. The FedFunds rate hit bottom in July 1958 and started going up. Inflation continued falling until April 1959, and only rose after that.
This brings us to the 1960 recession.
The 1960 recession began in April 1960 and ended in February 1961. CQ Researcher provides Wage Policy in Recovery, a remarkable article by H. B. Shaffer dated June 21, 1961. The opening paragraph:
Satisfaction over multiplying signs that the country is fast leaving the recession behind is currently clouded by fears that too vigorous a recovery will set in motion a new inflationary surge. The risks in the situation have impelled the Kennedy administration to make special efforts to prevail on labor and management to keep wage-price levels steady as business activity expands.
Shaffer's words emphasize the
bipolar approach to inflation management that is visible in the
historical data. March, April, May, June: It took four months to go
from "Things are great!" to "Oh, no! Things are too good!" -- and
Shaffer's article was written even before June was out. There was "much
anxiety" about inflation, as James Forder said.
Fifty-nine years.
I was in algebra class when they announced it.
Some things, you don't forget.
My habit is to use the inflation measure FRED calls CPIAUCSL because I memorized the name of it and because it was FRED's most popular inflation measure when I was looking for a name to memorize. (It still is their most popular inflation measure.) But that inflation measure gives the CPI "for all urban consumers".
I figure most consumers are urban consumers. I used the urban measure for a long time without worrying that it might be different from the national measure. But now I have decided to take a look at it, and that is our adventure today.
On the graph I show the first
dataset as a wide, bright blue line and the second one narrow and bright
red so I can see how the one line matches the other. But it is easier
to see if the image is bigger. To see a bigger version of the graph
below, click on the graph image. To access the graph at FRED, click the
word "Graph" in the caption.
%20%5BFRED%20WAUB%5D.png) |
| Graph #1 |
By eye, red and blue differ a little in 1954, 1962, 1967, and 1970. But the two lines are similar enough that I figure the "urban" measure is a good match to the "national" measure. I should say, though, that I don't really know if the blue is a national measure. It sounds national from the dataset title "Consumer Price Index in the United States" but if it is a national measure, I don't really know.
The values used for the graph are annual.
The
red line starts in 1948 and ends with the most recent annual data to
date, 2021. The blue starts in 1951 (I don't know why) and ends in 2012;
this series was "discontinued". I like it because the red line sticks
out at both ends. I think that makes the graph easier to read.
Not that it matters, but FRED's name for the blue dataset is USACPIBLS. I didn't memorize this one, but it is easy enough to parse: For the USA, it is a measure of CPI from the BLS. Sometimes the names are easy like that.
If you remember the 1970s inflation, you know "CPI" is "Consumer Price Index"; it was on the news all the time. With this current inflation I don't know that they emphasize "CPI" so much.
And BLS is the Bureau of Labor Something.
I'm not happy that
I don't know if the blue line is supposed to represent "national" data.
So I found another dataset that sounds like it might be national:
"Inflation, consumer prices for the United States". I don't know if this one
represents national data, either, but I figure two weak links are better
than one because I'm using them in parallel, not in series: I'm using
two chains to carry this analysis, each with one weak link.
FRED's name for this one is FPCPITOTLZGUSA. I didn't even try to parse it.
For
this graph I used the one above, at FRED, and just swapped datasets.
The colors and line widths worked themselves out automatically.
My second chain:
%20%5BFRED%20WAVo%5D.png) |
| Graph #2 |
This
time the blue line starts in 1960 and ends with the red one in 2021.
And here, blue matches red so well it makes me wonder if they just used
the red data and cut off the first few years to make the new dataset look different.
So I still don't know about urban vs national. But I'm going to keep using the "for all urban consumers" measure of inflation, and I'm gonna figure that it works as a measure of inflation nationwide.
 |
| Graph #1: Monetary Interest Paid by Households as a Percent of DPI, 1946-2021 |
Arthurian theory:
Interest cost to households rose from 1% of DPI in
1946 to 2% by 1951. Those costs rose to 3% by 1956, 4% by 1963, and 5% by 1977. That's fact, not theory.
Usually, a normal yearly pay raise is around 3%, they say. But the source graphs behind that claim only go back to 1998. Lacking better data, let's suppose the 3% annual pay increase was typical going all the way back to 1946.
In 1956 households were paying 3% of their disposable income just to cover their interest costs. In other words, the pay raise that year barely covered the cost of interest. In later years, the annual interest cost kept rising -- reaching 8% by 1986 -- but the old reliable pay raise kept plugging along at 3% annual.
Maybe we should allow for
inflation, which started climbing in the mid-60s. Raises would have
increased; that's just part of the inflation. Does this affect this analysis? No, because the pay raises are reflected in the "disposable income" numbers, and the interest paid is shown as a percent of disposable income. Inflation did increase our income, yes. But even so, "monetary interest paid" increased faster than income in those years. That's what the graph shows.
Anyway, the inflation mostly
impacts the graph (and the economy) after 1965 or so, and by then the annual
interest cost amounted to more than four and a quarter percent
of income and was still climbing. Even if pay raises amounted to more than 3% annual, the interest paid by households each year increased faster than after-tax income all through the 1950s and '60s and '70s, as the graph shows.
Reviewing what we know, annual interest costs after 1956 were higher than annual pay raises. Interest costs made gains on income every year. So the cost of interest, all by itself, could have been enough to get the Great Inflation going in the 1960s, as people struggled (many even going on strike) to keep their income from falling behind their costs.
Thus the rising cost of finance created the Great Inflation. That's Arthurian theory. Everyone else blames oil or wages.
This same cost problem, the cost of finance, would have affected the
business world. One price increase that comes to mind is the 1962
increase by U.S. Steel. President Kennedy was not happy about that one.
//
My goal here, as always, is to show that the rising cost of finance is the one factor we can reasonably hold responsible for the decline of the US economy in the decades since the second World War.
