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rising cost that can turn expansion into recession couple quotes from arthur burns and inflation pdf by robert l hetzel backstory burns was the protégé of the american institutionalist and founder of the nber wesley clair mitchell in 1946 they published a comprehensive study of the business cycle measuring business cycles both achieved worldwide recognition as preeminent scholars of the business cycle hetzel on burns s view of the business cycle during expansion phases firms will find their profit margins rising handsomely and people have a feeling of confidence about the economic future a mood that may gradually change from optimism to exuberance the new spirit of enterprise fosters more new projects however rising costs erode profit margins and eventually turn expansion into contraction that sounded right to me at first rising costs eventually turn expansion into contraction but how can it happen doesn t a rising tide lift all boats unless we have something like an oil shock or as in more recent times a package of wrong headed policies that create imbalances in the economy unless we have something like that to create imbalances doesn t the rising tide lift all boats suppose the rising cost is wages don t rising wages boost aggregate demand and doesn t rising demand boost profit if the rising cost of wages leads to rising profit doesn t the problem solve itself granted we could get inflation this way but that s not the question the question is whether rising cost turns expansion into contraction certainly the situation is different if as in 1973 the price of oil increases extraordinarily that shock drew money out of the domestic economy and within the domestic economy it created an imbalance favoring the oil industry the oil shock created a cost imbalance in the economy the imbalance caused the recession the oil shock is not a good example burns offers an explanation of the typical cause of the typical business cycle recession what imbalance could cause that surely not every recession is generated by a supply shock the equivalent of the 1973 oil shock few are i m looking for an example of rising cost that fails to boost demand and fails to boost profit and therefore results in recession i m looking for an example where imbalance is created in a normal economy in a normal business cycle what are the rising costs that do not lead to rising profit at chron they offer the bleeding obvious production costs are expenses such as materials and labor that your company incurs in the course of producing the product that you sell to consumers in general the lower your production cost the higher your profit or the amount you have left over after you subtract your expenses from your sales revenue other things equal any rising cost would reduce profit sure the same way writing a check would reduce the balance in your checking account but that s a micro example and one so extraordinarily micro that it considers only the one check and its immediate effect on the balance in your account similarly the chron quote considers only the one situation and considers nothing beyond the one consequence that immediately follows these are two examples of what henry hazlitt called the fallacy of overlooking secondary consequences henry ford thought that if he paid his workers enough they d buy cars from him ford was not one to overlook secondary consequences in general as i see it the lower our production costs the less money our customers have that they can use to purchase our products this is just the opposite of burns s view that as a rule rising costs bring on recession that reminds me jeez from ten years ago sometimes my memory is surprisingly good my dad gave me an advertisement he d received a magazine size flyer from investment rarities incorporated in the flyer was an interview with dr kurt richebacher richebacher s first answer is the reason i kept dad s flyer q give us the cause of the profits problem a corporate cost cutting for one the widespread measures that individual firms take to improve their own profits have in the aggregate the opposite effect on the profits of other firms business spending is the key source of business revenues not consumer spending a retrenchment in business spending cuts business revenues higher profits and higher prosperity cannot possibly come out of general cost cutting magnificent again richebacher says business spending is the key source of business revenues a retrenchment in business spending cuts business revenues higher profits and higher prosperity cannot possibly come out of general cost cutting richebacher is saying what i said i m saying what he said in general the lower our production costs the less money our customers will have that they can use to purchase our products higher profits and higher prosperity cannot possibly come out of general cost cutting this is the opposite of burns s view that rising costs bring on recession thanks dad rising costs hetzel s burns says turn expansion into contraction but kurt richebacher says general cost cutting cannot possibly lead to higher profits and higher prosperity i m with richebacher and henry ford and by god henry hazlitt and this is the first time i ever said that so the question remains what causes recessions curses it still makes sense what burns said rising costs cause recession but then don t we also have rising costs during the expansion you can t expand if you don t spend more so it s not a sure thing that rising costs lead to recession is there a way we might have rising costs that don t lead to rising profit well yes you have the oil thing where everyone saw cost increases but only oil producers saw profit increases in general it is not likely that everyone s profit will increase more than their costs some businesses some industries will do better than others some of the unlucky will go out of business some of the others will pick up the slack small imbalances like that can work themselves out without causing a recession okay but we re talking about recessions lots of recessions one or two or three of them in every decade and we re talking about some unidentified cost we are trying to find a cost not offset by rising profit a cost that typically leads to recession and it would have to be something like the oil shock where the one industry benefits at the expense of all the rest i know i know what it is it s finance in the wealth of nations book 1 chapter 6 of the component parts of the price of commodities adam smith wrote the interest of money is always a derivative revenue which if it is not paid from the profit which is made by the use of the money must be paid from some other source of revenue all taxes and all the revenue which is founded upon them all salaries pensions and annuities of every kind are ultimately derived from some one or other of those three original sources of revenue and are paid either immediately or mediately from the wages of labour the profits of stock or the rent of land when those three different sorts of revenue belong to different persons they are readily distinguished but when they belong to the same they are sometimes confounded with one another at least in common language that confusion still exists as timothy taylor points out the calculation of labor share involve adding compensation received by employees to proprietor income which is the labor income received by those who run their own business however proprietor income is conceptually tough to measure because someone who owns their own business can receive both labor income as if the person was an employee of their own business and capital income as the owner of the business in the real world these two types of payments are jumbled together the difficulty distinguishing between labor income and capital income is exactly the confusion described by adam smith another example one that gets less attention arises in the confusion of interest with profit or rent with profit bezemer and hudson would say it is confusion of the financial economy with the real economy now we re talkin in the real sector you work for your money in the financial sector your money works for you or look at it this way real sector business makes and services things financial sector business makes and services money when real profit and financial profit are confused together the difference between profit and interest is blurred the difference between productive business and financial business is blurred this confusion allows imbalances to develop in our economy before the crisis the growth industry was finance the crisis when it came was financial crisis in our economy the confusion is so deep that productive business is called non financial most of us have real sector jobs even people who work in finance are in this group they work for their money too and most of us have or want to have money in the bank so we re in both worlds real and financial or at least we want to be the whole goal of having financial income as with any income is to increase it so a big portion of the income that goes into the financial sector stays in the financial sector little comes out this is what made finance a growth industry it also creates imbalance when you have money going into finance and not coming out it is very much like when you have money going to the oil producing nations and not coming out oh it comes out yes but it s not drinkin money it s on a leash the oil producers money comes out to buy up our assets the money that comes out of finance most of it comes out in the form of loans loans which bring interest back with them to the financial sector as the debt is repaid this assures that there s more money in finance when a loan is paid off than there was before the loan was taken out unlike rising wages growing financial costs do little to increase aggregate demand except in the financial sector and the rising demand it does create does little to boost profit except in the financial sector one industry benefits at the expense of all the rest imbalances arise you want to see a rising cost that can turn an economic expansion into recession finance is that cost at december 23 2019 no comments email this blogthis share to x share to facebook share to pinterest saturday december 21 2019 i don t remember looking at this before i got rgdp growth rate data from fred and put a hodrick prescott on it then i put a linear trend on it two linear trend lines actually one based on start of data thru 1980 the other based on the post 1980 period both linear trend lines run from start to finish on the graph but the lower one is based on the data from 1947 to 1980 the upper one the dashed black line that starts at or above the 5 level is based on data that starts in 1981 and runs to 2019 the dashed line is higher at the start but this doesn t mean growth was better under post 1980 policies it means growth was going downhill faster under the post 1980 policies than under the pre 1980 policies what i find interesting on this graph two points growth was slowing in the early period almost as much as it was slowing in the latter period both trend lines end up in the same place same result either way i won t dwell on these points but you might want to think about them at december 21 2019 1 comment email this blogthis share to x share to facebook share to pinterest thursday december 19 2019 the art of deduction i can get individual income tax filing total deductions from fred i can get it broken down as individual income tax filing standard deductions and individual income tax filing itemized deductions i can even get it broken down further showing individual income tax filing statutory adjustments student loan interest deduction individual income tax filing itemized deductions charitable contributions individual income tax filing itemized deductions home mortgage interest paid and such but that s not what i want i want corporate deductions specifically i want the deduction for corporate compensation of employees the data must be available because most payments you make to employees and employee benefits are deductible business expenses to your company i want to see corporate compensation of employees including wages salaries commissions and bonuses and retirement plans health insurance life insurance disability insurance vacation employee stock ownership plans etc as a percent of total corporate deductions i want to see if employee compensation was rising as a share of total corporate costs or of deductible costs at least during the time of the great inflation i want to know what was happening in the 1960s and 70s when inflation was called wage push anyway here s what i get from fred they all start out the same corporate profits total receipts less total deductions irs corporate profits total receipts less total deductions irs bad debt expense corporate profits total receipts less total deductions irs interest payments of regulated investment companies corporate profits total receipts less total deductions irs income of organizations not filing corporation income tax returns federal reserve banks corporate profits total receipts less total deductions irs income of organizations not filing corporation income tax returns federally sponsored credit agencies corporate profits total receipts less total deductions irs adjustment to depreciate expenditures for mining exploration shafts and wells corporate profits total receipts less total deductions irs state and local taxes on corporate income corporate profits total receipts less total deductions irs posttabulation amendments and revisions corporate profits total receipts less total deductions irs disaster adjustments net corporate profits total receipts less total deductions irs income of organizations not filing corporation income tax returns corporate profits total receipts less total deductions irs depletion on domestic minerals corporate profits total receipts less total deductions irs adjustment for misreporting on income tax returns corporate profits total receipts less total deductions irs income of organizations not filing corporation income tax returns other all of them subtract the deductions none of them tell me what the numbers are that they are subtracting and none of the titles say compensation of employees not useful i did manage to find corporate compensation of employees at fred but for total deductions i ll have to go fishing at december 19 2019 no comments email this blogthis share to x share to facebook share to pinterest tuesday december 17 2019 problem solved sort of i solved the problem of not being able to find a few quarter inch nuts for a little project i m doing by at last finding the nuts i was ecstatic but only for a moment then i realized i didn t solve the problem by becoming better organized it s like solving the economic problem by raising somebody else s taxes or by having the government hand out money like we all won the lottery or...