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Text of the page (random words):
ntinuing cost problem saturday january 25 2020 concern about declining growth turns half a thought into a whole theory something i want you to keep in mind oh loyal reader assuming you have one and assuming i have one everybody else on the friggin planet when they mention cost push they are talking about inflation when i mention cost push i m talking about a cost problem that pushes prices up or economic growth down or both at january 25 2020 no comments email this blogthis share to x share to facebook share to pinterest labels the continuing cost problem sunday january 19 2020 the continuing cost problem short version inflation has been a receding problem since the early 1980s our problems now are inequality stagnant income slow growth and more but not inflation so why am i writing about inflation first of all it s not inflation i m writing about but cost push inflation more to the point my focus is not on cost push inflation but on the cost push problem the problem of continuing cost growth a problem that can give rise to either inflation or slow growth it gave us worsening inflation in the 1950s and 60s and 70s since the 1980s it has given us slowing growth that s what i m writing about the growing cost of finance is the source of our continuing cost problem the consequences of financial growth are non linear they vary the growth of finance in the 1950s and early 60s helped our economy more than it hurt in the years since the growth of finance hurt our economy more than it helped unfortunately the thinking of policymakers is mostly linear they learned in the 1950s and early 60s that using credit was good for growth they adopted the principle that using credit is good for growth and have applied that principle ever since when non linearity turned against them in the 1960s their policies started to become less effective but instead of questioning their guiding principle credit use is always good for growth the solution they adopted was to keep strengthening the policies that promote credit use that solution is the source of our troubles at january 19 2020 1 comment email this blogthis share to x share to facebook share to pinterest labels the continuing cost problem friday january 3 2020 the continuing cost problem inflation it seems cannot happen without an increase in the quantity of money or in credit use or velocity nonetheless there may be cost push pressures that will lead to reduced economic growth unless the central bank accommodates the cost by increasing the quantity of money to generate some inflation or unless the cost issue is otherwise resolved cost push pressure will lead to slower growth temporarily perhaps causing a recession unless the fed accommodates by increasing the quantity of money to offset the increased cost perhaps causing inflation could there be cost pressure that creates not recession but a continuing trend of decline if as i think economic growth has been slowing since the 1960s is there an identifiable cost pressure that could have caused this long term decline the price system usually works out cost changes automatically so to speak a one time cost shock even a big one like oil will eventually find resolution as a change in relative prices so how could there be a cost pressure that creates a long term trend of decline it would have to be a long term continuing cost pressure one that even if resolved today returns tomorrow if resolved by monetary accommodation we would see a long term continuing inflation as we saw in the 1970s if resolved by volker like resistance to accommodation it would lead to recession but after the recession inflation would persist as we saw in the 1980s unless the cost problem was discovered and eliminated or if resolved by a compromise between accommodation and resistance to accommodation we would see a compromised economy with both continuing low level inflation and a continuing gradual decline in economic growth something quite like our own economy of the past several decades could there be continuing cost pressure like that in our economy what would be its features it would have to be a massive cost massive enough to influence our massive economy it would be a slow growing cost not a sudden shock like the oil crisis it is likely to be a cost we don t see as a problem continued cost growth that doesn t much concern us since we don t recognize it as the underlying cause of our economic troubles could there be such cost pressure in our economy the greatest trick the devil ever pulled we don t talk much about cost push inflation these days today s catchphrase is supply shocks here scott sumner there s supply side inflation which is created by shocks like sudden increases in oil prices and then demand side inflation caused by overspending in the economy it s really demand side inflation that the fed is concerned about there s not much they can do about supply side inflation that s a little too tidy to suit me it certainly seems right but i don t trust it i can t help thinking it s too simple i think sumner simplifies the story by leaving things out things like cost push inflation some people say there s no such thing as cost push inflation sumner again quoting caroline baum this is one of those myths that never dies cost push inflation mike shedlock quoting hb there actually is no such thing as cost push inflation economy wide a rise in general prices is only possible if the money supply increases dallas s batten from 1981 in inflation the cost push myth pdf the ultimate source of inflation is persistent excessive growth in aggregate demand resulting from persistent excessive growth in the supply of money you know i want to agree with these views but they are too rigid inflation they hold can never be cost push it is always demand pull funny it strikes me that dallas batten left out the word always the ultimate source of inflation is always persistent excessive growth in aggregate demand now it reminds me of milton friedman who emphasized the always the recognition that substantial inflation is always and everywhere a monetary phenomenon is only the beginning of an understanding of the cause and cure of inflation i like this better friedman uses the word substantial in a way that leaves a door open inflation that is not substantial might be due to something other than monetary factors seems right to me the economy is complex enough that we should want to allow for that possibility and friedman allows for it i like the statement too because the word monetary is non specific enough to include not only the supply of money but also the expansion of credit use and changes in velocity or whatever it is that happens when the fed changes the interest rate as for myself i accept the view that if prices are increasing it is because spending is increasing and i accept that spending cannot increase unless monetary factors allow it to happen i don t see any way around this even if something other than money is driving the process i like what google finds at investopedia in short cost push inflation is driven by supply costs while demand pull inflation is driven by consumer demand the two types of inflation are driven by different things this leaves plenty of room for the view that inflation can only happen if monetary factors allow it to happen if we begin with too much money in the hands of consumers consumer demand leads directly to demand pull inflation if we begin with rising supply costs putting upward pressure on prices the central bank may have to choose between recession and accommodation if they try to minimize or avoid recession the accommodation can give rise to cost push inflation there is plenty of room to agree with hard liners who insist that prices can t increase unless money and spending increase yet still hold that cost push pressures can sometimes be the driving force and there you have it cost push inflation but i would be willing to never again use the phrase cost push inflation if you would be willing to allow for the possibility that cost push pressures may at times be responsible for the monetary accommodation that results in the inflation you call demand pull cost push inflation may be a myth but cost push pressures are real the greatest trick the devil ever pulled was convincing the world that continuing cost push pressure doesn t exist demand pull versus cost push if the problem is too much money chasing too few goods then you ve got demand pull inflation milton friedman described it when a country starts on an inflationary episode the initial effects seem good the increased quantity of money enables whoever has access to it to spend more without anybody else having to spend less jobs become more plentiful business is brisk almost everybody is happy at first those are the good effects but then the increased spending starts to raise prices anna schwartz described it an increase in the supply of money stimulat es spending business firms respond to increased sales the spread of business activity increases in a buoyant economy stock market prices rise if the money supply continues to expand prices begin to rise especially if output growth reaches capacity limits friedman s jobs become more plentiful business is brisk almost everybody is happy is a description of the economy in a time of demand pull inflation so is schwartz s buoyant economy cost push is a different animal you have to raise prices or your profits will fall you have to have more take home pay or your standard of living will fall jobs are not plentiful business is not brisk the economy is not buoyant and almost nobody is happy about it in a cost push world the problem is not too much money but too much cost profits are squeezed so is our standard of living and the economy is not buoyant and yes restraining the growth of money restrains the increase of prices but it doesn t solve the cost problem demand pull is the inflation of a good economy cost push is the inflation of a troubled economy fritz machlup whose another view of cost push and demand pull inflation was published in may of 1960 wrote i believe that for an explanation of the consumer price inflation from 1945 to 1948 and from 1950 to 1952 the basic model of the demand pull inflation does as well as or better than any of the other models simple or complicated on the other hand for the period 1955 59 several cost push models appear to do better and i am prepared to regard the consumer price increases of these four years as a result of a cost push inflation samuelson and solow in their paper of may 1960 offered a similar assessment regarding the inflation of the latter 1940s they wrote most economists are now agreed that this first postwar rise in prices was primarily attributable to the pull of demand this emphasis on demand pull was somewhat reinforced by the korean war run up of prices after mid 1950 but just by the time that cost push was becoming discredited as a theory of inflation we ran into the rather puzzling phenomenon of the 1955 58 upward creep of prices which seemed to take place in the last part of the period despite growing overcapacity slack labor markets slow real growth and no apparent great buoyancy in overall demand demand pull inflation arises amid plentiful jobs and brisk business in a buoyant economy cost push inflation arises despite growing overcapacity slack labor markets slow real growth and no apparent great buoyancy in overall demand burns couldn t identify the cost in january of 1970 arthur burns who accepted cost push as a theory of inflation became chairman of the federal reserve from arthur burns and inflation pdf by robert l hetzel in november 1970 the minutes of the board of governors show burns telling the board board minutes 11 6 70 pp 3115 17 that prospects were dim for any easing of the cost push inflation generated by union demands wage demands cost push but then hetzel expands the story burns had a real or nonmonetary view of inflation that is inflation could arise from a variety of sources other than just money could and did burns thought to summarize hetzel s summary in 1970 burns said inflation was caused by wage demands in 1971 nixon imposed wage and price controls wage and price controls worked as intended hetzel says they held down wage growth and the price increases of large corporations nonetheless inflation rose to double digits by the end of 1973 burns then changed his story and blamed special factors such as increases in food prices due to poor harvests and in oil prices due to the restriction of oil production but says hetzel special factors are by nature one time events in 1974 inflation should have fallen as the effect of these one time events dissipated but it remained at double digit levels that year burns then changed his story again this time blaming government deficits he even padded the numbers hetzel says adding the debt of fannie mae to make the deficits look bigger that s robert hetzel s story not mine what hetzel says speaking in general but applying the thought to burns is the economist cannot explain the model s failure to predict by assuming that the world s underlying economic structure changes in an ongoing unpredictable way i m not sure hetzel is right seems to me that once cost push inflation gets going everybody gets a turn so the cause of the inflation would look different depending on when you look into it whatever what i get from hetzel is that burns could not identify the cost that was driving inflation but the fact that burns could not identify the problematic cost does not mean that there was no problematic cost on the contrary the decline of economic growth is evidence of problematic cost and central banks 2 targeting today is evidence of problematic cost volcker ignored the cost paul volcker became fed chairman in 1979 marcus nunes writes on becoming chairman of the fed volker challenged the keynesian orthodoxy which held that the high unemployment high inflation combination of the 1970 s demonstrated that inflation arose from cost push and supply shocks to volker the policy adopted by the fomc rests on a simple premise documented by centuries of experience that the inflation process is ultimately related to excessive growth in money and credit this view an overhaul of fed doctrine implicitly accepts that rising inflation is caused by demand pull or excess aggregate demand or nominal spending volcker ignored the cost problem and you know inflation came down there are different explanations for the fall of inflation but i m pretty comfortable with the centuries of experience story centuries of experience tell us that prices cannot go up if there is not enough money to support the higher price level i have no problem with that but i do have a problem with volcker s assumption that rising cost does not matter when prices are rising because we have too much money cost is not likely to be a problem but when prices have to rise because costs are risi...