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tand that the chain of causality begins with them a lot of people think government is running the economy into the ground on purpose i don t see it that way i don t see how that could be i think they just don t know how to fix the problem but even if it is on purpose we can probably get them to see that the cost of finance is a problem not a solution economic policy promotes the growth of finance and has done so since the end of the second world war at some point along the way finance became too big and costly for our economy we could no longer afford it that s when things started to go wrong we could probably argue for the rest of our lives about when things started going wrong that wouldn t be productive we need to start replacing money that costs interest with money that does not cost interest we have to reduce the cost of interest but we still need enough money that the economy can function we can keep doing that gradually for a while and we should start thinking about what level of debt would best promote economic growth and thinking about proportions how much of the total debt should be owed by government and how much should be owed by the private sector if we can fine tune these two adjustments the level and the proportions we can make our economy unimaginably good unimaginably good remember borrowing money and spending it is good for growth but paying the interest and repaying the principal are bad for growth but there will be some level of debt and some balance between government share and private sector share of debt that best promote price stability and economic growth to solve the problem created by economic policy we must make policymakers understand the problem all that remains is to convince them at december 14 2022 2 comments email this blogthis share to x share to facebook share to pinterest tuesday december 13 2022 where no output is produced one sector s gain is another s loss the profits of financial nonproductive corporate business are smaller than those of nonfinancial productive corporate business at the end of 1951 the profits of finance were only 10 of nonfinancial profits until the mid 80s they were generally less than 20 financial profits ran about 30 of nonfinancial in the 1990s between high peaks and since 2010 between 30 and 40 percent financial business profits are less than nonfinancial business profits but financial profits have been gaining on nonfinancial profits to look at that gain i show financial profits red and nonfinancial profits blue as percent of gdp i index both ratios to show them equal in the first quarter of 1952 graph 1 financial red and nonfinancial blue profits relative to gdp with both ratios indexed near the start for purposes of comparison the lines start out equal in 1952 but consider the early years up to the late 1970s financial profits show a general uptrend nonfinancial profits show a mild downtrend indexing makes the graph exaggerate what i will say now but what i say is still true if the financial share of corporate profits held fast at the 1952 level the financial profits above that level would instead have been the profits of nonfinancial corporations or would have added to labor s share of income or would have worked out as just plain lower prices as financial costs fell as a share of productive sector costs any of these options would have been better than the way things actually turned out nonfinancial profits on the graph show a mild downtrend it looks mild to me but when i google profit crisis of the 1970s the featured snippet says in the 1970s us capitalism suffered a legitimacy crisis as the economy was mired in high inflation unemployment and slower growth the rate of profit had been decreasing since the late 1960s and by the mid 1970s wall street was in poor shape clicking the link turned up the revenge of the capitalist class by thomas volscho google s snippet came from the abstract here s the next sentence capitalists politically mobilized in the 1970s to restore the rate of profit and to restore power to economic elites in financialization as symptom chris dillow says my generation of leftists was shaped by a crisis of non financial capitalism that of the 70s and early 80s l et s start with the crisis of the 70s profits were then being squeezed by wage militancy thatcher s response to this was to weaken labour s bargaining power by inadvertently creating mass unemployment he s right except for the wage militancy part but that was thatcher s error not dillow s the actual cause of the profit crisis was the growth of financial cost which increased the cost of the average transaction increased financial profits pushed the cost of living up pushed nonfinancial business costs up and pushed nonfinancial profits down dillow also says financialization is the result of a shift away from low profit activities in the real nonfinancial economy early on rising financial costs drove nonfinancial profits down until people noticed the problem but their policy changes encouraged financialization and drove financial cost even higher the graph shows it bill mitchell writes rowthorn says that the mid 1970s crisis which marked the end of the keynesian period and the start of the neo liberal period was associated with a rising inflation but also an on going profit squeeze due to declining productivity and increasing external competition for market share the profit squeeze led to firms reducing their rate of investment which reduced aggregate demand growth which combined with harsh contractions in monetary and fiscal policy created the stagflation that bedeviled the world in the second half of the 1970s since that time the world has been bedeviled by the solutions that were put into place at december 13 2022 no comments email this blogthis share to x share to facebook share to pinterest monday december 12 2022 and finance was growing the whole time graph 1 household debt as a percent of disposable personal income 1946 2021 we households owed debt equaling about 20 of disposable personal income dpi in 1946 that tripled to 60 by 1962 more than half our household income by 1962 the ratio ran flat from the mid 1960s to the early 1980s not by coincidence allan h meltzer puts the start of the so called great inflation at 1965 and the end at 1984 inflation increased dpi so rapidly that it made the ratio run flat all through those years even though household debt was still going up after the great inflation the ratio doubled from around 60 to more than 120 just in time for the financial crisis most people who write about this stuff would say it was our own fault our debt went up i say it was the fault of policy the economic policy that encouraged credit availability encouraged credit use discouraged repayment of debt by making interest payments tax deductible and according to scott sumner by restricting wage growth since the high point in 2007 the ratio has fallen to just below the 100 level so that household debt is now about equal to dpi but it is still way too high you can tell because our economy still sucks if debt was low again really low we would have money left over after paying our bills no one would have to be demanding wage increases or raising prices at december 12 2022 no comments email this blogthis share to x share to facebook share to pinterest sunday december 11 2022 cost pressure if we have a cost pressure problem it impacts the whole economy the cost pressure works the way an oil crisis works 1 by creating a general inflation and 2 by slowing economic growth but with cost pressure it is not necessarily the oil producing nations that benefit i think we have a cost pressure problem i think this because we never really did stop the inflation oh we slowed it yes but prices did not stabilize instead policymakers quit trying to achieve stable prices and started trying to achieve stable inflation instead stable prices means zero inflation stable inflation with a two percent target means they shoot for two percent inflation every year i think we have a cost pressure problem i think this because economic growth has been slowing for almost the whole time since the end of world war two economists do acknowledge bits and pieces of the slowing and try to explain it but they certainly have not reversed it the slowing continues pay does not keep up with prices and it gets harder and harder to find a better job we have had inflation and slowing growth for many years so i think we have a cost pressure problem the rapid growth of finance since the end of the second world war suggests that finance is the sector which benefited from the increasing cost pressure that we were living with the rapid growth of finance suggests that the growing income received by finance is the growing cost that causes inflation and slows the growth of jobs and income in the general economy again the growth of finance is responsible for the cost pressure the inflation and the slowing growth that we have been living with now for half a century and more and finance was growing the whole time at december 11 2022 no comments email this blogthis share to x share to facebook share to pinterest saturday december 10 2022 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 at december 10 2022 no comments email this blogthis share to x share to facebook share to pinterest friday december 9 2022 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 at december 09 2022 no comments email this blogthis share to x share to facebook share to pinterest thursday december 8 2022 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 at december 08 2022 no comments email this blogthis share to x share to facebook share to pinterest wednesday december 7 2022 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 civilizations don t crumble because of price controls civilizations don t crumble because of the inflation that gives rise to price controls 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 dow...