Can that be right?

Second in a series

Unit Labor Cost (ULC) is figured by taking Total Labor Cost (TLC) and dividing it by real output (RGDP):

Work backwards and multiply both sides by real output to get Total Labor Cost:

I put that number on a FRED graph along with the Monetary Interest Paid number from yesterday:

Graph #1: Oops!

Ouch. Labor cost dwarfs interest cost.

Can that be right??

No, I messed up. Read the units in the left-hand border. It's an "index" (the Unit Labor Cost number is an index) times billions of chained 2009 dollars, for the blue line. But the 2009 value of the index is 100. So Graph #1, for 2009, shows a number that is 100 times what it should be. For all the years, 100 times what it should be.

I have to take the ULCNFB*GDPC1 formula (in the top border of Graph #1) and divide it by 100:

Graph #2: Total Labor Cost (blue) and Monetary Interest Paid by Domestic Business (red)

Yeah, that's more like it.

Still, the cost of labor is far more than the cost of interest.

Fair enough. And I should hope so! Nonetheless, I argue that it is the increasing cost of interest that is the source of our economic troubles, going back to the 1960s or before.

High numbers on a graph like this squeeze the low numbers down near zero and you lose the detail. You can't see what's happening in the early years. So, to compare the two lines, divide one by the other:

Graph #3: Total Labor Cost relative to Monetary Interest Paid by Domestic Business

What the comparison shows is that Total Labor Cost was growing much more slowly than interest cost all the while, until 1981 or so. It's an important detail that has disappeared from Graph #2.

Graph #3 look familiar? Looks just like yesterday's Graph #4, Unit Labor Cost relative to Unit Monetary Interest Cost.

Well, yeah. It's only a slight re-arrangement of the same source numbers.

Graph #3 here is better though. The numbers on the vertical scale are better. The high point of the blue line here is between 70 and 80. On yesterday's graph it was between 7000 and 8000. Yesterday, I didn't even know what the numbers meant.

The reason these numbers are lower? Because I divided by 100 to fix my error. 7000 divided by 100 is 70, and 8000 divided by 100 is 80, so that's how the numbers changed. And suddenly the numbers become meaningful.

Back before the 1950s, total labor cost was about 70 times the total cost of interest paid by domestic US businesses. From 1980 to the crisis it was generally less than 10 times as much. That means that for every $70 US business paid to labor in the late 1940s, they had one dollar of interest cost. Since 1980, for every $70 US business paid to labor, they've had about $7 to $10 of interest cost, maybe more. That's what the graph says.

Here, let me invert the ratio:

Graph #4: Monetary Interest Paid by Domestic Business, relative to Total Labor Cost

Before the mid-1950s, there was less than two cents of interest cost for each dollar of labor cost. By the mid-1960s it had doubled to four cents per dollar of labor cost, and by the mid-1970s doubled again, to eight cents per dollar. After that it doubled again, and went even higher, but till now has not yet gone back below the eight-cent number.

If we had kept the interest cost to US business at four cents per dollar of labor cost, there would have been a whole lot of money left over to boost business profits. The economy would have grown like gangbusters.

Some of those boosted profits could have been spent giving people raises. That would have increased aggregate demand and living standards... and would likely have quelled the anger that vents itself these days in politics.

If interest costs were restrained, the financial sector would not have grown so much. Finance would today be a smaller segment of GDP. But then, with higher profits in the nonfinancial sector, GDP would have grown much more.