Why focus on the inflation of the 1950s and 60s and 70s?
Because it was cost-push, and the problematic cost was never
discovered, never dealt with. This means the problem still exists today:
not the inflation problem, but the cost problem -- the problem ignored by
Paul Volcker and by everyone since.1
The problem, since the 1950s, was growing financial cost. That problem grew until the financial crisis of 2008. For a brief moment, then, everyone knew finance was the problem. But again the problem was not dealt with, and now -- even before Covid, I mean -- the economy is worse than it was before 2008.
The downhill march continues.
Notes
1. Not everyone. I don't ignore the cost problem. Nor does James Forder, who wrote
... it was possible – and in fact quite normal – to doubt that inflation between 1955 and 1957 was due to excess demand...
So alternative explanations of inflation were needed, and several were suggested, most of which have tended to be described in not altogether appropriate terms as 'cost push' theories of inflation...
Such approaches to inflation were later greatly disparaged on the basis that prices could not continue to rise unless the policymaker allowed for nominal demand to increase to accommodate the higher prices, and therefore that the real source of the inflation lay with the policy, and with excessive demand. But these points are based on a poor appreciation of the cost push idea...
Lerner (1960b), using his idiosyncratic terminology of 'buyers'' and 'sellers'' inflation, captured the point perfectly, saying (p 121)The appropriate treatment for buyers' inflation is to cut down the excessive spending that causes it. This may be done by a restrictive monetary or fiscal policy. But if restrictive monetary or fiscal policy is used against sellers' inflation, spending is reduced when it is not excessive, so that we get a deficiency of demand, depression and unemployment...
James Forder and Abba Lerner and me. Perhaps there are others?
3 comments:
James Forder, Abba Lerner and me. And Edward Sonnino:
"The logic behind the belief that Volcker’s extremely tight money brought down the high inflation of the early 1980’s rests on the flawed assumption that there is only one strain of inflation, “demand-pull inflation”. But there is a second, distinct variety of inflation, i.e., “cost-push inflation”, having completely different causes and requiring completely different economic policy responses. “Demand-pull” inflation, the most common variety of inflation, is due to excess aggregate demand, the situation of “too much money chasing too few goods”, corresponding to a booming economy with high capacity utilization and low unemployment. “Cost-push” inflation, a historically rare variety of inflation, is instead due to increased costs of production and distribution having nothing to do with excess aggregate demand. Those increased costs are transmitted by companies to consumer prices in an attempt to protect shrinking profit margins, even when such price increases result in fewer sales."
James Forder, Abba Lerner, Edward Sonnino and me. And Peter Cooper at heteconomist:
"Money creation can enable cost-push inflation, but the real source of the problem will be the cost pressures themselves."
In Distributional conflict and inflation – Britain in the early 1970s Bill Mitchell writes:
"Understanding the inflation of the early 1970s requires us to reject the Monetarist causality and instead recognise that inflation can arise from supply side (cost) factors even when their is significant unemployment (output well below its potential)."
To my ear the key part of that sentence is this:
"inflation can arise from supply side (cost) factors even when their is significant unemployment".
Mitchell takes a simple definition of cost-push inflation ("inflation can arise from supply side (cost) factors") and adds even when their is significant unemployment. That is a big deal. Look what happens:
1. As we know, the Fed creates significant unemployment when it fights inflation.
2. As Mitchell says, you can have inflation from supply side (cost) factors even when there is significant unemployment.
3. So the inflation may continue despite the high unemployment that the central bank creates to fight the inflation.
In other words, demand-side policy is not effective against cost-push inflation. Sounds a lot like what Abba Lerner said, highlighted in yellow above.
I had to pull a few teeth to get there, but now maybe we have James Forder, Abba Lerner, Edward Sonnino, Peter Cooper, and me and Bill Mitchell. Not sure, but maybe.
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