1977: "This is much too simplistic a view..."

On page 521 under the heading "Disbelief", George Terborgh from "Unwinding the Present Inflation":

Strangely enough, it is still possible to find economists who deny on theoretical grounds that wage-push inflation can exist. Stranger still, this view is entertained by some eminent business journals. The following comments refer to the British efforts to abate the wage spiral:

All of these calculations assume that this kind of compact with the unions will in itself bring about a slower rise in the general price level. We don't believe labor causes inflation; [we believe] that at best all labor can do is cause a temporary change in relative prices. Governments cause inflation through excessive monetary expansion.

This is much too simplistic a view of a complex phenomenon. Since the mix of demand-pull and cost-push inflation varies over the business cycle, no single explanation can be valid for all phases.

In a footnote, Terborgh's quote is referenced to the Wall Street Journal, June 4, 1976.

In those days, cost-push seems to have been attributed almost exclusively to wage-push and the response of  prices. That is a good explanation of a continuing (built-in or expectations- or conflict-driven) inflation. But it ignores the imbalance that initiates the inflation.

What got the inflation started? In other words: What was the real cause of it?

My answer:
The idea that using credit is good for growth
Leads to:
The policies that encourage credit use
Which lead to:
The accumulation of debt, the growth of finance, and the growth of financial cost
Which lead to:
financial cost-push pressure, while finance itself provides endogenous "accommodation" so that the price changes are not merely relative, and the general price level rises.

But not just since the 1990s, when we finally began to realize that it wasn't only government debt that was a problem. Rather, since the late 1940s and early 1950s, when debt other than federal was already growing unsustainably fast. Or at the latest, before the mid-1960s when the effects of financial cost started showing up as the end of a "golden age" and the start of a "great inflation".

 

Using credit is good for growth, of course. But using credit creates debt. Policies that encourage the use of credit also encourage the growth of debt.

When policymakers create policy to encourage the use of credit, do they also create policy to accelerate the repayment of debt? No.

Does this explain the unnatural accumulation of debt (other than federal) to insanely high levels? Yes.

Does the increase of this debt lead to the increase of federal debt? Yes.

When policymakers create policy to encourage the use of credit, do they also create policy to accelerate repayment of debt? No.

Would this problem be easy to solve? Yes.

Is cost-push inflation a drag on economic growth? Yes.

Would that problem be easy to solve? Yes.

Would policy that accelerates repayment of debt be an anti-inflation policy? Yes. 

So what's the hold-up?