I have to begin by saying that demand-pull inflation encourages economic growth, and cost-push inflation causes growth to slow. But by the time I get the thought out, half the internet is hollering THERE'S NO SUCH THING AS COST-PUSH INFLATION and the other half didn't hear me, doesn't believe me, or just doesn't care. For or against, then, they all go back to preparing for the next insurrection.
If we could just fix the damn economy we wouldn't need insurrections. But no one stops to think about that.
Let me say it again: cost-push slows the economy. It means we get less income per dollar's worth of effort.
Now, maybe it is true there is no such thing as cost-push inflation, because we only get inflation if they print too much money. But here's the thing: It isn't the inflation that slows the economy, it's the cost-push. It's cost pressure that slows the economy. If policy prevents the inflation but fails to relieve the cost pressure, the economy slows anyway.
If policy prevents inflation but doesn't relieve the cost pressure, the economy slows
anyway.
Maybe the cost pressure first arose with financialization in the 1980s and 1990s. Maybe it first arose during the Great Inflation of the 1960s and 70s. Maybe it first arose in the 1950s, or even before. The point is that the cost pressure has been a problem for a long time, and economic growth has been slowing all the while.
Economic growth has been slowing all the while.
Paul Volcker quashed inflation in the early 1980s, and we thought he had solved the problem. But the cost pressure problem was not solved. Then, in 2012, the Federal Reserve adopted something called the two-percent target. Now that sounds innocent enough, until you realize it means their goal is to have two percent inflation every year.
The standard story is that Volcker quashed inflation. The fact is that the Federal Reserve tried for 30 years, and then gave up on quashing inflation.
Hey, two percent inflation isn't bad, I'll give you that.
But two percent isn't zero. Two percent inflation is not stable prices.
It is rising prices. It is inflation. Economists call it "stable inflation." I call it hypocrisy.
They gave up on quashing inflation. At the end of 1982 the CPI
was 97.7. At the end of 2012 it was 231.2. At the end of 2023 it was
308.9. Prices have more than tripled since Volcker quashed inflation.
And because of cost pressure, the economy has been slowing all the
while.
As for myself, I would prefer to fix the economy. All we have to do is solve the cost-pressure problem. To me, that's an easy thing to do. The problematic cost is the cost of finance. We have to reduce the cost of finance. We have to reduce the bills.
Let me say it a different way: We need faster income growth, faster GDP growth, faster job growth, and better jobs. But none of that will solve the problem unless we reduce the growth of financial cost.
That's the whole plan, in a nutshell.
Let's say we make it economic policy to cut the growth of household debt in half. It has to be policy or the plan won't work, because under existing policy the increase in household debt gets bigger almost every year. It has to be policy, and the new policy has to reduce the growth of household debt.
The easiest way to do this is to make it policy to increase employee compensation by a comparable amount. For every extra dollar of income we get, policy encourages us to borrow a dollar less. So our spending can stay about the same, our debt increases more slowly, and we have smaller finance charges to pay. And that is how the plan works.
As
you may notice, the new policy I propose is just the opposite of
existing policy. Existing policy provides funds by expanding credit and fights inflation by restricting the quantity of money. The proposed
new policy accepts the view that the quantity of money should grow along
with output, that borrowing money should be minimized to reduce financial
cost in our economy, and that the proper way to fight inflation
is by restricting the growth of credit rather than the growth of money.
Our existing policy has been around for a long time. In the early days after World War Two it worked well. Back then it worked because we didn't have a lot of debt and our financial costs were low. The old policy worked so well that economists and policymakers stuck with it, forever encouraging us to use more credit. That was the mistake.
The existing policy didn't treat debt as a problem, because in the early days we had little debt and it wasn't a problem. Things are different now. These days, we can't afford to live. It is time for policy to stop encouraging credit-use at every turn. It is time for policymakers to admit that we now need less reliance on credit and more reliance on the dollar -- more reliance on income.
There was a time when encouraging the use of credit was good policy. This is no longer that time. This is the time to discourage the use of credit and to encourage the growth of income.
If you step back and look at this picture of the economy you will notice that if we adopt the new policy and it works, and we stick with it, then a day will come when we have too much money and not enough use of credit. We will eventually be tempted to abandon the policy that here is called "new" and to go back to the policy that here is called "existing". That is not the best solution.
The best solution is to
seek the point of optimum balance between money and the use of credit.
The point of optimum balance gives the best economic growth. It is
tricky, because continually increasing the reliance of credit will cause
our economy to grow until we are far beyond the point of optimum
balance. That is what gets us into trouble, as it did in 2008. What we
need is to find the point of optimum balance between money and credit,
and stay there, so that our economy can perform well over the long haul.
It can be done. We just need the right plan.
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