M.A. FINAL ECONOMICS at studyres.com

In the If by deliberate policy search I did the other day, something that looked interesting turned up: M.A. FINAL ECONOMICS at studyres.com.

I poked around a little, finding enough that I wanted to come back for a more thorough look.

I found something on Robert J. Gordon and his "triangle model" of inflation. I heard of that 20 years ago or more, and had in the back of my mind ever since. Never went looking for it, but now here it was, quite by accident. So I made a note and kept the link to the M.A. FINAL ECONOMICS page handy, planning to get to it -- some time in the next 20 years maybe.

Then I came across the names Samuelson and Solow, together like that: a reference to their 1960 article that I've been on about lately. So I added to my note:

I DON'T KNOW WHAT THIS [PAGE] IS BUT IT MIGHT BE INTERESTING

While I was there I read the first sentence of the S&S part:

2.7 SAMUELSON AND SOLOW’S APPROACH
As this model says, it is not possible on the basis of a priori reasoning to reject either the demand-pull or cost-push hypothesis, or the variants of the latter such as demand-shift...

Ah, the good stuff. It struck me as a paraphrase, at first. But I remembered the words "a priori reasoning" and I remember S&S not rejecting "either the demand-pull or cost-push hypothesis, or the variants". Seemed like a lot of identical words, for one sentence. Sort of a relaxed paraphrase, or maybe a plagiaphrase. Couldn't say for sure, but I had to go back to my "I don't know what this is" note and double-underline it.

That was two or three days ago. I'm back to it now to see what I saw. I compared the M.A. FINAL ECON article to the Samuelson and Solow article that I recently extracted from the Joint Economic Committee report and put on the blog. The two are not identical after all. I've taken a few paragraphs of each, and highlighted the differences; I made the paragraph breaks the same for both, to make reading and comparison easier. The original paper from 1960 on the left; the M.A. FINAL ECON paper on the right:

IV

2.7 SAMUELSON AND SOLOW’S APPROACH

We have concluded that it is not possible on the basis of a priori reasoning to reject either the demand-pull or cost-push hypothesis, or the variants of the latter such as demand-shift. We have also argued that the empirical identifications needed to distinguish between these hypotheses may be quite impossible from the experience of macrodata that is available to us; and that, while use of microdata might throw additional light on the problem, even here identification is fraught with difficulties and ambiguities. Nevertheless, there is one area where policy interest and the desire for scientific understanding for its own sake come together. If by deliberate policy one engineered a sizable reduction of demand or refused to permit the increase in demand that would be needed to preserve high employment, one would have an experiment that could hope to distinguish between the validity of the demand-pull and the cost-push theory as we would operationally reformulate those theories. If a small relaxation of demand were followed by great moderations in the march of wages and other costs so that the social cost of a stable price index turned out to be very small in terms of sacrificed high-level employment and output, then the demand-pull hypothesis would have received its most important confirmation. On the other hand, if mild demand repression checked cost and price increases not at all or only mildly, so that considerable unemployment would have to be engineered before the price-level updrift could be prevented, then the cost-push hypothesis would have received its most important confirmation. If the outcome of this experience turned out to be in between these extreme cases-as we ourselves would rather expect-then an element of validity would have to be conceded to both views; and dull as it is to have to embrace eclectic theories, scholars who wished to be realistic would have to steel themselves to doing so. Of course, we have been talking glibly of a vast experiment. Actually such an operation would be fraught with implications for social welfare. Naturally, since they are confident that it would be a success,the believers in demand-pull ought to welcome such an experiment. But, equally naturally, the believers in cost-push would be dead set against such an engineered low-pressure economy, since they are equally convinced that it will be a dismal failure involving much needless social pain...

As this model says, it is not possible on the basis of a priori reasoning to reject either the demand-pull or cost-push hypothesis, or the variants of the latter such as demand-shift. UTe have also argued that the empirical identifications needed to distinguish between these hypotheses may be quite impossible from the experience of macro data that is available to us; and that, while use of microdot might throw additional light on the problem; even here identification is fraught with difficulties and ambiguities. Nevertheless, there is one area where policy interest and the desire for scientific understanding for its own sake come together. If by deliberate policy one engineered a sizable reduction of demand or refused to permit the increase in demand that would be needed to preserve high employment, one would have an experiment that could hope to distinguish between the validity of the demand-pull and the cost-push theory as we would operationally reformulate those theories. If a small relaxation of demand were followed by great moderations in the march of wages and other costs so that the social cost of a stable price index turned out to be very small in terms of sacrificed high-level employment and output, then the demand-pull hypothesis would have received its most important confirmation. On the other hand, if mild demand repression checked cost and price increases not at all or only mildly, so that considerable unemployment would have to be engineered before the price level up drift could be prevented, then the cost-push hypothesis would have received its most important confirmation. If the outcome of this experience turned out to be in between these extreme cases-as we ourselves would rather expect-then an element of validity would have to be conceded to both views; and dull as it is to have to embrace eclectic theories, scholars who wished to be realistic would have to steel themselves to doing so. Of course, we have been talking glibly of a vast experiment. Actually such an operation would be fraught with implications for in demand-pull ought to welcome such an experiment. But, equally naturally, the believers in cost-push would be dead set against such an engineered low-pressure economy, since they are equally convinced that it will be a dismal failure involving much needless social pain...

Okay. To tie this all together I want to point out that Samuelson and Solow said "it is not possible on the basis of a priori reasoning to reject either the demand-pull or cost-push hypothesis". And the M.A. FINAL ECON paper says it. And I say it, and maybe you also, I dunno. But Paul Volcker most definitely did not say it.

Gone was the notion of cost-push versus demand-pull. Volcker implicitly accepted that rising inflation was caused by “demand-pull”.

A Key Quote from Samuelson and Solow (1960)

The full thought, from section IV of Samuelson and Solow (1960):

"If by deliberate policy one engineered a sizable reduction of demand or refused to permit the increase in demand that would be needed to preserve high employment, one would have an experiment that could hope to distinguish between the validity of the demand-pull and the cost-push theory as we would operationally reformulate those theories."

I have to go back and check what they mean by "as we would operationally reformulate those theories", but Paul Volcker performed that experiment as Chairman of the Federal Reserve. Marcus Nunes writes:

On becoming chairman of the Fed, Volker challenged the Keynesian orthodoxy which held that the high unemployment high inflation combination of the 1970´s demonstrated that inflation arose from cost-push and supply shocks – a situation dubbed “stagflation”...

To Volker, the policy adopted by the FOMC “rests on a simple premise, documented by centuries of experience, that the inflation process is ultimately related to excessive growth in money and credit”.

This view, an overhaul of Fed doctrine, implicitly accepts that rising inflation is caused by “demand-pull” or excess aggregate demand or nominal spending.

Josh Hendrickson concurs:

... Relying on public statements and personal diary entries from Arthur Burns, I demonstrate that there is little evidence that the Federal Reserve was less concerned with inflation during the 1970s. Rather, the view of Burns and others was that inflation was largely a cost-push phenomenon. Burns thought that incomes policies were necessary to restore price stability and stated that “monetary and fiscal tools are inadequate for dealing with sources of price inflation that are plaguing us now.”

The shift in policy, beginning with Paul Volcker, was an explicit attempt to stabilize inflation expectations and this was done deliberately at first through monetary targeting and ultimately through the stabilization of nominal income growth. Gone were notions of cost-push versus demand-pull inflation. The Fed simply assumed accountability as the creator of inflation.

The Fed limited the growth of the quantity of money and limited the growth of nominal income. Volcker ran the experiment. Gone was the notion of cost-push versus demand-pull. Volcker implicitly accepted that rising inflation was caused by “demand-pull”.

Even before the experiment was over, cost-push was no longer considered valid theory. That was Volcker's premise. Today, the cost-push idea is taken as some kind of joke -- or quaint, perhaps, but definitely wrong. In comments on Hendrickson's post, Nick Rowe quoted the part about Burns thinking inflation was largely a cost-push phenomenon. and replied:

People forget (and maybe younger people never knew) just how common that view was in the 1970’s. It was common among economists as well as the general population. It was almost the orthodoxy of the time, IIRC. Tighter monetary policy would just raise interest rates, which would increase costs, and make inflation even worse.

Hendrickson agreed with Rowe. Nunes agreed with Hendrickson's post. And Bill Woolsey wrote:

There were really _economists_ who thought that “tighter money” would raise inflation through a cost-push mechanism?

I got in on the action and responded with a yup to Woolsey, quoting Robert V. Roosa, past vice president of the New York Fed, and Undersecretary for Monetary Affairs under President John F. Kennedy. Roosa, from Fortune magazine, September 1971:

And yet another factor has been the undue reliance on restrictive monetary policy to limit demand, with the perverse result of making interest rates themselves a major cost-push force.

Roosa's kind of thinking has been almost universally dismissed by economists. That dismissal is a case where the old ideas ramify into every corner of our minds.

In the US, in 1952, interest costs amounted to 5.67% of GDP, a pretty low number. Sixty years later in 2012, interest costs came to 15.42% of GDP. That's a difference of almost ten percent of GDP. If our reliance on credit hadn't increased, and our interest costs still amounted to 5.67% of GDP, prices could have been almost 10% lower than they actually were in 2012 -- with the difference not involving wages, but only interest costs.

Oh by the way: in 1952 the effective interest rate in the US was 4.35%. In 2012 that rate was 4.36%. Almost identical. (That's why I picked the years 1952 and 2012.) The interest rate was the same, but the interest cost was $160 billion more in 2012 than 1952. Why? Because there was more debt in 2012. A lot more debt.

Samuelson and Solow (1960):

"But in the modern world, all or most wages are increasing." -- Page 362


... and then there's Google (2019):