Saturday, April 14, 2007

Some Post Keynesian Propositions on Inflation

James Galbraith and Barkley Rosser, for example, are familar with this view.

Inflation is not always and everywhere a monetary phenomenon. In the United States in the 1970s, it was a matter of cost-push. When nominal claims on income add up to more than real income, inflation can result.

An incomes policy is one approach to attacking inflation that might have been tried. For example, a tax-based incomes policy could have been implemented. Institutions matter. For example, in an economy with large unions, major labor contracts could be coordinated to be renegotiated at once, or they could be staggered. The latter is likely to lead to more inflation.

Monetary policy is not impotent. In a modern industrial economy, the supply of money is endogenous. The Federal Reserve in the U.S., for example, sets an important interest rate but, generally, does not have control over the amount of money in circulation. Lowering the interest rate (pushing on a string) may not be effective, but raising interest rates can be a defacto incomes policy. When combined with union-busting, as in Ronald Reagan's foul policy, one can expect inflation to moderate.

8 comments:

YouNotSneaky! said...

Well, there's really nothing "Post-Keynesian" about the last paragraph. It's more or less consensus, except maybe the part about union busting.

It's very hard to argue that high rates of inflation (excess of 8, definetly 10 percent) are anything BUT monetary phenomenon, even when you take endogneity of money supply into account.

Robert Vienneau said...

The context of the linked discussions is what was believed in the 1970s and 1980s. I'm surprised to hear that the mainstream views Volker as implementing a defacto incomes policy.

I don't think 10% inflation is very high, compared to what other countries have suffered through. And I don't see why such a level cannot be a matter of cost-push.

YouNotSneaky! said...

I did say "except for the union busting" part, which contradicts the last sentence of your first paragraph.

As far as your second paragraph. If we suppose both stories - the monetary story and the cost-push - are plausible then it becomes an empirical matter. There's an abundance of evidence that hyperinflation is a monetary phenomenon. There's a lot of evidence that high inflation is a monetary phenomenon. There is some evidence that even moderate inflation (below 10%) is a monetary phenomenon.

So the answer is "it could be but it's not, generally".

Of course I'm not gonna bet my life on the 10% (it's probably lower). But we do know that high-enough inflation is monetary. So, even allowing for alternative theories of inflation, the question becomes at what point it's about money. If you're gonna argue that it's only at high levels (how high exactly?), you got some serious empirical work to do and some convincing evidence to produce.

J.G.'s a hold out on this, probably because he enjoys being a contrarian. Good for him. Why I should take him seriously is still left to be explained.

Don't let your politics get in the way of your economics. Sometimes points need to be conceded no matter how much it hurts. You can score points on other matters.

Adi the Austrian said...

Some minor comments of mine;

It can be true that the supply shock explanation of high inflation in the 1970's could be wrong. That means that Arabs oil cartel increased their oil price because US had already inflated so much. US had de facto broken dollars tie with gold when it had so much increased amounts of dollars in circulation.

And high inflation could result when central bank accomodates this increase of oil price. They might think that output will fall if they dont act, but reality is that you cant escape the fact that you must export more goods to pay oil bill.

And in Austro-Swedish monetary theory money is not exogenous (I was wrong with that in my comment on your post about Kaleckian economics which I now admit) because increase of commodity money and associated fall in interest rate can make banks increase their bank credit very fast.

Incomes policy has not helped much against inflation even in Nordic countries where it has been used most extensively. My nationality is Finnish so I know something about these issues.

Sweden has exported idea about EFO - norm which means that real wages cant increase more than the average increase of productivity in the open sector. Closed sector will follow this. Main motivation behind
this labour union sponsored economic theory is that then excessive wage increases wont cause employment and inflation and also structural change will be more quicker. Also this theory has been earlier very influential in Finland and our main union advocates that still.

Anonymous said...

Can anybody point me to the listing of goods and their weights are used in calculating inflation? I think the model used will show the difference between the two beliefs of inflation...also is there any empiracal studies on what the actual inflation is that most families experience?

anonymous Mike

Robert Vienneau said...

Radek, thanks for clarifying your point about what is mainstream. But shouldn't you have provided at least one reference to empirical results? It's not as if I was discussing practical current policies in the U.S. anyways, what with the weakness of unions nowadays.

Adi, I'm always impressed by multilingualism.

Mike, household income data, for example, available from the U.S. Census Bureau is deflated by a series identified as the CPI-U-RS. I think one would need to look at various industries to understand inflation dynamics. And even then I don't think it's simple to distinguish between views.

Adi the Austrian said...

Robert,

There are actually some facts about Finnish economy which might back your Neo-Ricardian/Post-Keynesian ideology on distribution cycles and inflation.

Collective bargaining in Finland
Tulopolitiikka

Report is in Finnish but you could read its summary.

I can give brief intro to this subject;

Finland had fixed fxrate with respect to USD in Bretton-Woods era and after it had foreign exchange basket regime. After our joinining EMU Finnish currency has been euro.

Finnish economy was earlier very much based on our export sector which exported pulp, paper and other forestry products. Its expenses (in Finnish Marks) were mostly wages to unionized workers, energy bills to energy producers and stumpage fees to forest owners. Closed sector which didnt compete internatioanlly was dependent on to high extend foreign imports. Devaluation of Finnish Mark increased competivity of our export business but hurt closed sector since import prices increased.

Usually business cycles in Finland started from abroad since small country is highly dependent on foreign trade. Increasing demand of Finnish products internationally increased domestic output of forestry products and also increased wages, stumpage fees to land owners and investments. Also banks used to lend more and our central bank accomodated so that money supply increased.

Increased price level in Finland deteriodated our trade balance and competivity abroad so that when business cycle turned to recession Finnish economy was in bad shape. Then our monetary authorities did made devaluation so that Finnish export business could regain its competiviness.

Then all started from beginning..

That is called "devalvaatiosykli" in Finnish (Devaluation Cycle).

Collective bargaining in Finland is centralized so that employers association, unions and government take part.

During good times (profits of export business are high) there is high pressure from the unions to make big increases to wages and vice-versa during bad times.

This EFO - norm which I presented earlier means that average increase of wages throughout the whole economy is based on increase of average productivity in export sector.

I know that one Finnish economist has used Lotka-Volterra predator-prey model to model distribution cycles in this kind of environment.

It's of course clear that as an Austrian economist I think that all this has been very harmfull to our economy.

Robert Vienneau said...

Thanks for the comment. The Philip curves seems to fit US data in the 1960s. During that period Kennedy had wage-price guidelines. Wages were supposed to rise in line with productivity.

The predator-prey models are probably based on the work of Richard Goodwin. (He's another one that was not accepted by the propagandists at Harvard.) I may someday explain Goodwin's model in one of my more mathematical posts.