WIPP Inflation Now

kernals12

Banned
In the 70s, we all lost our minds. I'm not making a joke about disco. In a period of fairly high unemployment and modest government budget deficits, we began expecting, for no good reason, that prices would rise 6% or more per year in perpetuity. As such, we demanded wage increases to keep up with this expected inflation, creating a self fulfilling prophecy. Wage and Price controls failed and so we went for a painful option. Governments raised interest rates through the roof to create recessions and bring inflation under control.
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(purple is US)
In the 80s and 90s, people in many countries, who just 20 years earlier had never known mass unemployment, were being told that 7-10% unemployment was the price to pay to keep inflation at bay. No deficit funded economic stimulus could be used. It would've brought back the inflation of the 70s.

And those interest rates had a catastrophic impact on the third world. Pretty much every Latin American nation wound up defaulting on their debts at one point or another in the 80s. The rise in interest rates made their loans unpayable. This caused the term "structural adjustment package" to become a household term. It meant harsh austerity measures.

But there was one economist who had a brilliant solution that was sadly never used.
lerner-abba-p.jpg

Abba Lerner was a devout Keynesian. In his Magnum Opus Functional Finance and the Federal Debt (1943), he opined that the government should spend until full employment was achieved and that taxes were really a way of controlling inflation, not funding the government, which could be done by printing. This was the start of Modern Monetary Theory. But in 1978, the view that inflation and unemployment couldn't happen at the same time was put to the test by stagflation. He believed the problem was that, as I said, people had come to expect high inflation, creating a self fulfilling prophecy. His solution was to internalize the costs of inflationary wage increases through what he called a Wage Increase Permit Plan (WIPP). The name was a reference to Gerald Ford's "Whip Inflation Now" campaign buttons.

Here's how it would've worked:
Every employer with more than 100 workers, or whose workers are part of a collective bargaining agreement covering more than 100 workers, would be issued permits for each $1000 of their wage bill. These permits would entitle employers to increase worker pay by 3% annually, based on what he assumed the rate of productivity growth would be (it turned out to be 1.4%). If an employer wished to increase by more than that, they would've had to buy permits on the market from firms raising their wages by less than 3%.

Through this, inflationary insanity would've disappeared quickly. Employers would keep wage increases at or below 3%.

Lerner doesn't say whether this would be temporary or permanent, but I think it would've been best to have it in place for only 5 years, by which point people would have gotten accustomed to prices rising less than 2% per year, allowing all the costs of record keeping and enforcement to be eliminated. But if inflation rose above 5% for, say, 3 years, the scheme would've been reactivated.

This plan would've brought an end to an irrational burst of inflation without us being forced to tolerate massive unemployment. It's too bad we never tried it.
 

hammo1j

Donor
The trouble with a deficit stimulus is that people get wise to it if it's used continuously.

The value of money has gone down so my wages/prices need to go up.

Aka.

There's more money sloshing around so give me some of that.

The good professor's scheme may stop wages rising but would not stop firms putting their prices up.

So inflation as before, but workers take a drop in their standard of living.
 

kernals12

Banned
The trouble with a deficit stimulus is that people get wise to it if it's used continuously.

The value of money has gone down so my wages/prices need to go up.

Aka.

There's more money sloshing around so give me some of that.

The good professor's scheme may stop wages rising but would not stop firms putting their prices up.

So inflation as before, but workers take a drop in their standard of living.
In the 70s, budget deficits were not enormous. So it wasn't excessive money printing that caused the problem.
 
A.W Philip’s has a lot to answer for! His theories about the relationship between high inflation and low unemployment blighted the 1970’s. In a nut shell he studied periods of low unemployment and Discovered that during these periods there was usually high inflation. He developed a tool for policy makers called the Philips curve. Essentially x amount of inflation equals y amount of unemployment. All a policy maker had to do in periods of high unemployment was to consult the curve and print some more money and hay presto jobs for all!

It was realised that this wasn’t working and the 1980’s was the painful period where Governments attempted to get the high inflation under control. Nowadays the aim is to create a low inflation economy where investors have some surety about the future which leads to low unemployment.

I confess knowing little of Abba Lerner or his ideas but without the concept of low unemployment can be obtained by high inflation I don’t think his solutions would be needed.
 

kernals12

Banned
With this sort of policy we could keep unemployment at less than 2% without worrying about a torrent of inflation. Businesspeople would just have to learn to live with the annoyance of increased job vacancies.

With this, Jimmy Carter has a much better chance of being reelected. And eliminating the Latin American debt crises is obviously a very good thing, although IOTL the unrest caused by it is what led to the fall of most of the region's military juntas, so it might take longer for Latin America to return to democracy.
 

kernals12

Banned
A.W Philip’s has a lot to answer for! His theories about the relationship between high inflation and low unemployment blighted the 1970’s. In a nut shell he studied periods of low unemployment and Discovered that during these periods there was usually high inflation. He developed a tool for policy makers called the Philips curve. Essentially x amount of inflation equals y amount of unemployment. All a policy maker had to do in periods of high unemployment was to consult the curve and print some more money and hay presto jobs for all!

It was realised that this wasn’t working and the 1980’s was the painful period where Governments attempted to get the high inflation under control. Nowadays the aim is to create a low inflation economy where investors have some surety about the future which leads to low unemployment.

I confess knowing little of Abba Lerner or his ideas but without the concept of low unemployment can be obtained by high inflation I don’t think his solutions would be needed.
The idea that low unemployment causes high inflation came out long before A.W. Philips. Wages are by far the biggest cost for all businesses and if workers can bid up their pay when the labor market is tight, those higher wages will be passed on inevitably as higher prices.
 
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