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.
(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.
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.
(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.
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.