Now, those who claim that inflation is caused by an overheated economy are really saying that the immediate source of stadium discomfort is people trying to get a better view of the action at the expense of others, The root cause problem is that the game has become too exciting. Companies always want to raise prices and employees always want to negotiate higher wages, but they only go for it when sales are high and jobs are abundant. Cool things down: Make sports less interesting—i.e. push the economy into recession or even recession—and people will return to their seats—i.e., inflation will slow down.
And that is, in fact, basically the policy major economies are adopting to control inflation. The Federal Reserve and the European Central Bank have been raising interest rates in a deliberate effort to slow their economies and raise the risk of recession, precisely to persuade companies that they no longer have “pricing power” and to persuade workers to That they cannot demand such a huge increment.
But is that really the best we can do? We want football games to be exciting; Will they remain boring enough to keep the audience on their seats? Accordingly, there are many good aspects of a warming economy – tight labor markets are leading to a welcome downturn in the economy, among other things. pay disparity, which had been growing for several years. Should we give up these benefits to control inflation?
In the 1970s, there was widespread talk of “income policy”—some combination of incentives and moral coercion that could reconcile low inflation with a warming economy. This kind of thing got taken away, I think, partly because of a bad experience with Richard Nixon. rate controland partly because of a general loss of faith in the ability of government.
But there have also been some historical examples of successful income policy. Notably, in 1985 Israel corrected high inflation without a severe recession, by implementing temporary wage and price controls.
Realistically, this is not going to happen in major economies in the near future. But is it really foolish to imagine that we can make the fight against inflation somewhat less painful by seeking tools that go beyond raising interest rates until businesses and workers have pushed their limits? Haven’t you learned?
President Biden has been given enough grief for the jaw-dropping corporations that he charged up Taking advantage of inflation to engage in profiteering. European countries have been criticized for trying to control energy bills rate control, We can debate the finer points of these policies, but are they wrong in principle?
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