Unite to debunk both the right-wing backlash that has bedevilled economic policymaking throughout the world for over 20 years, and the economic sophistries that spawned it!
The backlash has used the sheer shouting-power of modern propaganda capabilities, not logical arguments, to persuade the public that the cause of the mounting government debts that threaten most national economies is extravagant overspending, and that the "obvious" solution is ever more drastic cutbacks in government budgets. These assertions fly in the face of the facts.
Large annual government deficits and burgeoning debts began abruptly about 1975 or soon after in most countries. Until then the evolving "Keynesian" techniques of demand management had given the major industrialized countries some 25 years of approximately full employment at relatively stable prices after the end of World War II in 1945, and had given the developing countries hope of a promising future. Far from extravagant overspending, this was a period of government surpluses or relatively small deficits in most countries.
What brought this halcyon period to an end was a world-wide outburst of inflation following the end of the so-called Bretton Woods system of normally fixed exchange rates in 1973, and its replacement by a regime of generally floating rates. Demand management as then understood proved incapable of controlling the outburst. Failing any better proposals in good time from economists, Keynesian or other, practical policymakers saw no choice but to resort to the traditional remedy for inflation: the use of monetary and fiscal policies to depress the spending stream, i.e. the exact opposite of their use for over 25 years to support it and thereby to support output and employment.
The objective of this strategy was perfectly valid--inflation is indeed a serious malady that needs to be vigourously combatted--but it gradually became clear that the circumstances of the post-1973 inflations are categorically different from those of any past inflation. Monetary and fiscal retrenchment now conflicts with the automatic stabilizers put in place in the 1950s and 1960s; it is the depressing effects of retrenchment on the spending stream, not overspending, that caused the massive and persistent government deficits that began about 1975, as well as the ballooning debts that now quite rightly concern most business and economic observers and analysts. But, since budget- slashing is the cause of this problem, it can not also be its cure. It has proven to be an egregious error to combat an entirely new 20th century problem with 18th or 19th century weapons.
It seems abundantly clear that the cure for the government-debt problem (and most of the world's other economic and social problems) is to get each national economy working close to its full-employment level of output again. It seems equally clear that the most promising way to do that is to revive demand management. Finally, the sine qua non for that revival is finding an effective new means of controlling inflation--one that does not make unemployment worse--so that monetary and fiscal policies can again be used to support the spending stream.
Technical economic arguments had little to do with the initial change in official policies in the early 1970s, but new economic sophistries soon began to evolve, supporting the laissez-faire ideas long held by some economists, in Šan after-the-fact rationalization of what had gone wrong. Nevertheless, it must be acknowledged that Neoclassical and New Classical ideas have largely overwhelmed the economics profession for many years. Those ideas have spawned the right-wing backlash that has given us a new world-wide depression, which has already lasted twice as long as The Great Depression of the 1930s and shows no signs of ending.
Keynesian economists have, of course, valiantly criticized and combatted the Neoclassical and New Classical pretensions--e.g., Tobin and Davidson in the Fall 1992 issue of the Eastern Economic Journal. For example, at the end of his article Tobin lists six pieces of empirical evidence in support of his contentions. Two of his comments on the Neoclassical and New Classical assertion that most reported unemployment is largely voluntary will suffice to give their flavour. First, "If people are voluntarily choosing not to work at prevailing wages, why do they report themselves as unemployed, rather than as `not in labour force'?" Second, "The utilization of plant and equipment varies cyclically parallel to the utilization of labor. Presumably machines are not choosing leisure voluntarily."
However, the Keynesian rebuttals have not made much impression on public opinion, in the face of the blatant propaganda from right-wing sources. This propaganda is respectfully and persistently repeated by almost all news media and news analysts. Indeed, most news media and news commentators--printed, radio, or television--are extremely reluctant even to so much as acknowledge that contrary views exist. (It is probably no co‹ ncidence that most of the news media are part and parcel of corporate conglomerates that are receptive to right-wing views.)
Significantly, the arguments by most professing Keynesian economists do not seem to have seriously addressed the obvious fact that monetary and fiscal policies can not be simultaneously used to combat inflation and to support output and employment; they seem to accept the inevitability of the first, yet to hope for the second. Nevertheless a number of economists have proposed remedies for inflation that are designed to permit the revival of demand management--see the list under the heading "The Search for Remedies" in the appended article--but as yet there is no general consensus among Keynesian economists as to the best solution. If other economists, Keynesian or non- Keynesian, are dissatisfied with all of these suggestions, I invite them to either devise remedies for their deficiencies or come up with something new and better. Even an imperfect strategy would be better than the self-defeating strategy that governments have been conned into inflicting on their citizens.
These two issue--recognizing that inflation is the real enemy, and achieving a recession-free means of controlling it (or a reasonable facsimile thereof)--appear to offer the most effective immediate focus for refuting the unfounded assertions of the perpetrators of the right-wing backlash. This is probably the most critical objective of any strategy to rehabilitate demand management. Liberal economists of the world, let's get going!
The article that follows is essentially an updated version of one published in the June 1995 issue of the Banca Nazionale del Lavoro Quarterly Review, which enlarges on the arguments presented above. The main modifications consist of a considerable expansion of the alternative strategies listed under the heading "The Search for Remedies" and consequential additions to the References. Š May I also add a plea: If you know of other proposed strategies that seem promising, especially if they originate outside of North America, please inform me of them. Alex N. McLeod, Professor Emeritus of York University. Home address: 8111 Yonge Street #607, Thornhill Ontario Canada, L3T 4V9. Telephone 905-8891-0191.
The 1980s and 1990s have been marked by major annual deficits in the national government's accounts in most countries, and by mounting concern because the consequent rapid growth of their debts appears to be out of control in most cases.
The ratio of government debt to gross domestic product (GDP) is commonly used as an indicator of the seriousness of the burden on the economy, and the relative growth rates of debt and GDP as an indicator of the sustainability of current trends. If the debt is growing less rapidly than GDP, the trend is presumably sustainable, though not necessarily healthy.
Montgomery (1994) presents a chart showing the debt-GDP ratio for the G-7 countries from 1980 to 1992. The ratio for Japan levelled off about 1987 and has declined moderately since; for Britain it declined from about 1984 to about 1990, but began to rise again thereafter; for the other five countries it has followed a rising trend throughout. The current level of the ratio is about 24% for France and Germany, about 40% for Britain, about 50% for Canada, Japan, and the USA, and slightly over 100% for Italy.
The conventional wisdom declares: (i) that these deficits and debts are the result of extravagant government overspending; (ii) that the debt problem is rapidly getting worse, and in some countries will soon become so serious that financial markets will refuse to accept further government issues and will begin to dump those they now hold unless corrective measures are taken promptly, thus precipitating a major financial disaster; (iii) that the only viable remedy is ever more drastic cuts in government spending.
The conventional wisdom is quite right in identifying rapidly mounting government debt as a problem that threatens to bring on a financial meltdown. These are unproductive debts--they are not being used to finance new productive facilities that will pay for themselves in useful goods and services; instead, they will be a deadweight drain on future government income. Indeed, to the extent they are owed to foreign residents or to foreign organizations, they will be a deadweight drain on the real income of the entire economy.
However, the conventional wisdom is quite wrong in its diagnosis of the cause of the trouble, and in its prescription of a remedy.
These deficits and debts are not due to overspending by extravagant governments. On the contrary, they have been incurred by governments that have used monetary and fiscal retrenchment to control inflation, and because they have done so.
The fact is that most national governments for over 20 years have been fighting a 20th-century problem with 19th-century weapons. The proper solution to their debt problems, and to most of their associated economic and social problems as well, is to get their economies growing again and creating jobs. That requires finding a way of controlling inflation that does not make unemployment worse.
The real danger is that repeated predictions of doom by business and government leaders may eventually precipitate matters in one or more countries, and become a self-fulfilling prophesy. Indeed, in view of the tendency for a financial crisis in one country to spread to others, it would probably become an international financial crisis very quickly. The recent troubles of the Mexican peso, and the spinoff effects on the US and Canadian dollars and other currencies, are ample evidence of the seriousness of that threat.
We do have some time yet to set matters right, but not unlimited time.
Widespread major government deficits first appeared in the mid-1970s. For six of the seven members of what is now the G-7 Group, 1975 marked an abrupt and adverse change in the budgetary accounts of their national governments; for the seventh (Italy), a similar abrupt change occurred three years later (see Table 11). Most other countries had basically similar experiences.
In most countries the official reports of government finances (by fiscal years) are designed primarily to show that revenues have been collected and appropriations have been spent as the legislature intended; the concept of "profit" or "loss" does not apply. For this and other reasons they may contain important peculiarities that have no parallel in private-sector accounting, and that therefore may cause confusion when direct comparisons are attempted. _______________ [End of footnote.]
In Britain, Canada, Germany, and Japan the change was from years of substantial annual surpluses to substantial annual deficits, or to materially smaller surpluses and occasional deficits. In France it was from substantial surpluses to substantial deficits and occasional surpluses. In the USA it was an approximate doubling of the annual deficits, followed by a further sharp escalation in the 1980s. In Italy there was a sharp break between relatively moderate deficits and materially greater deficits in 1978, and a further escalation in the 1980s.
Except for Germany and (after 1986) Japan, deficits predominated in the 1980s. At the start of the 1990s, with the exception of Japan and the partial exception of Britain, all were experiencing major deficits.
Country.......Britain........Canada....France....Germany.....Italy...........Japan...........U.S.A.
Unit2..........MM...........MM.......MM.........MM.........MMM.........MMM.......MMM
1946...............-856........-385 ........n.a............n.a.............n.a...............n.a.............3.3
7....................-92...........608........n.a..........n.a............n.a................n.a.............13.4
8...................433...........762..........n.a..........n.a...........n.a................n.a..............9.2
9...................505...........568..........n.a.........n.a.........n.a...................n.a.............-2.5
1950................591...........671..........n.a.........630........n.a................n.a.................8.2
1...................538...........995...........n.a......1,820.......n.a............... n.a...............6.0
2....................258...........317.......... n.a......3,010........n.a..............n.a..............-3.4
3......................85...........202............n.a......4,560......n.a...............n.a..............-5.9
4....................112............30.............n.a......5,500......n.a...............n.a...............-6.1
1955................ 370.......282..........n.a......6,980............n.a..............n.a...............4.2
6................... 279.......695.......2,363.....7,660.......... n.a...............n.a...............6.3
7....................379.......374........2,860.....6,300...........n.a...............n.a...............2.2
8....................465......-548........7,120.....5,450..........n.a...............n.a..............-8.5
9....................335.......-80.........8,380.....5,320..........n.a...............n.a...............-2.6
1960.....................40.......112.........8,520.....8,510..........n.a..............n.a..............3.5
1 .....................278......-236.....8,470.....10,030...........n.a............. n.a.............-2.6
2......................600......-387.....7,700.....8,290.......... n.a...............n.a..............-3.4
3......................168......-204.....9,940.....7,920...........n.a...............n.a................1.1
4......................422.......396....17,008....10,430......... n.a..............n.a................-2.6
1965...................800.......713.....18,961.....7,360..........n.a...............n.a................1.3
6...................1,104.......459....20,985.....8,730.........n.a...............n.a.................-1.4
7...................1,178.......169...13,940......6,290.........n.a...............n.a................-12.7
8...................1,749.......267...13,597......8,170.........n.a...............n.a..................-4.7
9...................2,939.....1,267....22,292...16,720........n.a..............n.a....................8.5
1970................3,532.......481....22,875....19,390.......255.........1,686.................-13.3
1...................2,842.......107....21,152....21,280. . ..-869.........1,380.................-21.7
2...................1,163......-197....24,934....11,490.....-1,470.......1,843.................-17.3
3......................894.......815....27,712....20,320......-1,470.......3,357..................-6.6
4......................609.....1,826...29,166....17,070......-1,852........1,786...............-11.6
1975....................-997....-3,200....-3,167....-6,040....-3,192........-1,754..............-69.4
6....................-2,648....-2,729....25,413.....2,890....-1,990........-2,513.............-52.9
7....................-1,340....-6,774.....6,312.....9,570....-2,220.........-3,621.............-42.4
8....................-3,489...-10,308....-7,196.....7,360...-15,550......-2,774..............-28.1
9....................-2,430....-9,221....-3,832.....9,140...-16,502.......-4,730..............-15.7
1980....................-2,988...-10,481... 21,248.....6,610...-19,139.....-4,680............-60.1
1.......................-4,671....-7,305....-7,307....-4,600.....-30,419....-5,241............-58.8
2 ......................-5,021...-20,004...-35,404...-4,620....-41,558....-5,971..........-135.5
3.......................-5,346....-24,536...-89,292.....3,170...-56,829...-6,226..........-180.1
4.......................-6,619...-28,667....-93,523.....7,070...-60,815....-5,079.........-166.9
1985...................-4,644...-30,463...-98,592....12,010...-66,189....-4,615..........-181.4
6......................-5,559...-22,955...-71,100.....7,920....-70,800....-3,214..........-201.0
7......................-2,532...-20,209...-61,096.......590...-73,377..........488 .........-151.8>br>
8.......................7,267...-18,451...-49,789....-6,970...-75,764......2,462..........-141.7
9......................10,500...-20,342...-37,347....19,200...-80,576.....1,670.........-134.3
1990...................5,601...-25,245...-23,449...-20,640...-89,833......6,800...........-166.2
1.....................-2,681...-30,296...-80,447...-25,300..-106,490.....6,129..........-203.4
2.................. -23,979...-28,012.-170,855....4,050.....-135,134.......736...........-276.3
3....................-31,668
4
This favourable experience was brought to an end by the alarming acceleration in most countries, beginning in the late 1960s, of what had long been merely creeping and relatively stable domestic inflations, for reasons that are beyond the scope of this article. In response, the authorities generally allowed interest rates to rise and unemployment to increase appreciably--some sooner, some later.
The rates of inflation in the major industrialized countries had diverged significantly throughout the postwar period, but by the late 1960s they began to diverge even more (see Table 2). These divergences had already caused the many currency crises that dotted the postwar years; in the end they brought about the collapse of the Bretton Woods system of normally fixed exchange rates in 1973, and the shift to a regime of flexible rates.
Inflation soared anew everywhere thereafter--to 31.6% per annum in Japan (1974), 24.3% in Britain (1975), even 7% in prudent Germany (1973 and 1974). Demand management as then understood proved incapable of controlling this new threat to economic progress. To this day the fear of encouraging a renewal of inflation is the main economic obstacle to the implementation of measures designed to support output and employment.
Country........Britain.....Canada...France....Germany.......Italy......Japan.......U.S.A.
1946................1.2.......3.9............n.a...........n.a.............18.4........n.a............8.0
7................1.6.......8.8............n.a...........n.a.............63.8........n.a...........14.8
8................8.7......14.9...........n.a...........n.a..............5.3.........n.a............7.5
9................3.0........3.0............16.0........n.a..............1............n.a..........-1.
1950................2.7.......3.1...............8.0.........-6.3...........-1.0........-7.6.........-1.3
1................9.9......10.4.............17.6.........7.8..........12.5........16.5..........8.1
2................6.3.......2.5.............12.0.........2.1............1.8..........5.0..........2.1
3................1.6......-1.0.............-2.1........-1.9............3.4..........6.6........-0.8
4................1.6.......0.6..............0.6..........0.2.............2.9.........6.5..........0.4
1955................3.5.......0.2 ..............0.9..........1.7.............2.3........-1.0.........-0.2
6................4.1.......1.3................3.9..........2.6.............2.4..........0.0..........1.5
7............... 3.4.......3.4...............-0.5..........2.0.............1.1..........3.1..........3.3
8...............2.8.......2.7...............15.2..........2.2.............2.8........-0.4..........2.9
9...............0.5.......0.9.................5.8..........0.9.............1.3..........0.9..........0.7
1960................1.0.......1.4............... 4.2..........1.5..............2.1..........3.8.........1.6
1................3.5.......0.9................2.4...........2.3.............2.0..........5.4.........1.1
2...............4.1.......1.2 ................5.2...........2.9.............5.0..........6.6.........1.1
3...............2.0.......1.7.................4.8...........3.0.............6.7..........7.8..........1.2
4...............3.3.......1.8.................3.4...........2.3.............6.3..........3.7..........1.3
1965.................4.8.......2.4................2.7..........3.2.............4.2..........6.7...........1.6
6.................3.9.......3.7................2.6..........3.6.............2.4..........5.0...........3.1
7.................2.4.......3.6................2.8..........1.6.............1.3..........9.2...........2.8
8................4.7.......4.0................4.6..........1.6.............1.2..........5.4...........4.2
9................5.5.......4.6................6.1..........1.9.............3.8..........5.3...........5.4
1970.................6.4.......3.3................5.9..........3.4.............5.0..........7.6...........5.9
1.................9.5........2.9..............5.5..........5.2.............5.0..........6.3...........4.3
2.................7.1.......4.8................6.2..........5.5.............5.7.........7.5...........3.3
3.................9.2.......7.5................7.3..........7.0............10.8.......15.7..........6.2
4................15.9......10.9............13.7..........7.0............19.1........31.6.........11.0
1975................24.3......10.8............11.8..........5.9............17.0..........8.1............9.1
6................16.6........7.5..............9.6..........4.3............16.7..........5.0............5.8
7................15.8........8.0...............9.4.........8.2............18.5..........1.9............6.5
8..................4.7........8.9...............9.1..........2.7...........12.1.........-2.6............7.6
9................13.4.......9.1.............10.8..........4.1............14.8...........7.3..........11.3
1980................18.0......10.2.............13.3.........5.4............ 21.3.........17.8..........13.5
1................11.9......12.4.............13.4.........6.3.............19.5............5.0.........10.4
2..................8..6.....10.8.............11.8..........5.3............16.5............2.7............6.2
3..................4.6........5.8 ..............9.6..........3.3............14.6............1.9............3.2
4..................5.0........4.3...............7.4..........2.4............10.8............2.3............4.3
1985................6.1.......4.0...................5.8.........2.2...............9.2............2.0...........3.6
6................3.5.......4.1...................2.8.......-0.3..............5.9.............0.6...........1.9
7................4.2.......4.4...................3.3.........0.3.............4.8..............0.1...........3.6
8................4.3.......3.9...................3.0..........1.3............4.0.............0.6............3.8
9................7.8.......5.0...................3.9...........2.8...........6.3.............2.3.. .........4.8
1990................9.5.......4.8...................3.2.......2.7...................6.4...........3.1..........5.4
1................5.8.......5.6...................3.2.......3.5.................12.3...........3.3..........4.3
2.................3.7......1.5...................2.4.......4.1...................5.2...........1.7..........3.0
3................1.5.......1.9...................2.1.......4.1...................4.5...........1.2..........3.0
41..........2.9.......0.2..................1.7.......2.9...................4.0............0.0.........2.9
________________________________________________________________________
At the first "summit" conference in France in 1975 the six participants Š(Britain, France, Germany, Italy, Japan, and the USA) agreed that their economies needed stimulation to reduce unemployment, but the emphasis changed rapidly thereafter. By the second summit in Puerto Rico a mere seven months later (thereafter known as the G-7 Group, including Canada) there was a consensus that inflation had to be combatted vigourously. Failing the proposal of any better solution, and enlivened only by predictably unsuccessful attempts at price controls, by then most major industrialized countries had adopted or were adopting the centuries-old remedy: a strategy of combined monetary and fiscal retrenchment.
To put it bluntly, this meant deliberately and substantially depressing the national economy--temporarily, it was doubtless hoped, but that is not how it worked out.
Personally, I admit to being as guilty as anyone else at that time in not foreseeing all that was implied in the new direction economic policy was taking, and not being able to offer any better advice until too late.
Actually, retrenchment had begun even before the 1976 G-7 agreement. Monetary policy, traditionally the first line of defence against inflation, was tightened promptly in most of these seven countries by 1973, and progressively tightened further in succeeding years. Before the war that had always brought a fairly prompt end to inflation, but this time inflation increased.
As already noted, some fiscal restraints had already been imposed in the late 1960s, as government after government compromised its support for output and employment in the face of rising inflation. As time passed, these restraints were brought increasingly into play, in the form of some combination of spending cuts and tax increases. Most other countries accepted the new G-7 orthodoxy, willingly or unwillingly. Some tried to resist, but fell into balance-of-payments difficulties for their pains, and had to conform eventually in order to get help from the International Monetary Fund.
However, inflation proved very stubborn everywhere; in the G-7 Group it was not brought down to levels the national authorities were prepared to tolerate until the early 1990s, by which time their fiscal restraints had become very severe indeed in most cases. The tendency now is to favour spending cuts rather than tax increases.
Meanwhile, as described earlier, huge government deficits had suddenly appeared in or about 1975, and have persisted to this day.
The sudden appearance of huge government deficits, the start of unexpectedly persistent inflation, and the implementation of the retrenchment strategy at about the same time is not by any means a mere coincidence. The explanation lies in a certain aspect of demand management as it evolved after the war.
A major feature of those years was a great expansion of social-welfare systems, especially in those countries that had previously had limited provisions of this sort. These important institutional changes involved the establishment, partly by accident and partly by design, of what came to be known as "automatic stabilizers", which played an important ro^le in demand management's successes. They operate through the spending stream--the circular flow of money payments that regulate consumption and production, and in the process generate the incomes out of which these payments are ultimately made.
These stabilizers proved ineffective against the strong inflationary pressures of the early 1970s, but they work very well against deflationary forces. If the spending stream weakens and threatens to throw the economy into a recession, social-security payments grow to support the newly unemployed and the newly impoverished, while government revenues decline. That automatically creates a government deficit, which re-expands the spending stream and significantly counteracts the recessionary forces.
The new stabilizers changed the response of the economy to official retrenchment in two important ways.
First, automatic government deficits substantially offset the effects of tight money and fiscal restraint in reducing the spending stream and fighting inflation. That is why it took the individual national authorities over 20 years to beat their domestic inflations back to levels they feel are tolerable.
Second, by 1975 the depressing effects of the progressively strengthening combination of fiscal and monetary restraints at last began to materially exceed the supporting effects of the stabilizers in most countries. That put their national government budgets into a series of monumental annual deficits.
High market interest rates meant that interest charges on rapidly-mounting public debts further enlarged the annual deficits. In many countries tax concessions for the well-to-do, intended to stimulate new capital spending but ineffective in depressed economies, added to the problem.
Note that, although inflation has at last been brought under some semblance of control, it has not been entirely eliminated in any of the G-7 countries even now.2 Indeed, it threatens to accelerate again if real national income begins to expand at more than a relatively moderate rate.
Monetary policy has now been materially eased in most countries, and fiscal restraint has become the main element in the retrenchment strategy. However, monetary policy stands ready to re-enter the fray if inflation threatens to get out of hand once more, and has recently done so in the USA.
This rather modest success has been obtained at tremendous cost in lost real income, unemployment, and other economic and social evils. The continuing conflict between repeated deflationary initiatives and the automatic stabilizers has thrown individual national economies and the world economy into a depression that has already lasted 20 years and shows no sign of ending. No other word does it justice. Recessions have been long and deep, recoveries slow and incomplete. Unemployment has been persistently high, and productive capacity has not been fully utilized even at the peak of each business cycle.
Deficit cutting and debt reduction can only be practiced without hurting the economy in good times, when the private sector is able and willing to borrow the money the government is repaying, and spend it on new productive facilities. In hard times the attempt is largely self-defeating, and only makes a bad situation worse.
We are faced with an entirely new problem that is peculiar to the last half of the 20th century: we now know how to use fiscal and monetary policies to support high levels of output and employment, and we have long known how to use them to combat inflation, but we have yet to find a way to achieve both objectives simultaneously.
Finding a remedy for inflation that does not make unemployment worse, yet is compatible with the free-enterprise money-and-market system, would solve the problem of government deficits by reviving government revenues and reducing social-support spending. Also, it would either solve most of the nation's other economic and social problems or make them manageable, and it would make a generous social-security net easily affordable.
The market mechanism, though not without serious flaws, is better than any other known system at so directing a given spending stream as to give each individual income-earner access to the most satisfactory mix practicable of the goods and services that his or her share of that spending stream can command. However, it is not very good at raising the economy's output to a reasonable approximation of its full potential, and keeping it there; that is exactly what led to the invention of demand management some fifty years ago.
The system of demand management that worked so well for 25 or 30 years after the war, and that I wish to reactivate in an improved and inflation-proof form, is perfectly compatible with the free-enterprise money-and-market system. It supports the market mechanism, it does not supplant it.
Demand management permits the market mechanism to do the things it does efficiently, while at the same time ensuring the achievement of high levels of output and employment. It cushions, but does not oppose, the structural adjustments that are more or less continuously necessary in a dynamic economy. It does not condone the protection or bailout of inefficient firms or industries, or other offences against economic common sense.3 It yields a net economic benefit in the form of greater real income for the economy, and better overall welfare for its residents, than the unassisted market mechanism can deliver.
The only actual attempt so far at a recession-free remedy for inflation has been price controls, but they have been thoroughly discredited in practice. Most past attempts have been ill conceived or ill administered or both. However, the most damning fault of even the best imaginable plan is that it is not compatible with the free-enterprise money-and-market system, which relies on prices and price movements to direct production and consumption efficiently.
There are other and more promising strategies available; several such proposals have already been made by a minority of economists over the years. Those by North American economists include:
I also propose longer-range remedies for some of the inflationary biases now to be found in our economic system (McLeod, 1994, pp. 197-229.). Perhaps the most radical suggestion is that we accept a challenge posed in the 19th Šcentury by Victory Hugo (1972 reprint, vol. III, p. 27 [Fourth Part, Seventh Book, IV]). He argued that "work cannot be a rule without being a right"--if work is the way to earn food and survival, then work is a right.
Note that my proposed strategy would relieve the general price level of the ro^le of determining the equilibrium level of output that it plays in market-clearing models. (The same would be true of any other strategy for effectively controlling inflation without employing monetary or fiscal restraint.) The Classical Dichotomy would return in a new guise: relative prices would rule the economic roost, and the equilibrating process would involve only changes in the prices of individual goods and services. The absolute level of prices would become invariant, a mildly interesting historical remnant of the situation that happened to exist when it was stabilized in any particular country.
International equilibrium would, of course, require that the relationships among the price levels in various countries and the exchange rates among their currencies would be consistent with the principles of Purchasing Power Parity. The adjustment process would involve some combination of changes in individual exchange rates, changes in the domestic prices of some or all traded goods and services in one or more countries, and compensating changes in the prices of some or all non-traded goods and services in the same countries.
Most of the foregoing proposals have obvious flaws, but they do offer a starting point, and they offer many good ideas that might eventually be incorporated in a more comprehensive plan. If other economists are dissatisfied with all of them, I would like to encourage them to either devise remedies for their deficiencies or come up with something new and better. Even an imperfect strategy would be better than the self-defeating neoclassical strategy.
Sobering economic and psychological problems will have to be overcome in successfully raising national economic outputs to or near their potential, no matter how well designed and how well administered the program is. However, these problems should not discourage us from making a valiant attempt, especially for such a worthwhile prize.
Cornwall, John, and Wendy Maclean (1984). Economic Recovery for Canada: A Policy Framework. Ottawa; Canadian Institute for Economic Policy, 1984.
Cornwall, John (1994). Economic Breakdown and Recovery: Theory and Policy. Armonk N,Y.; M.E. Sharpe, 1994.
Fortin, Pierre (1993). "The Unbearable Lightness of Zero-Inflation Optimism", Canadian Business Economics, vol. 1, no. 3, Spring 1993, pp. 3-18.
______"A Strategy for Deficit Control through Faster Growth", Canadian Business Economics, vol. 3, no. 1, Fall 1994, pp 3-26.
Hellyer, Paul (1971). Agenda: A Plan for Action. Scarborough, Ontario, Canada: Prentice Hall, 1971.
_______ (1981). Exit Inflation. Scarborough, Ontario, Canada: Nelson Canada, 1981.
_______ (1984). Jobs for All: Capitalism on Trial. Toronto: Methuen, 1984.
Hugo, Victor (1972 reprint). Les Miserables. Paris; Le Livre de Poche, 1972.
Lerner, Abba P. (1979) "The Market Antiinflation Plan", in J.H. Gapinski and C.E. Rockwood (eds.) Essays in Post-Keynesian Inflation, Cambridge Mass.: Ballinger, 1979.
McLeod, Alex N. (1975). "The Essential Conditions for International Economic Stability", Banca Nazionale del Lavoro Quarterly Review, no. 113, June 1975, pp. 171-186.
______ (1979). "The Fearsome Dilemma: Simultaneous Inflation and Unemployment", Banca Nazionale del Lavoro Quarterly Review, no. 131, December 1979, pp. 377-389.
______ (1983). "Wanted: A Better Anti-Inflation Strategy", Queen's Quarterly [Kingston, Canada], vol. 90, no. 1, Spring 1983, pp. 1-15.
______ (1984). "Levy against Inflation, for Jobs",
______ (1987). "Deficit Cutting", Policy Options, vol. 8, no. 10, December
1987, pp. 9-11.
______ (1991). "ANY Inflation Is Too Much", Policy Options, vol. 12, no. 2,
March 1991, pp. 24-28.
______ (1993). "Economic Policymaking: High Time for New Thinking", Policy
Options [Montreal], vol. 14, no. 8, October 1993, pp. 28-34.
______ (1994). The Fearsome Dilemma: Simultaneous Inflation and Unemployment.
Rev. ed., Stratford, Ontario, Canada; Mercury Press, 1994.
Montgomery, John (1994). "The Changing Nature of Government Debt Markets",
Finance & Development, vol. 31, no. 4, December 1994, pp. 40-41.
Weintraub, Sidney, and Henry C. Wallich (1971). "A Tax-Based Incomes Policy",
Journal of Economic Issues, vol. V, no. 2, pp. 1-10-9.
Weintraub, Sidney (1978). "Proposals for an Anti-Inflation Policy", Challenge,
vol. 21, no. 4, pp. 53f.
< Return to Home Page