Modern monetary theory and inflation – Part 2


Bill Mitchell – billy blog: Modern Monetary Theory … macroeconomic reality has the article Modern monetary theory and inflation – Part 2.

Raw material shocks can also trigger of a cost-push inflation. They can be imported or domestically-sourced. I will devote a special blog to imported raw material shocks in the future.

But the essence is that an imported resource price shock amounts to a loss of real income for the nation in question. This can have significant distributional implications (as the OPEC oil price shocks in the 1970s had). How the government handles such a shock is critical.

The dynamic is that the imported resources reduces the real income that is available for distribution domestically. Something has to give. The loss has to be shared or borne by one of the claimants or another. If the workers resist the lower real wages or if bosses do not accept that some squeeze on their profit margin is inevitable then a wage-price/price-wage spiral can emerge.

I am glad to see an MMT person address the issue of cost-push inflation as we experienced with oil in 1974. However, I find this article’s explanation a good deal weaker than the part 1 explanation of demand-pull inflation. After wading through the article, the only prescription that I can find is the following:

The preferred approach is to use employment buffer stocks in conjunction with fiscal policy adjustments to allow the available real income to be rendered compatible with the existing claims.

The way I interpret this is that the government puts the brakes on the economy to increase private sector unemployment, but the government Job Guarantee takes up the slack in employment. With the JG, there is no unemployment, but the average salary is lowered. I have always felt that the way Ronald Reagan finally got inflation under control was to put the brakes on the economy to increase private sector unemployment. In Reagan’s case there was no government JG to ease the pain.

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