Instead of arguing about what to do now about inflation, why don’t we just repeat whatever policies that have worked in the past?
The Fed can raise interest rates to the point where buyers can’t afford loans for goods, services and labor. This squashes inflation but causes other ills like unemployment and stagnant economic growth.
There are two types of inflation:
- People creating money from air.
- Shortages and other problems making it more costly to get products to the shelf.
For the first, you can raise interest rates - and that’s what we usually do. For the latter, there might not much that you can do about it but wait it out. Playing with the money doesn’t change how hard it is to bring stuff to the shelf.
Let’s imagine WWII for example. Most factory labor was done by younger, US citizen men. Those people were sent off to Europe and the Pacific and could no longer produce all the products that people needed in order to stay alive and comfortable. So if there are fewer cans of tomato soup available then the prices for soup are going to go up. Devaluing the dollar, sending out stimulus checks, etc. doesn’t fundamentally change that. Maybe someone gets a stimulus check earlier than everyone else, can buy up more cans of soup before everyone else, and they’re happy for a day but as the checks start landing all around the country the prices are going to have to go up even more as the late recipients start to bid for the still insufficient quantity of soup.
The solution then was to tell women to go to work in factories. And something like that is the only real solution. You need to actually fix the issue, there’s no way to fudge around it by playing with numbers on paper.
Today, though, the things that we could do to improve the situation are more difficult and would take a while to implement.
If we want to reduce the price of gas, the best way would be to end the dependency on gas. To do that, though, we would need to be able to build a lot of batteries, which means that we need a lot of lithium. Building new lithium mines is not a quick thing.
The only plausible area of opportunity is if there are still production issues due to moving around the supply lines for the pandemic and post-pandemic world. That requires human labor to refit machines and to do manual production that should be automated. We could import more workers or assign military to work in factories. That’s about all we have.
According to the economist Richard Wolff, price controls in WW II and during Nixon’s reign worked pretty well to control inflation.
What ended the inflation of the 70s was a severe recession in the early 80s. It was painful, but it worked.
This is accurate, but surely we can do better than that. I understand capital doesn’t like price controls, but working people don’t like unemployment and austerity. Deciding they should take the hit to end inflation is a political call, not the only economic possibility.
I thought it was Volcker raising the interest rates.
Volcker’s interest rate increases brought on a severe recesión, which ended the 1970s inflation.
Nixon’s price and wage controls had a short term effect but obviously didn’t solve the problem.
A combo of price controls, rationing, and public pressure to paint price increases as unpatriotic kept inflation mostly under control in world war 2.
I’d have to see exactly what he wrote but the law of supply and demand would say that if supply drops then the price is going to go up. There’s no way around that but getting people to stop caring about the supply or by getting the supply back up again. If we’re talking food, there’s no way to get them to care less about the supply.
My guess would be that he said that the price controls kept producers/distributors from raising prices on inventory, pre-emptively, under the expectation that the inventory was going to deplete without laborers. And this saved us from a price shock while moving women into the roles, which solved the underlying issue, before supplies ran short.
But I suppose that it does raise the point that another thing that you can do is to advertise to people to tighten their waist belt and accept some diminished comfort for a time, while times are tough.
Most North American women workers in both world wars worked in “traditional” women’s work: secretarial work especially in government and military, nursing, and daycare. Rosie the Riveter made up a small fraction of the women in the workforce.
The larger point is economic decisions are as value-laden, and thus political, as any other. The decisions are not based on objective science but on underlying values and beliefs. The law of supply and demand is not like the law of gravity or even traffic laws. It is simply the enshrined and legally protected right to allow some people to charge what the market will bear. This law does not operate in many societies, historically.
As far as economists are concerned, raising the interest rate is how central banks can help fight inflation, as one of the ways that money is created is by banks making loans. The decrease in the money supply means that there is less pressure upward on prices.
In terms of what will end the current inflation spell, I like to think that it will require people who recently retired or otherwise left their jobs to reenter the workforce. Some of that will require the pandemic being less of an issue, and at least in the last few months that seems to be the case, even if it’s not eradicated. Additional child care opportunities should bring more people back into the workforce, but no one seems really keen on pushing this issue. And of course retirees might worry about running out of money long-term and take some of the part-time jobs that are hard to fill at a reasonable wage these days, helping bring down price increases needed due to increased wages needed to be paid to find enough help.
Inflation has also slowed down somewhat from the worst months. The CPI-U in June was 296.311, and it was 296.808 for September, a very minor change. Now September prices did increase a bit, but for August and July the CPI went down. If you consider that it takes a bit of a time-lag for the effects of rate increases to be felt, it looks like we might be at a point where rate hikes can stop or at least slow down. I think too many people focus on the yearly inflation rate and not enough on the month-to-month and 3-month rates. Month-to-month is obviously very noisy, but yearly data takes a lot of data from before there were any rate hikes. In the time frame that makes the most sense to analyze, it looks like inflation is under control to me, though that’s just looking at the overall CPI data, and my guess is that perhaps looking at the individual components might tell a different story.
The entire economic system collapsing and being replaced by a primarily non-monetary one worked for the roman empire
There were 6 million women working in factory positions, during the war. Around the start of the war, there were probably about 12 million people working in manufacturing.
A swap of half of the labor force in a top level industry is pretty far from being insubstantial.
Here’s a simple solution. If Richard Wolff says that, stop reading Richard Wolff.
The first cite is vague, written for a museum and not clear on what work women did in factories. Which of the 89 pages in the second cite contain the needed information?
I am not sure why people are so quick to support federal policy that is actually aimed at hurting working people and are so reluctant to consider other ideas.
In some areas, the collapse of the Roman Empire led to an increase in health and the standard of living.
Inflation can be extremely hard to control. Not only does the central bank have to raise interest rates, but that can’t be offset by the government borrowing more money to spend as stimulus to 'ease the pain ’ of the high interest rates or to bail out failing businesses. You need a combination of low domestic spending and high interest rates.
How high do rates have to go? Well, in 1980 they went to 14.8% in the U.S. Mortgages went even higher. The ‘Taylor Rule’ is an economic principle that says interest rates need to be raised 2% above inflation, adjusted for GDP growth. You need interest rates to be higher than inflation, or the interest rate is actually stimulative. Think about it: If interest rates are 5% but inflation is 8%, the real rate is -3% and peoole have an incentive to borrow more money, or to spend their money rather than leaving it in the bank.
Here’s the problem: Policymakers have used zero interest as an excuse to borrow outrageous amounts of money, and so have states, cities, businesses and individuals. This has made increasing interest rates even more destructive. The U.S. government has 31 trillion in debt. Half of it has an average maturity of about 3.5 years. If interest rates are 10% when that debt rolls over, that will cost 1.6 trillion dollars that will have to be borrowed. If the entire debt rolls over and interest is 10%, that’s 3.1 trillion in annual debt service - an amount that would break the government.
So I’m not sure what practical tools are available. One would be a tax increase on the rich, the middle and lower classes, with every nickel of it used to retire debt. Another method would be to improve the supply side by lowering expensive regulations to help bring supply closer to demand.
Another possibility is that we raise interest rates more, but not THAT high, but because our terrible leaders have flown us into an economic coffin corner it still causes cascading failures of businesses, a mortgage crisis, government crises, and a very deep recession. That is another way to shrink the momey supply.