Inflation Heresies by Dani Rodrik – Project Syndicate

0
1

Experiments that depart from conventional economic policy can be costly. But this does not mean that there are universal rules in economics or that the prevailing view among mainstream economists should determine what policymakers do.
CAMBRIDGE – The specter of inflation is once again stalking the world, after a long period of dormancy during which policymakers were more likely to be preoccupied by price deflation. Now, old debates have resurfaced on how best to restore price stability.
Should policymakers step on the monetary and fiscal brakes, by reducing spending and raising interest rates – the orthodox approach to fighting inflation? Should they instead move in the opposite direction by lowering interest rates, a route followed by Turkey’s central bank under the direction of President Recep Tayyip Erdoğan? Or should policymakers perhaps try to intervene more directly, through price controls or by clamping down on large firms with price-setting power, as some economists and historians in the United States have argued.
If you have a knee-jerk reaction to these policies – immediately endorsing one remedy while rejecting others out of hand – think again. Economics is not a science with fixed rules. Varying conditions call for different policies. The only valid answer to policy questions in economics is: “It depends.”
Orthodox remedies for inflation often have costly side effects (such as bankruptcies and rising unemployment) and have not always produced the desired effects quickly enough. Price controls have sometimes worked, during wartime for example.
Moreover, when high inflation is driven predominantly by expectations rather than “fundamentals,” temporary wage-price controls can help coordinate price-setters to move to a low-inflation equilibrium. Such “heterodox” programs were successful during the 1980s in Israel and in a number of Latin American countries.
Even the idea that lower interest rates reduce inflation is not necessarily outlandish. There is a school of thought within economics – dismissed by most mainstream economists today – which associates inflation with cost-push factors, such as high interest rates (which boost the costs of working capital).
Our newest magazine, The Year Ahead 2022: Reckonings, is here. To receive your print copy, delivered wherever you are in the world, subscribe to PS for less than $9 a month
As a PS subscriber, you’ll also enjoy unlimited access to our On Point suite of premium long-form content, Say More contributor interviews, The Big Picture topical collections, and the full PS archive.
Subscribe Now
The inflation-producing effects of high interest rates is called the “Cavallo effect,” after former Argentine finance minister Domingo Cavallo, who discussed it in his 1977 Harvard doctoral thesis. (Ironically, Cavallo would resort to a very different inflation-fighting strategy – based on a fixed exchange rate and full currency convertibility – when he assumed office in perennially high-inflation Argentina during the 1990s.) The theory has even received some empirical support in particular cases.
That is why ridiculing currently unfashionable ideas on inflation as “science denial” akin to rejecting COVID-19 vaccines, as some prominent economists have done, is so misplaced. In fact, when a particular claim about the real world appears inconsistent with existing theories, this is often an invitation for a young, smart economist to demonstrate that the claim can indeed be justified, under certain specific conditions. The true science of economics is contextual, not universal.
What might a contextual approach to inflation imply today?
Current inflation in the US and many other advanced economies differs significantly from the inflation of the late 1970s. It is neither chronic (so far), nor driven by wage-price spirals and backward indexation.
Inflationary pressure seems to derive largely from a transitory set of factors, such as the pandemic-related reallocation of spending from services to goods, and supply-chain and other disruptions to production. While expansionary monetary and fiscal policies have boosted incomes, these policies, too, are temporary. The alternative would have been a dramatic collapse in employment and living standards.
Under current circumstances, then, policymakers in developed countries should not over-react to the spike in inflation. As the historian Adam Tooze has argued, transitory inflation calls for a restrained response, whether through regulation or monetary policy.
The best argument against price controls is not that they are “incompatible with science” but that nothing so radical needs to be considered for now. The same caution would apply to orthodox policy as well: central banks should be patient before raising interest rates.
What about Erdoğan’s continued insistence that high inflation is the result rather than the cause of high interest rates? The validity of his argument has always been in doubt, given that Turkey’s macroeconomic imbalances are legion and have been building up for quite some time.
Even when an argument cannot be settled beforehand, facts eventually allow us to distinguish among theories that do and do not make sense in a given place. In Turkey’s case, the evidence that has accumulated since policymakers embarked on Erdoğan’s experiment speaks loudly and clearly.
In particular, despite the lowering of the Turkish central bank’s policy rate – the interest rate that the monetary authorities control directly – market interest rates have continued to rise. Depositors and savers have demanded higher rates, driving up the price of credit for borrowers.
This undermines the argument that lower policy rates could effectively reduce production costs for firms. It indicates that the rise in interest rates reflects more fundamental problems with the economy, uncertainty about the conduct of economic policy, and higher inflation expectations for the future.
Sometimes, as in Turkey’s case, the orthodox economic argument is indeed the correct one. Experiments that depart from conventional policy can be costly. But this does not mean that there are universal rules in economics or that the prevailing view among mainstream economists should determine policy. Otherwise, some of the most important policy innovations in history – think of the New Deal in the US or industrial policy in post-World War II East Asia – would never have occurred.
In fact, today’s dominant monetary policy framework, inflation targeting, is itself a product of the peculiar political and economic circumstances that prevailed in New Zealand during the 1980s. It sat uncomfortably with the theory of monetary policy of the time.
Economists should be humble when they recommend (or dismiss) various inflation-fighting strategies. And while policymakers must pay attention to economic evidence and arguments, they should be skeptical when the economists who advise them display excessive confidence.
For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world’s foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever – and we remain committed to fulfilling it.
But there is no doubt that we, like so many other media organizations nowadays, are under growing strain. If you are in a position to support us, please subscribe now.
As a subscriber, you will enjoy unlimited access to our On Point suite of long reads, book reviews, and insider interviews; Big Picture topical collections; Say More contributor interviews; Opinion Has It podcast features; The Year Ahead magazine, the full PS archive, and much more. You will also directly support our mission of delivering the highest-quality commentary on the world’s most pressing issues to as wide an audience as possible.
By helping us to build a truly open world of ideas, every PS subscriber makes a real difference. Thank you.
Subscribe Now
Jan 10, 2022 Gordon Brown & Martin Griffiths
Jan 11, 2022 Kofi Boa & Roger Thurow
Jan 10, 2022 Manuel Muñiz
Jan 10, 2022 Pedro Frizo
Jan 8, 2022 Djoomart Otorbaev
Writing for PS since 1998
192 Commentaries


Dani Rodrik, Professor of International Political Economy at Harvard University’s John F. Kennedy School of Government, is President of the International Economic Association and the author of Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press, 2017).
Before posting a comment, please confirm your account. To receive another confirmation email, please click here.
Please read the link below:
Autopsy and correlation of people who died of vaccines.
https://doctors4covidethics.org/on-covid-vaccines-why-they-cannot-work-and-irrefutable-evidence-of-their-causative-role-in-deaths-after-vaccination/

Early on, the double-jabbed appeared to have good protection, but that quickly changed. The Pfizer jab went from 92% effectiveness at day 15 through 30, to 47% at day 121 through 180, and zero from day 201 onward.
The Moderna shot had a similar trajectory, being estimated at 59% from day 181 onward.The AstraZeneca injection had a lower effectiveness out of the gate, waned faster than the mRNA shots, and had no detectable effectiveness as of day 121.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3949410

85% of COVID Deaths Could Have Been Prevented … So What Happened?

Of the people who died from COVID in the U.S., none received adequate and/or early enough treatment, Dr. Peter McCullough told podcast host Joe Rogan. If they had, at least 85% of them would have survived.
https://childrenshealthdefense.org/defender/covid-deaths-could-have-been-prevented/

Early views of Prof. Luc Montagnier.
It is clear that the new variants are created by antibody-mediated selection due to the vaccination

https://rairfoundation.com/bombshell-nobel-prize-winner-reveals-covid-vaccine-is-creating-variants/

What the insurance industry sees
Davison said the increase in deaths represents “huge, huge numbers,” and that’s it’s not elderly people who are dying, but “primarily working-age people 18 to 64” who are the employees of companies that have group life insurance plans through OneAmerica.
“And what we saw just in third quarter, we’re seeing it continue into fourth quarter, is that death rates are up 40% over what they were pre-pandemic,” he said.
“Just to give you an idea of how bad that is, a three-sigma or a one-in-200-year catastrophe would be 10%increase over pre-pandemic,” he said. “So 40% is just unheard of.” “What the data is showing to us is that the deaths that are being reported as COVID deaths greatly understate the actual death losses among working-age people from the pandemic.It may not all be COVID on their death certificate, but deaths are up just huge, huge numbers.”He said at the same time, the company is seeing an “uptick” in disability claims, saying at first it was short-term disability claims, and now the increase is in long-term disability claims.

https://www.thecentersquare.com/indiana/indiana-life-insurance-ceo-says-deaths-are-up-40-among-people-ages-18-64/article_71473b12-6b1e-11ec-8641-5b2c06725e2c.html
Dr. Peter McCullough's arguments are strongly disputed- eg here: https://healthfeedback.org/claimreview/joe-rogan-interview-with-peter-mccullough-contains-multiple-false-and-unsubstantiated-claims-about-the-covid-19-pandemic-and-vaccines/
Well said, Prof. Rodrik. This was a lucid and brilliant exposition of the merits and flaws of the different anti-inflation approaches. And a reminder how situation-specific the "science" of economics is.
It appears that you have not yet updated your first and last name. If you would like to update your name, please do so here.
After posting your comment, you’ll have a ten-minute window to make any edits. Please note that we moderate comments to ensure the conversation remains topically relevant. We appreciate well-informed comments and welcome your criticism and insight. Please be civil and avoid name-calling and ad hominem remarks.










Major economic forecasters like J.P. Morgan and S&P Global Ratings are painting a rosy picture of emerging markets’ growth prospects this year. But there are multiple reasons to believe that the consensus view will soon prove to be unsustainable.
Experiments that depart from conventional economic policy can be costly. But this does not mean that there are universal rules in economics or that the prevailing view among mainstream economists should determine what policymakers do.
Please log in or register to continue. Registration is free and requires only your email address.
required
required
Please enter your email address and click on the reset-password button. If your email exists in our system, we’ll send you an email with a link to reset your password. Please note that the link will expire twenty-four hours after the email is sent. If you can’t find this email, please check your spam folder.


required

By proceeding, you are agreeing to our Terms and Conditions.

 
 
Sign in with
Facebook
Google
Microsoft
Twitter

To receive email updates regarding this {entity_type}, please enter your email below.

If you are not already registered, this will create a PS account for you. You should receive an activation email shortly.

source

LEAVE A REPLY

Please enter your comment!
Please enter your name here