A couple of years ago – in connection with being awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2011 – Thomas Sargent, in an interview with Swedish Television, declared that workers ought to be prepared for having low unemployment compensations in order to get the right incentives to search for jobs.This old mercantilist idea has very little support in research, since it has turned out to be exceedingly difficult to really get clear cut results of causality on the issue....
What is needed more than anything else in these times is stimulus and economic policies that increase effective demand.
On a societal level wage cuts only increase the risk of more people getting unemployed. To think that that one can solve economic crisis in this way is a turning back to those faulty economic theories and policies that John Maynard Keynes conlusively showed to be wrong already in the 1930s. It was theories and policies that made millions of people all over the world unemployed.Lars P. Syll's Blog
Tomorrow the Labour Force data comes out in Australia and I will obviously be analysing that. Regular readers will note that of late I have been using Thursday and Friday to update you on the progress of our Modern Monetary Theory (MMT) text-book, which I am writing in liaison with my colleague and friend, Randy Wray. We are trying to get it completed for use in second-semester 2013 and so I am spending more time on it to meet that expectation. So today – it is text-book day given tomorrow we will be talking about how bad the labour market is (unless I am pleasantly surprised and the data is better than I expect). Today, I am moving on to develop the material on unemployment and inflation.
Chapter 12 – Unemployment and Inflation
12.1 Introduction
[Note: the Chapter order has been a juggled a little. This was formerly going to be Chapter 11 but we will probably take the Keynes and the Classics material out of this chapter and run it as a stand-alone Chapter 11 or even 10 - decisions are still to be taken]
In this Chapter, we will introduce the concept of inflation and discuss various approaches that seek to explain it. We will differentiate between inflationary pressures that arise from nominal demand (spending) growth outstripping the real capacity of the economy to react to it with output responses and, inflation that may arise from supply shocks – such as a rise in an imported raw material (for example, oil).
The first type of inflation has been termed demand-pull because excess nominal demand (relative to real output capacity) pulls up the price level. Sometimes you will encounter the expression “too much money chasing to few goods” as a crude simplification of this type of inflation.
The public debate about whether expansionary fiscal policy causes inflation, which we will deal with specifically in Chapters 13 and 19, are also predicated on the claims that fiscal stimulus runs the danger of causing the economy to overheat.
The second type of inflation is termed cost-push inflation because it originates from the costs of production increasing and pushing up the price level. We will learn that the mechanisms through which the supply shocks manifest as inflation are different to those that operate under demand-pull inflation.
However, both forms of inflation can be understood within a general framework whereby different claimants on real GDP and national income struggle to assert their aspirations. In this sense, we cast inflation within the general distributional struggle or conflict, that is elemental in capitalist economies, between workers seeking to maintain and achieve a higher real wage and firms seeking to maintain and expand their profit rate.
In other words, we situate the problem of inflation as being intrinsic to the conflictual relations between workers and capital, which are mediated by government. This mediation varies over the course of history and in more recent times has been biased towards protecting the interests of capital, particularly financial capital, at the expense of workers’ real wage aspirations. We will consider the consequences of that policy stance in this Chapter.
