The Politics of Inflation. A Comparative Analysis

256 Pages·1982·5.66 MB·English

by  Richard Medley (Eds.)

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PERGAMON
ON INTERNATIONAL POLITICS
POLICY
STUDIES
The Politics of Inflation
A Comparative Analysis
Edited by
Richard Medley
Published in cooperation wim the Committee on
Atlantic Studies
Pergamon Press
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Copyright © 1982 Pergamon Press Inc.
Library of Congress Cataloging In Publication Data
Main entry" under title:
The Politics of inflation.
(Pergamon policy studies on international
politics)
"Based, in part, on the tenth annual conference
of the Committee on Atlantic Studies held at the
Free University of Berlin, Germany, in September
1978"-Foreword.
Includes index.
Contents: inflation, recession, and the political
process / Leon Lindberg -Economic sectors and
inflationary policies / James R. Kurth - Europe
and the United States : the transatlantic aspects
of Inflation / Susan Strange - [etc.]
1. Inflation (Financej-Addresses, essays,
lectures. 2. Wage-price policy-Addresses,
essays, lectures. 3. Economic policy-Addresses
essays, lectures. I. Medley, Richard. II. Com­
mittee on Atlantic Studies. III. Series.
HG229.P65 1981 3324Ί 81-10719
ISBN 0-08-024625-7 AACR2
All Rights reserved. No part of this publication may be reproduced,
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electronic, electrostatic, magnetic tape, mechanical, photocopying,
recording or otherwise, v\/ithout permission in writing from the
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Printed in the United States of America
Foreword
Founded in 1964, the Committee on Atlantic Studies is an international
group of approximately 50 scholars from Europe and North America
who are dedicated to generating and improving scholarly dialogues on
issues of common concern to the Atlantic Nations. The annual coUo-
quia, held alternately in Europe and in North America, are attended by
both Committee members and invited guests.
The idea for this volume originated from the Tenth Annual Confer­
ence of the Committee on Atlantic Studies held at the Free University
of Berlin in September, 1978. About 30 academics from Europe and the
United States attended the meeting, and thanks to the efforts of our
host. Professor Helmut Wagner of the Otto Suhr Institute of Political
Science, the Free University proved to be a stimulating environment.
The coordination of domestic and foreign economic policies by
members of the Atlantic world to deal with persistent inflation is an
important topic of discussion for both policymakers and scholars, and I
hope that this volume will contribute to a constructive, transnational
dialogue.
Charles R. Foster
Executive Secretary
Committee on Atlantic Studies
Vll
Introduction
Persistent and accelerating, inflation has come to command the atten­
tion of academics and policymakers alike during the last decade. It has
gone a long way toward eroding faith in Keynesian policies and analytic
methods, and it has not responded to the simplistic and politically naive
prescriptions of monetarists. In some countries, like Britain, inflation is
primarily a problem arising through the economic sector via traditional
wage-price spirals. In other countries, inflation has become imbedded
through a combination of exogenous commodity shocks and political
stalemate. But in all countries we see a gradual movement toward
indexation as each individual attempts to secure his economic standing
in the future by betting on continued inflation. This volume's emphasis
is on both the domestic and international causes leading to each
country's level and duration of inflation. It also brings together the
political and economic considerations in one place.
It should be clear that the prescriptions of classical or neo-classical
economics, whereby the public weal is benefitted through the individual
pursuit of private gain, are rendered less compelling when private gain
is maximized by actions that fuel inefficient economic responses. Who
can blame the worker for demanding wage increases that take feared
inflation rates into account, or the capitalist who chooses to invest in
short-term commodities speculation rather than long-term plant and
machinery purchases when inflation is joined by economic stagnation?
Yet in relatively slack economies, like those of the last few years,
these cost push elements account for the greatest part of inflation
pressures.
*The editor wishes to thank Charles Foster of the Atlantic Committee,
for his help in arranging many of these articles. None of the views in
this volume necessarily represent the opinion of the U.S. House of
Representatives Committee on Banking, Finance and Urban Affairs, or
any of its members or staff.
IX
÷ INTRODUCTION
The opening chapter of this volume seeks to place these problems in
the framework of a few questions that the other contributions help to
illuminate. Professor Lindberg asks three questions central to the
problem of dealing with the economic forces of inflation within the
parameters of political reality:
1. Why do (or don't) governments help structure institutional charac­
teristics of wage and price setting?
2. Why do (or don't) governments innovate in managing the different
sectors and regions within their economies?
3. Why do (or don't) governments intervene forcibly to reduce or
moderate the impact of the inequalities of income and wealth?
The chapters in this book deal primarily with these three questions, but
with different emphasis on the mix of questions. One point which this
volume makes clearly is that inflation is an international commodity.
Inflation within each country is affected by what other countries do,
and the environment of moderately free trade constrains the set of
actions available to one country in dealing with its domestic economic
problems.
Professor Kurth's chapter begins to answer some of Lindberg's
questions by examining specific theories about the political and eco­
nomic arrangements within countries that help to explain why some
countries have proven susceptible to triple-digit inflation, while others
have managed to continue with double or single-digit price rises for
decades. His analysis of the various internal political and economic
blocs which have an interest in promoting inflation, and those which
have an interest in slowing inflation, provide a provocative cross-
national study of inflation politics.
Professor Strange addresses the transnational organization of cur­
rencies designed to smooth out inflation and speculation-related gyra­
tions of exchange rates since the breakdown of the Bretton Woods
agreement. This collection of European currencies, first known as the
"snake," then formalized into the European Monetary System, was an
attempt to stabilize the participating countries' currencies against the
dollar. One curious occurrence is that the German Mark has fallen from
the top of the EMS range to the bottom in the two years since EMS was
formed. Professor Strange seeks to explain the reasons for forming EMS
and the political and economic causes of its less than complete success.
Professor Stallings deals with another international organization of
great concern to countries as they battle with recurring inflation. The
International Monetary Fund (IMF) has gained a reputation as a great
financial help to troubled nations, but the strict and, sometimes
draconian, economic policies it requires of a country seeking its help
has produced a great deal of anger and controversy in recipient
countries. Professor Stallings adds substantially to the debate about the
IMF's function by a case analysis of intervention in Britain, Portugal,
and Italy. Her conclusions indicate that IMF policy may do nothing to
calm inflationary flames - at least in more developed countries with
INTRODUCTION xi
strong left-wing labor organizations. She also presents a clear and
compelling analysis of the prevailing economic theory at IMF head­
quarters, which she terms "eclectic monetarism."
The chapters on specific countries are divided into two sets, with
the first three concentrating on major industrial western economies,
specifically the United States, England, and Germany. England and the
United States have internal, sometimes largely political, developments
to blame for the largest share of their inflation problems. Catherine
Hill offers a thorough analysis of the political and economic backing
and filling which brought England to its economic knees before the
advent of Margaret Thatcher, and of the, so far, unfavorable results of
Mrs. Thatcher's experiments with monetarism and recession. The chap­
ter on the United States' inflation problems is a solid summary and
collection of evidence in favor of the theory of political business
cycles, which has received a great deal of attention in the last few
years. The evidence presented here indicates the major problems that
presidential-type democracies have in forming and carrying out long-
range economic plans, as well as the reasonable success presidents have
had at manipulating the short-term economic conditions to suit their
electoral goals.
Germany has been largely successful in its battle against inflation
during the last decade. It is moving, however, toward more serious
economic difficulties in the eighties, largely as a result of international
pressure from the United States and other major OECD countries. Part
of its current balance of payments deficit - highly unusual in post-war
Germany - results from the government's decision to stimulate its
economy, thus acceding to nearly a decade of OECD pressure to act as
the Western world's "locomotive." The theory here is that Germany's
strength would provide markets for its weaker sisters, and pull the train
of capitalism out of its mid-seventies funk. Other countries did not
respond according to theory, and Germany was hit with decreasing
exports and increasing import prices creating a balance of payments
problem that was exacerbated by the 1979 oil shock. On top of this, the
D-Mark's new status as the free world's second largest reserve currency
has spawned a heated political and economic struggle as the German
Central Bank seeks to keep capital from streaming out of the country in
search of higher interest rates, primarily in Britain and the United
States. The Bundesbank's primary weapon is to maintain high interest
rates, but this tightens liquidity at a time of growing domestic
recession that would normally dictate a looser monetary policy.
The final two chapters in this volume present studies of inflation
and political problems in two transitional economies of Latin heritage -
Argentina and Spain. Both of these countries have had well publicized
political and economic difficulties over the last decade, but they are
not countries about which much is generally known by non-Latin
specialists. The clear recapitulations of events in these chapters gives
us a better feel for the universal nature of inflation as an economic and
political problem in the modern world.
xii INTRODUCTION
This volume offers a variety of perspectives on the interrelated
problems of inflation and political change. Its purpose is largely
expository, seeking to raise questions and provide information about the
generation of inflation that takes into account national and inter­
national occurrences, presenting them in one forum. The two trans­
national organizations studied having some specific concern with
curbing inflation - or at least with the effects of inflation - give us
insight into the problems of simplistic, imposed cures that do not take
full account of both these national and international sources of infla­
tion.
Richard Medley
Washington, D.C.
1
Inflation, Recession, and
the Political Process:
Challenges to Theory
and Practice
Leon Lindberg
INTRODUCTION
This chapter explores some aspects of the interplay among economic
and political systems and processes as these relate to macroeconomic
fluctuations in prices, employment and income, and stabilization policy
performance. I am especially interested in the post-1968 period which
has seen an acceleration of inflation rates, simultaneous high levels of
unemployment, mounting evidence that traditional instruments of fiscal
and monetary policy no longer produce anticipated results, and growing
concern that economic stability has become unachievable within the
framework of a capitalist economy and a democratic political system
(3ay, 1977; Brittan, 1977; Buchanan and Wagner, 1977; Hirsch, 1976;
Bell, 1976; and many others).
In order to explore political-economic interactions we must go
beyond conventional economic analysis which is typically limited to
identifying the sources(l) of inflation or unemployment in wage and
price determination and monetary and fiscal policies. We must also
probe the socio-political environment in which wages are formed,
changing institutions and economic structures and the politics of both
the expenditure and the revenue sides of the budget. We must also take
account of unintended consequences of policies, for example, the
conventional deflationary "medicine," rather than lowering expectations
may intensify long-term inflationary pressures by increasing union
militancy, polarizing groups and eroding government legitimacy, setting
off a "politics of compensatory claims" as public expectations of the
economy are systematically frustrated, thus institutionalizing "stop-go"
economic policies and a tendency toward protracted economic'stagna­
tion (Ruggles, 1976; Lindberg and Hammarlund, 1976) and a fiscal crisis
(O'Connor, 1973).
I limit my analysis here to the inflation - stabilization process
within nations. This does not deny that inflation may often be imported.
1
2 THE POLITICS OF INFLATION
Indeed, there is every reason to anticipate that destabilizing shocks
from abroad (Lindbeck, 1976; Calmfors, 1977) and from the supply-side
(Muller, 1977; Chase, 1973; Lindberg, 1976) generally may become
endemic, and that these will greatly complicate stabilization policy.
Double-digit (and worse) inflation rates seem to be associated with
relative exposure to sudden shocks or to a generalized dependency on
the international economy (Maier, 1977). Furthermore, such inflations
are much more likely to set in train a competitive process in which
groups perceive a need to act decisively to defend their living standards
and income shares (Jackson, Turner and Wilkinson, 1972), and have a
"much stronger tendency to conserve their momentum (Pazos, 1977).
Thus, the variable capacity of countries to absorb "exogenous"
shocks without setting off an internal inflationary cycle will be critical.
This is especially the case where changes in the relative prices of fuel,
food, and other commodities redistribute income from country to
country, or group to group. But it is also true where inflation rates
among close trading partners vary rapidly over time. Such shifts no
doubt call for great flexibility in the part of government policy as well
as in the expectations of mutual understandings of labor and business.
Even Sweden, with one of the most enviable records in these dimensions
appears to have stumbled badly in the last few years (Calmfors, 1977;
Business Week, June 13, 1977).
The facts of international interdependence and the relative weights
of different national economies in the global system will limit our
ability to explain differences in inflation levels and rates between
countries and within countries over time. Some economists argue that
most governments have so little autonomous policy control that going
into their internal politics of inflation-stabilization does little but add
"adventitious detail." Others raise the unit of analysis problem by
arguing that the variance of inflation rates among countries is no
greater than the variability of inflation rates among regions of any
given country.
These criticisms are useful corrections, but surely go too far. There
are "homegrown," internally-generated inflations that have little to do
with relative exposure to international factors. In some countries,
imported inflationary shocks or pressures are dampened, while in others
they set off wage-price cycles and ever-accelerating rates of inflation.
And clearly, governments seem to vary widely in their ability to
manage roughly equivalent imports of inflation and to contain the
dynamics of wage and price formation and the "public household" so as
to assure a more or less politically acceptable balance among changes
in prices, employment, and real income.
ENDOGENIZING POLITICS
It is now widely accepted that macroeconomic fluctuations (inflation,
unemployment, stagflation) involve complex socio-political as well as
economic forces and processes. The real argument is over how these are