Unemployment, Inflation and New Macroeconomic Policy PDF
Preview Unemployment, Inflation and New Macroeconomic Policy
UNEMPLOYMENT, INFLATION AND NEW MACROECONOMIC POLICY By the same author AUSTRALIA AND THE WORLD ECONOMY BILLION DOLLAR QUESTIONS: Economic Issues for Australia in the 1970s BRITAIN AND AUSTRALIA: Economic Relationships in the 1950s CONTEMPORARY MACROECONOMICS (co-author) CRISIS-POINT IN AUSTRALIAN ECONOMIC POLICY? INTERNATIONAL POLICY FOR THE WORLD ECONOMY MACRO-ECONOMIC POLICY: a Comparative Study (co-author and editor) MACROECONOMIC POLICY IN AUSTRALIA STERLING AND REGIONAL PAYMENTS SYSTEMS THE AUSTRALIAN ECONOMY (co-author) THE BANKS AND THE CAPITAL MARKET (co-author) THE MACROECONOMIC MIX TO STOP STAGFLATION THE PATTERN OF AUSTRALIA'S TRADE AND PAYMENTS THE STERLING AREA, THE COMMONWEALTH AND WORLD ECONOMIC GROWTH UNEMPLOYMENT, INFLATION AND NEW MACROECONOMIC POLICY J. 0. N. Perkins Professor of Economics University of Melbourne © J. O. N. Perkins 1982 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission First published 1982 by THE MACMILLAN PRESS LTD London and Basingstoke Companies and representatives throughout the world ISBN 978-0-333-32116-4 ISBN 978-1-349-16784-5 (eBook) DOI 10.1007/978-1-349-16784-5 The paperback edition of this book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, resold, hired out, or otherwise circulated without the publisher's prior consent, in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser To my colleagues at the University of Melbourne - for suffering so stoically and for so long their exposure to my ideas about the macroeconomic mix; and for their role in formulating and polishing these ideas Contents Preface ix Outline of the Basic Argument xi Introduction and Summary 2 Current Macroeconomic Problems and Policies 5 3 The Basic Proposals 23 4 Balance of Payments Aspects 53 5 The Mix, the Budget and the National Debt 68 6 Resource Allocation Policy and Macroeconomic Policy 90 7 Criticisms, Complications and Conclusions 108 Notes and References 129 Bibliography 132 Index 134 vii Preface This book is concerned with the crucial macroeconomic policy issue in the world economy at the start of the 1980s; namely, how to reduce both unemployment and inflation at the same time. It is probably influenced disproportionately by the writer's interest in the economies of Britain (where he was born and educated, and had his first job- as a journalist) and Australia (where he has spent most of his working life- as an academic). But it has been influenced also by many helpful discussions on macroeconomic issues of common interest, with both official and academic economists in the USA and Canada, during visits in 1976 and 1980, and in Scandinavia (especially during a visit in 1980) and some other parts of Europe in 1976 and on several visits to the OECD and the IMF. In particular, the hospitality of the London School of Economics is gratefully acknowledged during several months in 1980-81, and during briefer visits in 1978 and 1979. The Institute of International Economic Studies in Stockholm provided kind and helpful hospitality on visits there in 1976 and 1980; and stimulus is acknowledged from very helpful seminars there, and at Aberdeen, Cambridge, Dundee, Manchester, Stirling, Strathclyde and at the London School of Economics as well as from various sessions at the University of Oklahoma, where Kirker Stephens made me very welcome and proved to have more ideas in common with mine on these issues than anyone else I have met. I have also received constant stimulus over the years from my colleagues at Melbourne, especially Ian McDonald. The book The Macroeconomic Mix to Stop Stagflation contains a fuller exposition of the ideas underlying the basic policy proposals in the present book. These basic ideas are therefore merely summarised here (in Chapter 3). The present book consists mainly of developments and extensions of these basic ideas, together with discussion of comments on them (made by reviewers of the previous book, and by various participants in seminars and in private conversations), as well as drawing upon events and experience in various countries over the three years or so since the previous book was written. It may be said that one purpose of the previous book (as evidenced by its dedication) was to try to reduce the risk of the country of the author's birth from sliding down the slippery slopes of stagflationary policies that had ix X Preface been adopted in the second half of the 1970s by the government of the country of his adoption. With the additional evidence now available of the deficiencies of such policies, the time seems overripe for rethinking the future of macroeconomic policy in the light of the clear failures of the approach adopted in so many countries in the later 1970s and the beginning of the 1980s. My thanks to my colleagues, Duncan Ironmonger, Bob Jones, Neville Norman, Sam Ouliaris, Alan Powell, Phyllis Rosendale and Peter Sheehan as well as to Kirker Stephens, who all read drafts of parts of the manuscript, but of course bear no responsibility for remaining deficiencies. Jenny Gibson and Anne Marsden provided admirable and efficient secretarial assistance. Melbourne, May 1981 J.O.N.P. Outline of the Basic Argument 1. The unemployment of the 1930s occurred in the context of stable or falling prices. In such a situation either monetary expansion, or government spending, or tax cuts could reduce unemployment without causing undue increases in the price level. 2. The unemployment of recent years has, however, been coupled with rapid inflation. It is thus necessary to ask what combinations of measures will reduce unemployment whilst doing most to check the upward pressure on prices. So long as some macroeconomic measures have more upward effect than others on the price level for a given effect in increasing employment, there is some reduction in the expansionary effect of the former type of measure which can be combined with some stimulus to demand through the latter to stop stagflation. 3. Expansionary monetary measures are the most inflationary, and tax cuts are the least inflationary types of stimulus' to employment. Most types of government spending are more inflationary than tax cuts. The best remedy for stagflation is thus tax cuts coupled with relatively tight monetary policies. Unfortunately, during the 1970s tax rates were raised to high levels and monetary policies were far too inflationary. A reversal of these policies is essential in order to stop stagflation. 4. The toleration of high unemployment for the purpose of trying to stop inflation may or may not be successful - depending on the.measures used to hold up unemployment. But it is unnecessary, and socially wasteful, to attempt to use it for this purpose, because an appropriate change in the mix of macroeconomic measures can do as much to bring down inflation without the need for the unemployment. The world is being forced - unnecessarily - to tolerate the waste and human cost of high unemploy ment largely because governments are misusing their macroeconomic instruments, keeping taxes too high and real post-tax interest rates generally too low. xi
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