Olivier Blanchard, an MIT professor and former IMF chief economist, and Paul Krugman, a Nobel laureate in economics and a New York Times columnist, started January 1 without a hangover. That day they tweeted about an aspect of inflation that doesn’t always get highlighted in the discussion in core countries: the distributive conflict as a propagator of rising prices. Something like this is happening in the United States today and both Blanchard and Krugman have echoed it.
Many immediately joined the debate. For example, the Argentine Vladimir Werning, also a professor at MIT, and whom Krugman mentioned in his column a few days later. Clarín consulted Werning himself and another Argentine who lives in the United States and teaches there (Rafael Di Tella, of Harvard) to explain what implications this debate has for Argentina, given that on Twitter some they took the arguments of OB and PK as a justification for what is happening in the country. And guess what?
The questions to Werning and Di Tella were:
1. What does this exchange between Blanchard and Krugman teach?
2. Both highlight the factor of distributive conflict as one of the mechanisms that propagate inflation. Can you explain it?
3. Inflation was controlled worldwide in the 1980s. Are the policies then valid today?
4. What and how is inflation taught to an economics student in the United States?
5. An Argentinian economist said that “when it comes to stabilizing I have theoretical agnosticism, I have to convince everyone, so I believe in everything”. Is lowering inflation a challenge to the imagination or something standardized?
Ivan Werning (MIT): “Our inflation has been high for a long time and self-inflicted”
1. First I would like to clarify that these discussions are motivated by what is happening in the US and in Europe e seem less relevant to Argentina. There are moderate spikes in inflation there, mostly caused by shocks like the pandemic and the war in Ukraine. The question of the Blanchard-Krugman debate is how to deal with these shocks at minimum cost. In Argentina we have had high inflation for a long time and it has been quite self-inflicted. Having made this clarification, this does not mean that there is nothing relevant in the debate for us.
I can’t speak for Blanchard-Krugman, but I think we can all agree the main tool to control inflation is monetary policy. This has real effects and in some cases can be costly to reduce inflation. The idea therefore is to think more carefully about the mechanism and process of inflation: where does it come from, how to put a spanner in the works and open to consider other policy instruments.
2. I would argue that distributive conflict is the closest cause of inflation. But that there are several things that influence this conflict, such as monetary policy, and therefore influence inflation. That is why it can still be said that the root of inflation is due to monetary policy.
In Argentina, some try to cover up the bad economic policy, blaming the “distributive supply” or the “greed” of businessmen and, at the same time, many times the inflation discourse is summarized in very simple postulates such as ” prices follow the printing of money”, a oversimplificationwith a share of truth although not always.
Often there is also the temptation to go back to the micro: if the demand for a good increases, its price increases. But this insight does not explain the increase in general prices, but the increase in a relative price. Is not enough.
But we can go macro and formalize inflation by thinking about the discrepancy between the relative price one group seeks and what another seeks. Let’s imagine that there is no inflation and there is a negative shock such as the increase in the price of imported energy. Workers will want to maintain a certain fixed real wage and firms will want to maintain their profit margin. Both are not possible and this distributive conflict generates inflation because prices will rise to maintain margins even if wages do not rise. But in response to that, wages will rise to try and maintain the real wage. But that will lead to higher prices to maintain margins, and so it continues. So the most direct cause of inflation is a distributional mismatch or conflict. Very different from saying that there is inflation due to the greed of one group or another, which is nonsense.
3. I don’t know, but I think it’s good to keep an open mind. In other sectors of the economy we have claimed victory very early and then we are faced with new challenges that evolve the practice of economic policy. One example was the 2008 global financial crisis which led to innovations in central banking and regulation.
4. Inflation is an exciting topic to study if you’ve experienced it. It is easy for Argentines but very difficult, until recently, for young US or European economists.
5. I think economists know a lot about the subject, but we still lack. And we need to be more humble, so I really like that quote.
Rafael Di Tella (Harvard): “Here is a fiscal and monetary disaster”
1. The important thing for us is that the word stabilization means something different in the United States and in Argentina. In the US it is used to try to bring inflation down when it is high because the economy is overheating. Long-term inflation expectations may be anchored and one may still want to stabilize inflation in the short term.
In Argentina, the word stabilization refers to when long-term inflation expectations are “unanchored” and need to be lowered. Argentina’s inflation is very high today because there is a monetary and fiscal disaster, not because the economy has overheated.
2. It seems to me that they refer to something other than what in Argentina was called distributive conflict. It’s not that it’s an alternative theory of inflation where it doesn’t matter if you monetize the fiscal deficit. It refers to the mechanism by which inflation can acquire “inertia”.
No offense, the parallel that comes to mind is the debate over the use of fans versus air conditioning to bring down the muggy temperatures in Rome in the year 50 AD. The virtues of either method were widely debated, but until someone told Nero to stop playing the harp and put out the fire, both methods proved equally useless.
Argentina has a fiscal dominance problem. There is no solution to the inflation problem without a tax peg as a precondition. It is true that there is also a supply problem: the disorganization of production is so great that a number of reforms will also be needed.
Once Argentina stops expelling capital and can stabilize, a small part of this very interesting debate may be relevant to Argentina. One problem with price and wage coordination as a tool is that it is being misused by the current government and being abused. Something similar happened to harp music lovers after the reign of Nero.
3. I don’t see that the world is about to radically change the way it fights inflation, the interest rate continues to be a central parameter of economic policy. Of course there is the idea that attempts to coordinate prices and wages can be useful for very short periods. Richard Nixon’s initial experience with “revenue policies” is seen as more successful than the intermediate or final phase.
4. With difficulty. Although this last year the interest in the study of inflation has increased a lot.
5. In the Argentine case there is consensus on the need to eliminate the deficit as a first step. This is true even among heterodox economists. There is fiscal dominance, which is why Argentines pay attention to the tax authority. Any attempt to anchor expectations using central bank or price controls with a fiscal deficit in this context may “work” in the very short term but it’s a big mistake if you look beyond your nose.
Source: Clarin
