Ivan Werning: “Inflation slogans are a problem, they lead to slavery”

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Argentine economist Ivan Werning is a professor at the Massachusetts Institute of Technology in Boston. Weeks ago, together with a colleague of his (Guido Lorenzoni), he published an article that sparked intense debate within the academy and networks in Argentina. “Inflation is Conflict,” he entitles himself. Many economists and Kirchnerist officials have pointed to the work as the ultimate legitimization of their sui generis interpretation that inflation has nothing to do with monetary and fiscal aspects.

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Nothing further from reality. Werning explains in this interview that his work focuses on one particular cause of inflation, but at the same time admits that there are others. Slogans are risky.

Years ago Werning was chosen among the brightest economists under 45 in the world. The Economist noted it as one of the most influential. Nobel laureate Paul Krugman cited his academic work a few days ago. Here is a summary of the interview with Clarin.

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– We refer to a disagreement among persons, workers, groups, firms, agents, about the relative prices of an economy, including here not only prices but also wages, a disagreement which causes some to seek to earn more or more than a previous level. Some reach it earlier than others, generating an upward price spiral process. The idea is that this disagreement in relative prices is the proximate cause of inflation, and that all inflation results from agents’ impulse to address this disagreement. After all, price or wage changers seek to settle a disagreement, but this quest is continually frustrated by disagreement.

– I could have used the word disagree. Conflict is perhaps a loaded word, it’s not my favorite. But we lean toward it to honor pre-existing literature and other articles that used it. We believe we make an important contribution to our work. While the idea of ​​price disagreements is not new, our proposal opens up the possibility of interpreting inflation more broadly.

– I don’t like the term, at least in the way it is used in Argentina, for the simple reason that it is loaded with an interpretation that is often an excuse to blame others for inflation. release responsibilityFor example, that of the Central Bank and the management of monetary policy, it seems to me a mistake.

– For example, our work he does not argue that monetary policy is not important for reducing inflation. I would never advocate something like this in the current situation in Argentina. Nor does he say that the fiscal deficit or emission play no role in the evolution of prices. Lowering the fiscal deficit in Argentina is a necessary condition for reducing inflation. Finally, it’s not even an alternative model or a theory of inflation, quite the contrary it is a general picture that includes various models or theories and factors that drive inflation; in particular, we do not invalidate the traditional explanations of the phenomenon, but we want to better understand and expand them.

– Born out of a concern to better understand the mechanism by which inflation occurs. But it wasn’t overnight. This article is the latest in a series of articles I have written on the subject. Some of them are more applied and arise from specific situations in the world: for example, in an article for an annual conference in the United States, I wrote about the effect of Covid, lockdowns and bottlenecks which have generated significant changes in relative prices. Then in another article we address the issue of spiraling wages and prices, a current concern in the US and Europe. In all these studies, monetary policy plays a fundamental role. This is why I would never deny the importance of monetary policy, as I said before, but at the same time it seems relevant to me to think about the demands of the unions and their bargaining power, or the effect of tariff adjustments, to mention two important dimensions in Argentina.

– I find it useful to give the example of Europe. There was an energy shock. Oil, gas and prices have risen. What would happen to workers and their wages? The more neoclassical theory would say that they would have to accept a decline in their real wages to achieve general equilibrium. But We know that’s not the case, there is resistance because maybe the salaries are low and that’s where the conflict is generated.

– First of all, let’s say that slogans or simplistic explanations are very tempting, and I also do mea culpa: as an economist I was brought up with some ideas that today I consider oversimplified, which in their extreme versions become slogans. I think we should be a little more humble and realize that we’ve collided many times by oversimplifying ideas. We see that many countries have managed to bring inflation down with much more pragmatic and using different tools like the cases of Israel and Brazil. also the pepper. They used the exchange rate, interest rates, tax policy, etc. Of course, it wasn’t achieved overnight.

– All inflation slogans are a problem. As with “puja,” I didn’t like it when Argentina referred to multicausal inflation as an excuse to get rid of the problem. On the other hand, in the view I subscribe to, the challenge of tackling solutions to a complex problem must be embraced, but without disengaging from the problem or blaming the other. That’s why I say that slogans simplify hardships and can lead to ties when it comes to making economic policy. With inflation, reality ends up being more complicated than a slogan and sticking to them hurts us. Same with the idea that simply controlling the amount of money automatically lowers inflation. This was tried in 2018-19 in Argentina and although it had effects on inflation, prices did not automatically respond one by one.

– Here’s the big dilemma, what technique versus politics. Technically, I believe the inflationary process has inertia because it looks backwards. Expectations look ahead and matter, but they’re not everything as some say. It is a big challenge to reduce inflation in 2-3 years, without resorting to very extreme measures. Politically, there are expectations of showing results in a presidency or maybe half. Here lies the dilemma of the technician who collides with the politician, and another reason not to underestimate the problem. And tempting solutions appear…

– Like dollarization or at the time it was to fix the exchange rate; of which I consider dollarization an extreme form. Recreating an independent central bank, lowering the fiscal deficit as the countries I mentioned above have done, is what I prefer to aim for but at the same time it requires a longer period to see results.

-This document in particular would say it is broader. I think a small seed was planted because I was from Argentina, but what happened in Europe and the United States recently made it sprout. Let’s see, I’ve been thinking about monetary issues and I always feed on Argentinean history and experience. It motivates me. At the age of 21, I went to Tucumán and worked on a thesis on Tucumán’s ties. And I have been working on the inflationary issue from an academic point of view for some time. I like the John Maynard Keynes quote “Practical men, who think themselves free from all intellectual influence, are usually the slaves of some dead economist”. I think what Keynes said is very true. In Argentina this reaches fantastic levels. You watch TV for 5 minutes and there are people arguing over the interpretation of a theory of inflation. And you take a cab and the driver has a theory about him.

Source: Clarin

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