The Politics of Inflation and Economic Stagnation: Theoretical Approaches and International Case Studies

By Leon N. Lindberg; Charles S. Maier | Go to book overview
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16
Alternatives for Future Crises

Charles S. Maier and Leon N. Lindberg

What lessons does the great inflation of the 1970s offer? Inflations, as Robert Keohane comments in chapter 4, are not "natural disasters." National societies retain some degree of freedom in submitting to or resisting inflation. They can undergo greater or lesser degrees of the price rises that were so dislocating for over a decade. This study is built on the premise that economies are institutional arrangements responsive at least in part to political and social choice. Centralized decisions as well as "the invisible hand" can affect the output of goods, the allocation of time and labor, and the movement of prices.

Having choices does not make policymaking easy. There are several orders of difficulty. First, the alternatives are often painful. The cost of not undergoing inflation may itself be a great one. Second, it is hard to measure the pain. How do countries choose between the discomfort caused by, say, 10 percent inflation or 7 percent unemployment?1 Nonetheless, societies may arrive at a consensus that some choices are less optimal than others. Some waste more human and material resources; they impose welfare costs that may not be necessary. The point is to secure the least unfavorable trade-off, to move, in the economists' jargon, to the utility curve farthest from the origin. Charting those curves in the technical sense--that is, measuring the numbers--remains the task of the economists. But there is a further order of difficulty. An economy does

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Too many economists in the 1960s assumed blithely that inflation imposed no real welfare losses except for the shoe leather worn down in carrying checks from savings banks to commercial banks. Perfect knowledge or perfect indexation might have neutralized the effects of inflation. Too often, however, those checks went from the savings accounts of the vulnerable into the money markets of those less exposed. No aggregate welfare losses, of course--except for the undermining of confidence in the future that must underlie all economic activity.

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