Wages and Panic Buttons

Doug Henwood dhenwood at panix.com
Wed Aug 4 09:09:41 PDT 1999

Ellen Frank wrote:

>While inflation means higher nominal interest rates,
>it generally means lower real (minus inflation) interest
>rates, because (1) existing contracts can't be rewritten,
>so lenders locked into 7% are stuck, whatever the inflation
>rate; and (2) since inflation is associated with rapid growth
>and high demand, competition between lenders keeps
>nominal interest rates from rising too fast.

Does it really? I thought there was a lot of recent research showing essentially no relation between inflation and growth if you leave out the rare instances of hyperinflation (which is usually a symptom of a society in collapse). As I recall, Bob Pollin was citing this against the austerity crowd. But it cuts both ways. Sure, tight money and tight fiscal policy - conventional anti-inflation weapons - stifle growth. But that aside, what demonstrable relation is there between inflation and growth over the long term?

Also, some of the worst real wage declines in the U.S. were during the high inflation years of the late 1970s. Some of the best recent real wage gains have come during the last two years, a period of low (and falling) inflation.

Finally, I'm tempted to make the argument that inflation is psychologically destabilizing and leads people to a longing for order - for authoritarian politics, in other words. Thatcher, Reagan, Fujimori....


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