> This is great stuff. I've been thinking a lot about these issues, oddly.
> Hope you don't mind this overlong post.
Well I can hardly complain about that! Sorry for the delayed reply, wanted to do it justice.
> First off, I see your point about the dangers of accepting an incomes policy
> based on wage restraint while labor is weak. But I would add this: Through
> most of the period you're working on, labor was at least structurally strong
> enough (or held on to enough dregs of past strength) to deter any resort by
> the authorities to catastrophic recessions as an answer to inflation. That
> was just "not done" back then. But why was it not done? Partly because of
> the brute fact that the working class was too strong to have such measures
> forced down its throat. But also because of the prior existence of
> institutions "at the ready" capable of offering an alternative to barbarous
> macropolicy as an answer to inflation - in Australia's case the arbitration
> system.
But the point I'm making in my thesis is that the use of unemployment to discpline inflation actually _was_ done during the postwar period, it's just that for whatever reason less unemployment seemed to do the trick until the 1970s. The attempt to use to arbitration system as a tool of counter-inflation policy in the 1950s was a failure, because it was a judicial institution with other briefs, at which the government made submissions rather than laying down the law. Often the system exacerbated inflation by granting cost-of-living adjustments. When it did take inflation seriously and tried to hold down money-wages, decentralised bargaining took off and wages began to drift above the arbitration-set minimums. Australian macropolicy during the long boom was disinflationary at least as often as it was stimulatory, and there were episodes like the 'Horror Budget' of 1951 and the 'credit crunch' of the early 1960s.
I don't know enough about the US situation to draw the parallels and differences, but there's a somewhat similar story about the development a postwar Keynesianism of restraint using unemployment to discipline wages in Dickens' [1995] paper in the Review of Radical Political Economics 27:4, "US monetary policy in the 1950s".
> My lodestone on this subject is Ton Notermans' book on the history of social
> democratic economic policy in Europe, do you know it? (I imagine you'd have
> some smart, critical things to say about it.) So for example, in Europe,
> Notermans argues that it was historically fortuitous that the Depression had
> given rise to various state-sponsored price/wage stabilization schemes
> (often implemented by *conservatives*, especially in agriculture) aimed at
> preventing *deflation*. As a result, once the postwar boom was underway,
> there happened to be institutions already in existence that made it possible
> to permit full employment while *repressing* prices. The counterexample, for
> Notermans, is the post-WWI years, when the authorities, under pressure from
> labor, tried to reflate their way to full employment but had no
> price-repressing institutions, so the immediate result was galloping
> inflation that led to popular opposition and the experiment being promptly
> shut down, leading to deep recessions.
No I don't know that book - I'll look out for it.
> So what lesson does that hold for the present? Right now, labor is very
> weak, obviously - not just in its political strength but in the way current
> institutions are now designed. The centerpiece of macroeconomic policy is
> now the NAIRU-enforcing central bank. So the question is - *if* labor were
> once again to become strong enough to impose full employment as the object
> of policy, what institutions could be used to counter inflation? This is an
> important question, since any such revival, if it arrived, could be promptly
> squelched simply as a result of a failed experiment in full-employment
> macropolicy in the absence of a price strategy. Such a revival could also be
> *forestalled* in the first place by the absence of anti-inflation
> institutions: Part of labor's weakness can be attributed to the intellectual
> belief (including among many labor people) that there is no alternative to
> the NAIRU/central bank model. Also, it seems to me there's a
> chicken-and-egg problem: It's hard to picture labor getting very strong
> without full employment, but hard to picture a return to full employment
> without labor getting very strong.
Yeah, I totally agree with you on the politics. It really is chicken and egg. It's hard to imagine an industrially strong labour movement in conditions of substantial unemployment, and it's hard to imagine a political challenge to the macro-policy regime without a strong labour movement.
I have to say I think there's something real behind the NAIRU in its 'time-varying' form, however ideologically it tends to be dealt with. It's real in the sense that I do think an attempt to reach full employment simply by boosting demand would hit an inflation barrier before full employment is reached. My reading of the 1970s in Australia is that the inflation barrier rose dramatically, not that governments set out to create massive unemployment. Attempts were made to bolster employment, but they failed. Of course, the orthodox explanation for variations in the NAIRU - focusing on labour market 'flexibility' - is bogus, since it was clearly much lower in the postwar period when labour markets were substantially less 'flexible' than they are today. Not entirely sure about the determinants of the inflation barrier, but they probably include the rate of productivity growth (broadly speaking so as to incorporate supply shocks like the cost of oil), hysteresis, and labour market institutions and strategies.
> I guess the upshot of these remarks is just that labor should take an
> interest in this topic, since a key element of any possible revival would
> fail unless these issues were dealt with. I don't know if you mention this
> in your dissertation, but you probably know that in the 70s, especially in
> the US, there was a flurry of work done on various incentive anti-inflation
> schemes. The crudest and most famous example was Weintraub's TIP, but more
> complex and sophisticated versions were put about by others, including by
> Abba Lerner and David Colander, the latter of whom coupled their proposals
> with some very interesting theoretical work on inflation, picturing
> inflation as the result of an externality embedded in market institutions.
> Needless to say, all this work went down the memory hole after our 1982
> recession. (The one we "needed to have.")
Yeah I read some of that stuff when I was starting out, but haven't for a while. Actually I'm more familiar with the British literature. Glyn and Sutcliffe's 1971 book 'British Workers and the Profit Squeeze' is a classic, arguing that the strong labour movement was doomed by its economic strength if it didn't develop a broader political strategy, because it was vulnerable to a macroeconomic policy attack - which proved quite prophetic, the British labour movement pushed economism as far as it could go in the 1970s and provoked a political beating.
Leo Panitch's early stuff on the crisis of corporatism and social democracy in Britain in the 1970s is great and talks about exactly what we're discussing - collected in Working Class Politics in Crisis.
> One final point/question. You say it's not in the power of policy alone to
> ensure full employment, and cite the fact that without exogenous boom
> conditions real wages and profits have to grow more slowly come what may. Of
> course you're right about that. But I don't see the connection - real growth
> in wages/profits/income is analytically a different issue from full
> employment. One involves the growth of production potential, the other
> involves putting to full use existing production potential. Obviously West
> Germany in 1960 had much lower real wages than the US in 2010, but the
> former had full employment and the latter most certainly doesn't.
I maybe answered this above talking about the NAIRU. The connection is via the relationship between unemployment and the rate of money-wage growth, which is not set in stone but tends to be relatively stable in the short-run. It's rates of growth that are important, not absolute levels. So Germany could sustain full employment and price stability in 1960 because the rate of money-wage growth associated with full employment, and the rate of productivity growth, were such that it remained profitable to maintain such a level of demand for labour without raising prices.
There are a lot of variables in there - I quite like Stephen Marglin's treatment in the Cambridge Journal of Economics in 1984 - 'Growth, distribution and inflation: a centennial synthesis' - it's kind of an alternative marxian/post-keynesian route to a time-varying NAIRU. Dealing with a closed economy he rules out some factors that are pretty important to countries like Australia, but I found it useful for getting my head around it all.
> None of this, incidentally, is to deny your point about the limits of policy
> and the much greater horizons that would open up if control over investment
> could be wrested. I was a great fan of your essay about the limits of social
> democracy.
Thanks! I think we're pretty close on the political conclusions but maybe I was focusing on the egg and you on the chicken... or the other way around. WITBD remains obscure!
Mike Beggs