1 Inflation, the State and Economic Policy

Notes 1 Inflation, the State and Economic Policy 1 . Since the outbreak of the crisis in 2007–08, this may seem less true, since defla- tion has been more of a threat than inflation. But I see nothing to suggest that inflation will not again become a priority when it returns, though there may be more readiness to accept results closer to the higher bounds of the targets. Indeed, the counter-inflationary imperative is still much in evidence despite widespread stagnation, particularly in the reluctance of eurozone authorities to engage in quantitative easing and the urging of many commentators and some policymakers to start raising interest rates while employment remains well below potential. 2 . Borland and Kennedy (1998) survey unemployment over the whole of the 20th century. 3 . There had been short periods of negative real growth in that time, particularly in 2000–01, when unemployment rose by a full percentage point (from around 6 to around 7 per cent). 4. See the collection of essays in Arestis (2007a), especially Arestis’ own chapter (Arestis, 2007b). For a specific discussion of ‘new consensus’ monetary policy, see Arestis and Sawyer (2008). Wren-Lewis (2007, p. 43) writes: ‘Twenty years ago, a standard way to teach macroeconomics was to contrast alternative ‘schools of thought’. There was a Keynesian approach, a Monetarist approach, a New Classical approach and so on ... Nowadays macroeconomics, at least at the more advanced level, is taught in a very different way. Different schools of thought have largely disappeared. Instead we teach students that in macroeconomics, as in microeconomics, there is a main- stream core ... ’ This has been claimed both as the ‘triumph of monetarism’ (DeLong, 2000), and the ‘triumph of Keynes’ (Dalziel, 2002). The extent of the effect of the global financial crisis of 2008–09 on the consensus remains to be seen. 5 . Bernanke has also famously argued that better policy was responsible for the ‘Great Moderation’ (after Stock and Watson (2002)) between the mid-1980s and mid-2000s. But he tells a more nuanced story, giving credit also to struc- tural change and good luck, arguing only that good policy (again defined in terms of the Taylor rule) ‘deserves more credit than it has received in the literature’ (Bernanke, 2012, p. 159). For a critique of the idea of a ‘Great Moderation’, see Quiggin (2012, pp. 5–35). 6 . Australian national government spending (including payments to the states) has shown no trend since the 1970s, fluctuating counter-cyclically around 25 per cent of GDP (Laurie and McDonald, 2008). 7. Note that the systems have quite different geographical extents. The economic system is a global system, a world market, though forces of competition and exchange relations are disrupted by national boundaries and other geographical factors. States, on the other hand, are territorial. 278 Notes 279 8. For a thorough account of the reception of Keynesian ideas by Australian economists and policymakers before the war, see Millmow (2010). He argues that ‘Australian economists came to achieve a superior command of Keynesian statecraft arguably earlier than most of their overseas counterparts’, though ‘the new economic thinking articulating a coherent form of macroeconomic management ... raced ahead of political convention and attitudes’ (Millmow, 2010, p. 4). 9. Even these variables grant too much control to the authorities – in reality fiscal stance is somewhat unpredictable, given its two-way causal interaction with private expenditure flows, and even the central bank’s control over the base rate can come into question, while its effectiveness over other rates and quantities is uncertain and shifting. 10. In fact he distinguishes between ‘qualitative policy’ ‘in which the structure of the economy is changed’ and ‘reforms’ in which changes affect ‘spiritual aspects or relations between individuals’, but it seems to me that this is a difference of magnitude rather than kind. Examples he gives of the former include rationing of goods or foreign exchange, welfare measures, changes to tariff structures and anti-monopoly legislation, and his examples of the latter include the introduction of a full-scale social security system, nationalisation and industrial democracy (Tinbergen, 1966, p. 149). 11. ‘This may be so for physical reasons: if government building activity were an instrument, this activity cannot surpass the production capacity present in the relevant industry’ (Tinbergen, 1966, p. 59). 12. Radical political projects aiming to fundamentally alter the economic system face an extremely formidable challenge on this front, in that any single reform incompatible with overall cohesion is likely to be ‘rejected’ by the system as a whole; everything needs to change before anything in partic- ular can. This is what I meant by the idea that the ‘new macroeconomic consensus’ or ‘neoliberalism’ might be a local maximum without being a global maximum: it may be hard to find a viable political trajectory from one politically and economically functional ‘equilibrium’ to another, even if the latter is preferable, because the situations in between are economically dysfunctional and tend to generate political crisis. 2 ‘External Balance’ and the Counter-Inflationary Imperative 1. As McKinnon (1993, pp. 3–4) notes, under the gold standard, governments that suspended were expected to restore convertibility as soon as possible, and at the old parity, and governments did strive to meet this obligation even at high deflationary cost. But it was an ‘implicit’ rule, not a formal imposition by international agreement, as with the Articles of Agreement from Bretton Woods. 2. This phrasing is not from the delegation itself, but from the commentary of Australia economist Edward Shann (quoted in Turnell, 1999, p. 90). The British Government resisted calls for increased public works expenditure and the British Commonwealth declaration at the World Economic Conference focused on monetary measures ( Ibid., p. 92). 280 Notes 3 . Keynes himself seems to have found the Australian push annoying. In April 1945 he wrote a letter to his old friend TS Eliot: ‘Not so long ago I was at a conference where the Australians urged that all the Powers in the world should sign an international compact in which each undertook to maintain full employment in their own country. I objected on the grounds that this was promising to be “not only good but clever” ... Insufficiency of clever- ness, not of goodness, is the main trouble’ (quoted in Markwell, 2000, p. 59). Earlier, Keynes had complained to a British Treasury official that in 1942 talks with the United States Treasury the Australians ‘seem to have wasted a good deal of time discussing full employment and came away not known very much more about it all than they knew when they went in’ (quoted in Turnell, 2002, p. 116). 4 . White was also later publicly accused of being a Soviet agent and appeared before the House Un-American Activities Committee in 1948, days before his death. Decrypted KGB messages, declassified in 1995, suggest he did indeed pass classified material to the Soviet Union. Skidelsky (2000, pp. 256–63) reviews the evidence and provides context. 5. The volume of available reserves do not quantify the ‘room to move’ precisely. A secondary impact of the quota system was to augment the effective reserves over the world as a whole, reducing the impulse to hoard gold, US dollars, or sterling. It spread them further by centralising some currency reserves so that they could be advanced to whichever country needed them – rather than being confined to national vaults. Probably more important than the quotas themselves was the great expansion of the world’s dollar supply from the large American payments deficit that unexpectedly opened up in the 1950s. Australia would have benefitted from some expansionary effects of Bretton Woods whether or not it joined the system. Conversely, had the Clearing Union plan prevailed, the extra liquidity it provided might have facilitated a higher rate of world inflation and eroded some of the real value of the extra reserves it promised. 6. It was only in this period, also, that holdings of gold scattered among private banks were centralised into the Commonwealth Bank reserve; foreign exchange was centralised at the outbreak of war in 1939 (Schedvin, 1992, pp. 52, 59; Bell, pp. 9–11). 7. Private foreign exchange dealers might also make accommodating payments in the short term, but would ultimately turn to the central bank to restore or discharge inventories. In practice, in Australia in this period, foreign exchange was centralised at the central bank, and the trading banks held only small working balances. 8. In the case of public transactions, it might be hard to distinguish in practice between ‘accommodating’ public international borrowing for the purpose of shoring up foreign exchange reserves, and ‘autonomous’ borrowing for other purposes, since external balance mixed with other policy goals. 9. Earlier work by Robinson (1937) and others had begun this integration, but Meade’s book gave it a full systematic exploration. Metzler (1948) surveys international macroeconomics before Meade. 10 . Because of the delayed publication, Swan was not always recognised as the originator (Arndt, 1976; Metaxas and Weber, 2013, p. 2). Notes 281 11 . For an extension of Swan’s approach to a model allowing for some endog- enous impact on the terms of trade, see Salter (1959, pp. 233–36). The consensus of the literature was that such a case was not relevant to Australia, though it might be to Britain, where a substantial proportion of exports were manufactures with domestic cost-driven prices (Corden, 1960, p. 19). 12 . Pearce (1961, pp. 3–4) discusses the price index problems. 13 . Although it is defined with reference to import and export price indices, Swan often refers to the external price level as a price index of tradables – a broader concept including goods and services which are potentially but not actually traded – and thus whose prices are also affected by competition with foreign producers.

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