Bill Mitchell is one of the founders of Modern Monetary Theory (as opposed to the P³ who is merely a misunderstander of it) and he’s got a long explanation in The Guardian of why the current fiscal incontinence just isn’t going to lead to inflation.
There being two fun points in it – quite apart from the deliberate ignoring of the money equation.
Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman
Until full employment is reached, governments need not cut back on public spending
Well, OK, that’s the Guardian subs but still. What’s missing there is an understanding that full employment is a nebulous concept. What do we actually mean by it? What level of frictional unemployment should we be having? More because jobs are more specialised these days? Or less because internet search costs are lower? One answer is to consider NAIRU, the non accelerating inflation rate of unemployment,. Which seems fair here as that’s what the G is using, we need full employment for inflation to occur, so let’s define full employment as the rate at which inflation does occur.
OK. But different structures of the economy will lead to different Nairus. If unemployment pay faces a distinct, even total, cut off at way 26 weeks then we’d expect 30 week unemployment to be lower in such a place then in one where the cut off is 35 weeks. And this is a part of Richard Layard’s analysis of long term unemployment rates – the 26 week usual limit in the US explains their very low levels of long term unemployment. The generally open ended systems in Europe explain the high long term unemployment rates. The short term rates, as he says, tend to bounce around with the business cycle in roughly the same manner.
So, our measure of full employment, that one that might cause inflation, is dependent upon the structure of the economy we’re talking about. There is no one number that is.
Which is fun. And also feeds through into this:
However, there is little prospect of a 1970s-style inflation emerging. Then, strong unions and firms with price-setting power engaged in a dispute aimed at shifting the real income losses from the rising oil prices on to each other. But the strength of the relationship between oil prices and inflation has waned since the 1990s. The ability of workers to engage in this sort of distributional struggle has been constrained by the rise of precarious work, persistent elevated levels of unemployment and underemployment, and pernicious legislation that has reduced union capacity to pursue wage demands.
So, Maggie was right then! We need to have a flexible labour force, one without pricing power, so that we can get closer to full employment without suffering inflation. Or, even, we’ve got to kill the unions so that MMT has longer to work before going tits up.
Which is, I think you’ll agree, an interesting insistence, no?