Inflation–Should We Take Another Look?

Summary:

Society has received only modest help from economists on inflation. Besides other effects, inflation redistributes income and wealth in ways not understood or predicted; it increases uncertainties for households, firms, and governments; and it calls into question individuals' expectations of their rightful share of goods and services, i.e., their “entitlement.” Our audiences need less mechanical, more complete and sophisticated explanations of what inflation is and what causes it; information on income, wealth, and equity effects of inflation among and between farmers, agri-industry firms, consumers, investors, savers, local and state government; and information on the consequences of alternative policies to deal with it. Agricultural economists must read and think about both emerging microeconomic and macroeconomic literature.

The new inflation of the seventies is mainly chronic, compared to cyclic. Chronic recession has accompanied chronic inflation. That implies the need for novel remedies that include structural changes as well as new monetary measures. The priority needs are outside agriculture, but dominate the interaction of inflation, agriculture, and rural development. Accordingly, agricultural economists cannot accept inflation as a given situation best understood and resolved by others.

The recent shifting of the primary monetary emphasis from ‘one eye on interest and one on the money supply’ to “one eye on reserves and one on the money supply” will not be adequate to control inflation. Long-run warfare to reduce inflation requires a comprehensive approach integrating monetary and fiscal measures, structural considerations, sharing of costs, and other public policy changes. Assets and income inflation create a spurious sense of well-being which has severe redistribution effects. Planning and acting on these inflated values further fans inflation. Some structural problems reinforce inflation, for example, the COLA (cost-of-living adjustment). Partial indexing creates widespread inequities, for example, social security recipients obtained a 14.3 percent raise on July 1, 1980 but the average wage earner's deductions increased in 1980 while his wage rate increased a mere 8 percent! Public policy implications include a needed statute to indicate the nation's will, desire, and procedures for containing inflation; automatic price and wage controls when inflation exceeds certain rates; elimination of partial indexing; and the resolve of all public leadership to control inflation.

Inflation is chronic, world-wide, unresolved. Comprehensive solutions are needed. Agricultural economists cannot expect others ot “solve” it.