Wednesday, 29 June 2011

On inflation

 Just thought I'd do a brief outline of a few, less than orthodox, methods of controlling inflation. (Sorry, it's not very funny, I wanted to make it funny but I could not for the life of me think of anything funny about prevention of the year on year increase in prices from being too high).

When it comes to inflation, the left has always, it seems, treated it as a secondary priority compared to the primary priority of keeping unemployment low. However, as a recent IFS report shows ( inflation disproportionately affects the poor, and if the left wishes to continue to see itself as the "champion of the poor" then it should really start seeing inflation as more of a priority. There are a number of ways in which inflation can be tackled, ignoring the frankly laughable suggestion of simply  "giving independence to the Bank of England", the idea that you can simply partition the economy saying "monetary policy and inflation here" and "everything else over here" is childish at best and dangerous at worst.

1. Price rise controls
Explanation: A legal limit on the rate at which prices can rise. This is the most direct approach to controlling inflation.
Advantage(s): This is inherent in its directness. Inflation literally cannot exceed whatever limit the government places on it.
Disadvantage(s): The problem with this however, is that it can only work to combat "demand pull" inflation, that is inflation caused by people being more willing and/or able to pay higher prices. A prices policy would run into serious problems in tackling inflation caused by increases in raw materials prices as it could reach a stage where firms cannot increase prices to avoid selling at a loss.

2. Government mediation.
Explanation: Here I refer to a policy, similar to the one pursued by the Callaghan government, whereby the government is given a role in mediating between the unions and employers to keep both wage and price rises at a low level, although preferably with the former being slightly higher than the latter.
Advantage(s): Like the previous policy it is rather a direct one, tackling inflation by directly trying to limit wage and price rises. However, unlike the previous one it is more flexible and exceptions can be made for special cases. Also if applied on a national level, the government could promote an element of standardisation so that employees doing the same work for different firms get the same pay and conditions.
Disadvantage(s): A problem with this is that the government element would be subject to a problem caused by our political system, namely that every decade or so the party, and hence objectives and philosophy, of the government element in this system would change, thereby removing stability from this method as well as potentially turning inflation into a "political football".

3. Leave CAP
Explanation: Agricultural prices are kept artificially high through the CAP, removing it would lower them.
Advantage(s): In addition to lowering the price of agricultural goods, the removal of the CAP from Britain's agricultural sector could hopefully remove the ludditism that is prevalent in the CAP with its fondness for "organic" foods and hostility to GM crops. Also the removal of the CAPs protectionist elements could lead to increased agricultural trade with the third world, many of whom's economies are far more dependent on agriculture than ours, providing these countries with an export market is arguably better for all parties than foreign aid.
Disadvantage(s): On its own, not a solution. As a method of reducing inflation on a long term basis, this would not be an ideal one due to Britain's agricultural sector being somewhat minuscule, less than a single percent of GDP. Also the removal of protectionism would likely impact upon Britain's farmers, resulting in a number of farms being unable to compete. For these farms I would suggest either the government help them diversify, specifically into products where western technology allows them to be competitive or into other, non agricultural, uses of the land or to help the farmers seek employment elsewhere. While many people probably don't like the idea of anything that impacts upon farmers, who for some reason seem to be strangely popular, this as an ethical point fails to stand up when there are countries trapped in poverty as they can't sell their crops.
(Note, the leaving of the CAP by Britain is a much wider policy consideration than simply inflation)

4. Green tech
Explanation: Investing in methods of production, fuel and transport where oil plays a minimal as possible role.
Advantage(s): The cost of living in Britain is very much linked to the price of oil in the long term. This is because the cost of production is linked very much to it, what with many goods using oil in fueling the production, some in the actual production and many in the packaging of the product. Furthermore transport costs are also linked to the price of oil due to petrol (duh!). Due to the closeness of the cost of living with the price of oil, and with oil prices likely to considerably rise as demand from India and China continues to grow and the world rushes ever closer to the "oil apocalypse" when the oil runs out, leading to supply steadily falling until it reaches zero, there can be no doubt that the rising cost of oil will be a main driver of "cost push inflation", inflation caused by an increase in the cost of production.
Disadvantage(s): Cost, simply the fact that the government will need to spend a lot of money to make these technologies viable, but ideally through cooperation with the private sector and the fact it will cost less than the "oil apocalypse" means this isn't a major issue.

5. Lead by example
Explanation: Rather simply the government could set a standard pay rise for the whole public sector that is the same each year.
Advantage(s): Would hopefully lead to the private sector aiming for a similar rate of wage rise, and at the very least this would control demand pull inflation to an extent. Furthermore it prevents problems caused by having to continually renegotiate wages.
Disadvantage(s): The private sector could simply ignore it.

And there you go, something or a long boring blog on inflation and stuff. Granted if you thought economics and politics in general were all fun and games, you were wrong.

Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man. - Ronald Reagan.

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