Inflation without growth: A long-run perspective on short-run stabilization policies

Abstract

‘There is widespread agreement that the recent economic performance of the western world has been unsatisfactory. Inflation rates have become too high and unpredictable while growth’ and capital accumulation rates have become too low and unemployment has become excessive. The rate of inflation in the boom of 1973-74 was higher, in most countries, than it had been since the turbulent interwar years, and the recession from which the world economy is now recovering was the deepest since the Great Depression. Also, the rate of capital accumulation has been lower throughout the latest cycle than during any other postwar cycle. While there is widespread agreement on the seriousness and unsatisfactory nature of the recent trends in inflation, output, capital accumulation, and employment, there is strong disagreement:! on what should be done about it. The popular view, embraced by the press, by most governments, and by international organizations such as the OECD, is that inflation has become a problem because of a major change in attitudes, especially on the part of organized labor. In particular, a greater concern with both equity and real income growth has led to demands for a faster growth rate in money wages. These, in turn, with sluggish productivity growth and (relatively) constant profit margins, have led to a faster rate of inflation. Growth rates of real output have been unsatisfactorily low because of a failure of the market economy to deal adequately with intertemporal allocation. Uncertainty about the future leads entrepreneurs to invest too little and households to save too little. On this view, the solution to the problems of excessive inflation and sluggish growth are