Multiple currencies and noninflationary full employment

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Economic stabilization programs are currently beset by two interrelated problems. One is an apparent incompatability between the goals of full employment and stable general price levels. The attainment of higher levels of employment seems to require uncomfortable levels of inflation; conversely, stable price levels require politically intolerable levels of unemployment . (Economists refer to the trade off between unemployment and the price level as the Phillips curve.) The second problem is even more serious; we find that we can suffer from both inflation and high unemployment-s imul taneously . The term is being used to refer to such an unhappy state. The trade off between price stability and full employment is generally attributable to a combination of resource immobility and downward inflexibility of prices. To see how this trade off comes about, assume that unemployment is high and that the government seeks to raise aggregate demand. This increase in aggregate demand could result in rising demand for some sectors of the economy in which there is little or no excess capacity. Given an immobility of productive resources, capacity in these sectors would not be readily increased, and prices should therefore rise. Given the downward inflexibility of prices, there would be no offsetting price decreases in the sectors for which there is excess capacity. Thus, the general price level could rise substantially long before full employment is attained. 1 The problem of stagflation could develop if there are shortages of critical raw materials, food and fuel in particular. A shortage of food would, of course, lead to higher food prices. These higher prices in turn could lead to higher wage demands by organized labor, which would then cause all prices to rise; the notion that food prices are the main determinants of wage rates has a long history, extending back to mercantilist thought. Given these conditions, the government might be compelled to use restrictive monetary and fiscal policies, thereby also leading to unemployment. Although there are ways for dealing with these problems, these methods are either