From: rwojcik@atc.boeing.com (Richard Wojcik,snake)
Newsgroups: talk.politics.misc
Subject: Re: Inflation and Carter?
Date: 27 Aug 92 23:56:51 GMT
Reply-To: rwojcik@atc.boeing.com
Organization: Research & Technology

I think that we have made substantial progress in this thread, and I also
think that we may agree on most of the substantive issues.  Perhaps my
remarks below will establish some common ground.

In article @engin.umich.edu, jwh@citi.umich.edu (Jim Howe) writes:
>In article <81258@bcsaic.boeing.com>, rwojcik@atc.boeing.com (Richard Wojcik,snake) writes:
>|> I don't want to split hairs with you (although I have this queasy feeling
>|> that splitting hairs is what these debates usually devolve into).  One 
>|> definition of inflation is an "an increase in the amount of money and
>|> credit in relation to the supply of goods and services".  Another, perhaps 
>|> more general view, is that it is an "increase in the general price level...
>|> causing a decline in purchasing power".  Both quotes are excerpted from my 
>|> Webster's New World Dictionary, 3rd College Edition. 

>The problem with the second definition is it doesn't explain why
>the price level changed...

It doesn't have to.  The fact that it changed is sufficient.  You argue that the
increase in money supply, which is an economist's definition, didn't really take
place until after the OPEC shock.  The oil shock caused politicians to put pressure
on the fed.  I argue that, even had the fed done nothing, people's purchasing power
would have declined relative to the amount of energy (and oil products) they could
buy.  Costs would still have risen for the farmer, who, e.g., needs petroleum-based
fertilizer, and he would still have had to raise his prices to consumers.  From the
consumer's point of view, definition 2 is more salient, and inflation would have
taken place.  Even had the number of dollars circulating remained constant.  If you
want to say that that does not meet the criteria of definition 1, I am in agreement.
But there is a reason why dictionaries provide alternative senses for words.  Both
senses are valid. 

>... Inflation is *not* caused
>by people arbitrarily deciding to increase prices.  If you have
>a fixed money supply, an increase in prices in one area will
>result in a decrease somewhere else.  It's not possible for all
>prices to rise because you have a fixed amount of money.  Think
>of it this way, if you have $100 and you use it to purchase gas,
>and food, if the price of gas increases and you don't adjust the
>amount you purchase, you will have to reduce the amount of food
>that you purchase.  In other words, your demand for food will
>decrease...

Ouch!  No wonder economists have such a dismal reputation.  :-)  What happens
when your demand for food declines to 0?  I've already rebutted this argument.
If the price of gas and food both rise, then what happens to your $100?  It buys
less, and people see inflation.  (Note that gasoline is a direct byproduct of oil, 
and the cost of food is indirectly linked to oil--fertilizer, diesel fuel for the
tractor, etc.)  The problem is that your neat academic scenarios don't take 
into account real world conditions.  Worse yet, they are used to condemn people
such as Carter, who had to deal with real conditions.  You can't handle everything
by manipulating the money supply.

>No, inflation was caused because of budget deficits and a Fed who
>monetized them.  While Carter did not have direct control over
>the Fed, he could have vetoed unbalanced budgets and pressured the
>Fed to tighten money.

I agree with you on this.  Whether that was a realistic political option for
Carter...well, we probably disagree.  In any case, Carter's unbalanced budgets
now look like the height of fiscal responsibility--after 12 years of Republican-
inspired voodoo economics.

>... The oil price shock certainly
>put pressure on the US to inflate its currence but the price rises
>themselves were not the cause.

We are really going in circles here.  You admit that the oil shock had something
to do with the price rises, but you deny that they were a causal factor.  In
your previous post, you admitted that the oil shock (which was, in fact, a 
gigantic price rise) "led" to the increase in the money supply.  But it certainly
was not a "cause".  You are just playing semantic games to avoid admitting that
Carter had no real options.  Even if he had somehow pressured the fed to keep down
the money supply, price hikes would have occurred for basic commodities, and the
recession would have been deeper.  People would have perceived "inflation" no 
matter how many scholars defined the word for them.

>Other countries are also capable of increasing the supply of their
>own currencies.  I don't have the data but I would bet that if
>you examined the money supplies in those countries you would see
>that they were also increasing.

Right.  They all did it at the same time.  A miraculous coincidence that had 
nothing to do with the price of oil.  ;-)

>First of all, the collapse of OPEC was very much an economic event.
>Cartels are not self-sustaining.  Second, the collapse of OPEC may
                                                                ^^^
>have made it easier to have a tight money policy, but it was the
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
>tight money policy that brought inflation down, not lower OPEC
>prices.

Thank you.  The collapse of OPEC, not Carter's sudden reversal of an inept
policy, was the real event that ended the inflationary period.  Your two
concessions--that OPEC led to the expansion in the money supply and that
OPEC's demise led to the end of that monetary policy--really amount to an
admission that Carter was not solely responsible for the inflation.
His foreign policy did succeed in defusing the OPEC threat, in cushioning
weaker foreign economies from the worst effects of the oil shock, and his
domestic policy did succeed in establishing a sound energy policy and keeping
the economy in reasonable order.  Your "solution" of holding the money
supply steady would have been an absolute disaster for both our own and
foreign economies.  Carter made mistakes, but his behavior during that 
period was largely correct.  He got us through it.

-----
Disclaimer:  Opinions expressed above are not those of my employer.

    Rick Wojcik   (rwojcik@atc.boeing.com)   Seattle, WA
Newsgroups: talk.politics.misc,alt.politics.bush