On Twitter, Blanchard sounds a lot like Michal Kalecki, a Polish economist, who in 1943 wrote an influential article for Political Quarterly, “Political Aspects of Full Employment.” Kalecki was also channeled in an article published by the Federal Reserve Board in May by two Fed economists, David Ratner and Jae Sim — representing themselves, not the institution — who cited the “conflict theory” of inflation as follows: “The cause of inflation can be found in the class conflict between capitalists and workers.”
Economists tend to attribute the end of high inflation in the early 1980s to the increase in the federal funds rate to as high as 19 percent during Paul Volcker’s chairmanship of the Fed in 1980 and 1981, but President Reagan’s firing of more than 11,000 air traffic controllers in August 1981, which weakened organized labor, may have been a factor as well, Ratner and Sim wrote. (Since they happened around the same time, it’s hard to tell.)
According to conflict theory, wage-price spirals occur when capital and labor are evenly matched, like a pair of heavyweights in a 10-round boxing match. Spirals don’t develop when the capitalists get a first-round knockout, which appears to be the present case. What’s worse for workers is that the referee — i.e., the Federal Reserve — is making it harder for them by pushing up unemployment and thus reducing their bargaining power. “I honestly think that a guy like Jerome Powell is embarrassed by this, but he won’t tell you,” Mario Seccareccia, a professor of economics at the University of Ottawa, told me.
Is there a better way to heal the economy than jacking up interest rates until the economy cracks and workers lose their jobs? Seccareccia mentions “incomes policy,” an old idea that involves government-mediated coordination between business and labor to restrain both prices and wages. Blanchard, a former chief economist of the International Monetary Fund, mentioned the same notion in his weekend tweets, as did Krugman. A Fed-induced slowdown, Blanchard wrote, is “a highly inefficient way to deal with distributional conflicts.” He added, “One can/should dream of a negotiation between workers, firms, and the state, in which the outcome is achieved without triggering inflation and requiring a painful slowdown.”
Incomes policy can get messy if the government meddles too forcefully or clumsily in the workings of the labor market. But the status quo ain’t great, either — especially for those of us who are staring at a pay “raise” this year that isn’t a raise at all.
Elsewhere: The Uncertain ‘Cone of Uncertainty’
A lot of people don’t grasp the “cone of uncertainty” that meteorologists use to show the possible tracks of a hurricane, according to an October article in the Bulletin of the American Meteorological Society. That’s relevant to economics — not only because hurricanes cause economic damage, but because economists have their own difficulties conveying uncertainty about their forecasts. University of Miami and University of Michigan researchers surveyed Floridians and found that 58 percent believed the bulge at the far end of the cone “shows the storm at its largest size.” In fact,since the cone shows the possible tracks of the storm, a bigger bulge conveys more auncertainty about the storm’s path.