Red alert: how the global inflation crisis could actually be solved
An analysis of the proposal to nationalise the banks and raise public-sector wages to wipe out inflation, set against monetary orthodoxy. Includes data on military spending.
English · Original discussion in Spanish · Published
Print money and raise public-sector wages to beat inflation? The recipe dividing economists
The proposal sounds simple: nationalise the banks, print money and raise the wages of state employees. According to its advocates, this would wipe out inflation because public workers would have more purchasing power, shopkeepers would sell more and could pay decent wages. But economic orthodoxy replies that it is a recipe for hyperinflation. Where is the flaw?
The cost-push inflation argument
The claim is that today's inflation is not monetary but cost-driven: the rising price of oil and the shortage of cheap Russian gas. Under this view, the $1.5 trillion spent on the military effort in Ukraine did not fuel inflation because it did not affect crude oil prices. The solution would be to sustain aggregate demand through wage increases, provided there is enough domestic production. For the United States, with its self-sufficient industries, it would work; for Europe, dependent on Russian gas, there would be no remedy without restoring supply.
The orthodox response: more money, more inflation
Classical theory reminds us that inflation is a monetary phenomenon. Printing money to raise wages without increasing real output simply injects more liquidity into an economy that already has excess demand. The examples of Zimbabwe and Venezuela are cited as a warning. Moreover, today's inflation has multiple causes: post-ELbichito monetary expansion, supply bottlenecks, energy regulation and rising crude prices. Blaming oil alone ignores the role of central banks.
The open question is whether, in a context of supply shocks, traditional monetary tools are enough or whether more heterodox interventions are needed. While some see the proposal as a plan to sustain consumption, others warn it is a straight road to hyperinflation. Far from being settled, the debate reflects the lack of consensus on how to fight rising prices without strangling the economy.
Related discussions in the forum
The proposal sounds simple: nationalise the banks, print money and raise the wages of state employees. According to its advocates, this would wipe out inflation because public workers would have more purchasing power, shopkeepers would sell more and could pay decent wages. But economic orthodoxy replies that it is a recipe for hyperinflation. Where is the flaw?
The cost-push inflation argument
The claim is that today's inflation is not monetary but cost-driven: the rising price of oil and the shortage of cheap Russian gas. Under this view, the $1.5 trillion spent on the military effort in Ukraine did not fuel inflation because it did not affect crude oil prices. The solution would be to sustain aggregate demand through wage increases, provided there is enough domestic production. For the United States, with its self-sufficient industries, it would work; for Europe, dependent on Russian gas, there would be no remedy without restoring supply.
The orthodox response: more money, more inflation
Classical theory reminds us that inflation is a monetary phenomenon. Printing money to raise wages without increasing real output simply injects more liquidity into an economy that already has excess demand. The examples of Zimbabwe and Venezuela are cited as a warning. Moreover, today's inflation has multiple causes: post-ELbichito monetary expansion, supply bottlenecks, energy regulation and rising crude prices. Blaming oil alone ignores the role of central banks.
The open question is whether, in a context of supply shocks, traditional monetary tools are enough or whether more heterodox interventions are needed. While some see the proposal as a plan to sustain consumption, others warn it is a straight road to hyperinflation. Far from being settled, the debate reflects the lack of consensus on how to fight rising prices without strangling the economy.
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Summary of a discussion on Burbuja.info - Foro de economía, actualidad y política., translated from Spanish and reviewed before publication. Read the full discussion (50 replies).
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