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From John Rawson (NZ)

Understanding inflation

Cost-push inflation may be more important than the demand-pull variety

May I extend the excellent comments on inflation by the Editor in the MayJune “Review”?

First, two observations: In the late 70’s and early 80’s New Zealand was, under the Finance Minister Roger Douglas, leading the world into trendy neoliberalism. The volume of money was slashed savagely, but inflation kept climbing.

For a while, businesses were paying interest at over 30% for their finance. Second, some years later, the Reserve Bank raised its interest rates to counter an increase in the price of oil, when presumably more money was drained out of circulation to acquire the extra overseas funds needed to buy it.

No wonder “theories used to forecast it (inflation) just don’t seem to work” when economists neglect taking cost-push inflation into account.

What’s more, increasing interest rates or taxes can be inflationary! “Lunatic fringe” comment? Maybe, but I can show that it is right and so can anyone with a knowledge of business, simply by considering markups. More accurately than by the model I used because I believe that I underestimated them.

Let’s firstly get rid of the idea that all business is exploitive and can absorb large increases in taxation. In a competitive situation they must pass all such costs into prices, suitably marked up to cover associated costs, thus enabling them to make a reasonable profit. The alternative is bankruptcy. If some firm firm does have a monopoly, it is likely to do so at greater cost levels anyway.

A dollar taken at retail level will, therefore, result in an increase in the price level of somewhere between $1.10 and $2 or more. Taxes etc. at lower levels of production will be compounded through succeeding stages so that $1 could be compounded to $2.60 or more at price level.

In passing, here is a warning for those advocates of a “Universal Income” who assert that it must be funded from taxation. Taxing industry would defeat its purpose by raising prices well above the level of the sums paid out.

Finally: “It has been commonly believed within financial markets that inflation is ultimately a function of how much money a central bank creates.” Having spent considerable periods of my life trying to persuade electors that our Government should, as it did in the early days of our first Labour government, make use of Reserve Bank credit for some of its expenditure on infrastructure, I only wish this could be possible. But not enough to cause demand inflation, of course. Central banks create reserves for the banking system, and effectively also create money in circulation whenever they purchase financial assets from the nonbank private sector. They do this, like our Government does, by instructing the payee’s bank to create bank credit money in the payee’s account.

From Richard Giles

Public finance without debt

Two articles in the ERA Review Vol 9 No. 4 (pp.9-14) advocate using a stateowned bank to provide credit to fund public infrastructure. To my mind such a method of funding infrastructure would work. But that is the problem.

Henry George argued that any measure which added to the wealth of the community, as this measure would certainly do, must also add to land values. Those fortunate enough to be in possession of these land values would perhaps welcome such a measure. Even though they will have missed out on the opportunity to own privatised roads and railways, power plants and water supplies, they will doubtless be glad to be made that much wealthier.

They will also know that government has discovered a way of public finance that leaves this enormous stream of income from land values even more safely in their hands.

Henry George argued that this wealth produced by the community, when spent upon public works and other common benefits, enlarged its own ‘tax base’. Thus, the credentials for this ‘single tax’, from both a fiscal and ethical perspective, were sound.

In the context here George’s point of view would seem to be that if the fund for infrastructure already exists why borrow. Could it be that China’s many billionaires are actually already beneficiaries of China’s way of public financing?

There is no reason to rule out credit financing for business. Indeed, the present banking system, where much of business depends upon privately held funds, seems historically to be just another way by which the ‘ruling class’ keeps command over the rest of us.

Editorial commentary:

Ellen Brown’s suggestion for funding infrastructure was originally framed within the context of a bank owned by a state which is not a monetary sovereign, taking the State Bank of North Dakota as an example. The profits from such a bank would provide revenue for the state. When using the word ‘government’ it is important to distinguish between a monetary sovereign (usually the central government if there is a federation) which creates and issues the nation’s currency and all other levels of government. If the central government is unable or unwilling to provide adequate grants to the state governments, then their infrastructure spending would need to be accommodated by finding revenue from (a) taxes and other charges, (b) borrowing, or (c) profits from state-owned banks and other enterprises.

In regard to infrastructure projects funded by a currency-issuing central government, any deficit spending can be accommodated by either direct borrowing from the central bank (CB) or by borrowing from the private sector. The notional debt incurred by either route is never a problem, because a government in debt to its own CB is not really in debt at all, while a monetary sovereign’s debt to the private sector can always be serviced.

The Georgist alternative to these methods of public financing relies on imposition of a levy on income obtained from land values. In other circumstances the land values in a city will inevitably increase whenever public investment in infrastructure occurs. In 1977, Joseph Stiglitz wrote a paper demonstrating that, under certain conditions, beneficial public investments will increase aggregate land rents (a form of unearned income) by at least as much as the investments cost. This proposition was dubbed the “Henry George theorem”.

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