‘Inflation is always and everywhere a monetary phenomenon.’ The idea of this (in)famous Milton Friedman quote that inflation is too much money chasing too few goods is one of the most influential ones in the history of economic thought, and also shapes the discussion of the recent price surge.

Recently, two interviews with critics of this narrative were published with James Forder and Thomas Palley. James Forder argues that there is something he calls the “Philips Curve Myth”, a kind of master narrative of modern economics.

The Phillips Curve Myth is the idea that in the 1960s — before Milton Friedman brought enlightenment to the world — there was a widespread but mistaken belief among economists, especially “Keynesian” economists, that policy makers could reduce unemployment using expansive policies that somewhat raised inflation, and that this result could be safely sustained over time. […] But the myth is the idea that lots of people ever believed this, or that it was the consensus of the time.

Thomas Palley, on the other hand, acknowledges that Friedman has made an important contribution to the understanding of inflation – but only one specific kind of inflation, which he calls demand-pull. Palley additionally distinguishes between five other kinds of inflation (conflict inflation, supply-side inflation, imported inflation, high inflation, hyperinflation), which all have different causes. Furthermore, in contrast to Forder, based on work of Tobin he argues that there is a systematic Phillips curve – but one where inflation expectations are incorporated.

Tobin’s basic idea is that we need to think of the economy as consisting of many sectors, or what you might think of as many small economies that are aggregated together into a national economy. Each sector is being hit by random disturbances. Demand and spending are shifting between these sectors. And this is going on all the time. At any moment, some sectors are at full employment, and others are below full employment. […] The implicit Tobin view is that labor markets are like escalators. You have a shock; the local labor market then slowly adjusts back to full employment. Faster demand growth is a way of speeding up the escalator so that you get to full employment sooner. But the cost is inflation in those labor markets elsewhere that are already at full employment.

Read the interview with James Forder here, and the one with Thomas Palley here.

Recently, the OECD presented two studies specific to Germany: The Economic Review for Germany 2023 examines the country’s overall economic development in the context of global and national challenges, including the ongoing energy crisis. The study makes policy recommendations to strengthen the recovery. A special chapter analyses how Germany can achieve its ambitious climate goals. Among other things, it calls for reducing tax concessions and modernising and reforming public sector administration. In addition, the tax burden on labour income is to be reduced, but other taxes such as inheritance, gift and property tax are to be increased in return.

The Environmental Performance Report for Germany 2023 assesses Germany’s progress in addressing environmental challenges and examines how goals in the areas of energy, climate and biodiversity can be achieved with an integrated approach. Special attention is given to Germany’s energy transition and progress towards climate neutrality and sustainable mobility. A special chapter takes a close look at Germany’s commitment to climate adaptation and investments in nature-based solutions.

The main findings of the report, summarised in an article in Die Zeit:

The Organisation for Economic Co-operation and Development (OECD) has called on Germany to act more ambitiously to become truly greenhouse gas neutral by 2045. In handing over its economic and environmental review report, the OECD appealed to the German government to accelerate the implementation of existing climate measures and to take new ones – especially in sectors that have not met their targets. The experts see a particular need in the transport sector. For example, there must be more public investment in rail transport – especially in local public transport to improve the connection of sparsely populated areas to urban centres.

A new policy brief from the Delors Centre explores what the US Inflation Reduction Act (IRA) means for Europe’s economy. The study quantifies the dramatic impact US subsidies could have on production costs for various climate-friendly technologies in the US, China and Europe.

The US Inflation Reduction Act (IRA) has rekindled European fears of missing out in the global green technology race. However, EU member states still disagree on whether the greater risk lies in doing too much or too little. At heart, there remains significant confusion on which European sectors stand to lose competitiveness; how much the EU should fret about these losses; and whether there is a need for joint support from the EU level to avoid economic divergence. We take a first stab at the existing sectoral evidence. Our results suggest that the IRA will undercut European production costs in several sectors. This does not mean the EU must mimic the US program. However, it does mean that the EU needs to turn its piecemeal Green Deal Industrial Plan into a coherent strategy. This requires a greater focus on green industries in which Europe can develop a competitive edge and more joint financing at the EU level.

The whole study is available here.

This is How Unfairly Wealth is Distributed in Germany – Article (German, Paywall)
Markus Zydra, Süddeutsche Zeitung, 24.04.23
Die Vermögen in Deutschland sind extrem ungerecht verteilt. Die zehn Prozent vermögendsten Haushalte besitzen 56 Prozent des gesamten Nettovermögens, so die Bundesbank in ihrem Monatsbericht, der am Montag veröffentlicht wurde. Die vermögensärmere Hälfte der deutschen Haushalte besitzt insgesamt gerade einmal drei Prozent des Nettovermögens.

Extreme Wealth is a Serious Problem for Democratic Societies – Interview (German)
Christoph Eisenring, NZZ, 20.04.23
Gabriel Zucman is the enfant terrible of the economists’ guild. Multinational companies and their rich owners are the biggest profiteers of globalisation, he says – and rising inequality is a danger to democracy. Zucman sees tax competition as the prime example of a bad kind of competition.

Macron Plans Reforms à la Hartz – Article (German)
Niklas Zaboji, Süddeutsche Zeitung, 19.04.23
After the pension reform, the French government is already tackling the next major economic policy construction site. Paris is putting pressure on the social partners and striving for full employment.

The False Choice Between Neoliberalism and Interventionism – Article
Yuen Yuen Ang, Project Syndicate, 18.04.23
Over the past 40 years, the United States and other Western liberal democracies have pursued policies that prioritized markets over government intervention. But, as China and even the US have shown, governments are not limited to a binary choice between laissez-faire and top-down planning.

How Inequality Blocks the Climate Transition – Blogpost (German)
Julia Cremer & Vera Huwe, Makronom, 17.04.23
New research shows that higher inequality is also a cause of the climate crisis. A climate-social policy is therefore necessary to increase the effectiveness of climate protection measures.

“Contacts With Richer People are the Decisive Factor for Advancement” – Interview (German)
Nicolas Abe, Der Spiegel, 16.04.23
Who rises in life, who stays behind – and what does that depend on? Harvard economist Raj Chetty has analysed huge amounts of data. He can answer these questions for every region of the USA.

The Myth of Renunciation: This Is Not How Climate Protection Works – Essay (German)
Frank Wiebe, Handelsblatt, 05.04.23
To save the world, we must stop or even reverse economic growth, they say. This sounds plausible, but only distracts from a consistent climate policy.

Fiscal rules entail a fundamental trade-off between enforceability and flexibility. In a recently published article, German Finance Minister Christian Lindner seems to be concerned solemnly with commitment without acknowledging that there exists a trade-off at all. Because he fears that public debt levels will become a ‘subject of political negotiation’, he calls for better enforcement by an one-size-fits all rule to ensure ‘sufficient debt reduction each year’.

Common fiscal rules have to ensure a rapid and sufficient reduction of deficits and high debt ratios, while allowing for necessary public and private investment. Improving the quality of public finances by prioritising spending remains key. To live up to these goals, the reference values of 3 per cent of gross domestic product for the deficit ratio, first set out in the Maastricht treaty, and 60 per cent of GDP for the debt ratio must remain untouched. The excessive deficit procedure in the event of a breach of the 3 per cent deficit criterion has been our most effective enforcement tool in the past. It must not change. […]

In addition, safeguard provisions to ensure an actual decrease in debt ratios exceeding the Maastricht reference values in each year are needed. We also need further measures to ensure compliance by member states, as well as less discretion in the interpretation and application of the rules.

Taking this phrasing seriously, proposal seems to ignore problems of pro-cyclical fiscal policies and political constraints, as pointed out by Sander Tordoir.

Budget policy is at the heart of democracy: you cannot wish politics away. Wolfgang Schäuble, the former German fin minister who was also a staunch proponent of tight fiscal policy, backed out of sanctioning Spain and Portugal in 2016 because he worried about political stability

— Sander Tordoir (@SanderTordoir) April 25, 2023

Moreover, as Olivier Blanchard and Jeromin Zettelmeyer write in a recent report, the German proposal does address the main problem of Commission’s proposal: transparency of and common rules for the debt sustainability analysis (DSA) framework. Whereas Germany seems to regard DSAs as a ‘beast that cannot be tamed and thus must be kept in a cage’, Blanchard and Zettelmeyer underline the strength of DSAs to ‘identify debt risks and adjustment needs’. Hence, they propose transparent rules for the framework to tame the beast:

But DSAs do not bite, and they certainly can be tamed. Rather than going back to simple numerical rules, the German government – and the Commission – should focus on implementing the Council conclusion that “the Commission trajectory should be based on a common methodology to be agreed that is replicable, predictable and transparent, and should include an analysis of public debt and economic challenges.”

In his article, Linder seems to threaten the reform:

Reform of the Stability and Growth Pact cannot be an end in itself. It is only acceptable if we make significant improvements to the framework. Otherwise, changing the rules would not be advisable.

As Blanchard and Zettelmeyer argue, this ‘would be dangerous for the future, and a major blow to the construction of the EU, and must be avoided at all costs’.