An MMT-er's view on what caused inflation in the 60s & 70s, and other things. - Politics Forum.org | PoFo

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#14954588
Beyond Austerity in The Nation
Deficit mania is built on a series of destructive neoliberal myths.
By William Mitchell
MARCH 16, 2011

https://www.thenation.com/article/beyond-austerity/
". . .
"How Did We Get Here?

"The Great Depression taught us that without government intervention, capitalism is inherently unstable and prone to delivering lengthy periods of unemployment. The Hooverian orthodoxy of balanced budgets, tried during the 1930s, failed. Full employment came only with the onset of World War II, as governments used deficit spending to prosecute the war effort. The challenge was how to maintain this full employment during peacetime.

"Western governments realized that with deficit spending supplementing private demand, they could ensure that all workers who wanted to work could find jobs. All political persuasions accepted this commitment to full employment as the collective responsibility of society. As a result, very low levels of unemployment in most Western nations persisted until the mid-1970s. While private employment growth was relatively strong during this period, governments maintained a buffer of jobs for the least-skilled workers. These jobs were found in the major utilities, the railways, local public services and major infrastructure functions of government. By absorbing workers who lost jobs when private investment declined, governments acted as an economic safety valve. In addition, welfare systems provided income support and other public services (such as health and education) to citizens in need. While there were significant differences across nations in the scope of these systems, they all shared the view that the state had a role to play in providing economic security to citizens.

"However, conservative resistance to the use of budget deficits [to maintain fullish employment] grew in the late ’60s, particularly in the United States, as inflationary pressures mounted because of spending associated with the Vietnam War. And conservatives believed that trade unions had become too powerful. But the full-employment consensus didn’t collapse until the escalating inflation that followed the OPEC oil-price hikes of the ’70s. This marked the beginning of the neoliberal era, which has dominated the political debate ever since.
..."

The mid-70s also marks the separation of the lines on the graph of real wages and productivity. Real wages became flat for the next 40 years and productivity continued to go up at just about the same rate for those same 40 years.
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#14955088
I would like to take a stab at just why Vietnam War spending was inflationary while MMT claims that (in general) deficit spending is not inflationary as long as there is unemployment and excess capacity to create stuff and services to buy.

1] Maybe there was no excess capacity to create more stuff. I'm not an expert, so maybe; but I really, really doubt this was the reason.
2] Certainly there was unemployment in the late 60s & early 70s. It even averaged higher than it averaged in the 50s.
3] Productivity had been and continued to track wage growth very well before and all through this period. It seems to me (IStM) that as long as this is true there should not be a need for inflation. That is, the growing amount of dollars in the hands of the workers (=population) is matched by an equal growth in the total value of the goods being made because of increases in productivity. So, where is the "force" that is going to drive up prices?
4] The US Gov. was spending a lot to buy stuff overseas that it sent into Vietnam directly for the war.
5] The US Gov. was spending a lot to buy stuff in America that it sent to Vietnam for the war.

#4 Doesn't seem to me to be all that inflationary. The dollars are overseas and I don't remember exports seeing a big jump as the dollars "came home" so to speak. If they did come home then they would be bidding up prices to some extent.
#5 Must be the source of the inflation. But, exactly how?

a] Maybe corporations saw the war as a temporary thing and decided to not invest in more plant and equipment because the war would end tomorrow and they would be stuck with the excess capacity. They would have wasted dollars buying it and then could not sell the stuff in the American post war civilian market. This seems like a good thought to me.
b] Maybe it was the fact that the stuff was going to Vietnam and blown up there that somehow makes a difference. I'm not sure how this makes a difference though. If the Gov. had built a bridge and given it to the public by not charging a toll then how would the excess dollars spent to build it be pulled back out of the economy by the presence of the bridge being there compared to it not being there?

OTOH, maybe it was the Great Society spending that was the cause of the inflation. That is, giving more dollars out in welfare to the poor would have been a driver for increased sales of stuff. However, MMT claims that corps should invest to increase production as a result (if it can, see above for why it could), so the dollars should have been sucked up by buying the newly increased production and not by simply increasing the prices.

It is still a mystery to me unless a] above is *the* reason.
Can you all please jump n with your thoughts, PLEASE.
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