Cllr Aaron Jacob is a District Councillor in St Albans representing Stephen’s Ward. He used to work in the telecommunications industry and is now training to be a solicitor.
It’s back. The inflation beast from the 1970s, which policymakers long thought they had slain, is now the salient issue in economics and politics. The debate over whether this bout of inflation is ephemeral, or whether it heralds the ‘new normal’, is something that economists are grappling with.
Looking to recent history for guidance whenever macroeconomic problems rear their head is always tempting, and nowhere more so than here. Commentators continually return to the 1970s when analysing this problem: it was the period during which a supply shock arrived on top of difficult industrial relations, resulting in inflation hitting 24 percent in 1975. Yet, from the perspective of the policymaker trying to construct a solution, it is not the stagnant 1970s that one ought to look to, but the roaring 1920s.
Start with the facts, and with recent history. CPI Inflation has just hit 7 percent in the UK, and 8.5 percent in the US. The Bank of England expects CPI inflation to hit 8 percent in Spring 2022 in the UK. The causes are multiple. The global economy had begun to recover from its COVID-induced slumber, as increased demand from households collided with constrained supply. Oil prices were already rising when Russia decided to invade Ukraine, resulting in a jump in energy prices not seen since 2008. Food prices, too, have risen for the same reason: Russia and Ukraine account for 30 percent of the world’s wheat exports.
Inflation is a macroeconomic problem that desperately requires tackling. Inflation, particularly the sort which is persistently high, distorts economic incentives and has pervasive distributional consequences for both capital and labour. However, it is also true that the reason that inflation has become the problem that it is today because it remained quiescent for so long, following the financial crisis.
The problem of the 1920s was not inflation. The problem was unemployment that remained persistently high compared to previous periods. Official unemployment between 1921 and 1938 never fell below one million people, nearly reaching three million people in the winter of 1932. This problem was novel, as the Edwardian British economy had not suffered unemployment on the same scale, and the subsequent war effort ensured that labour was scarce.
Policymakers in the 1920s believed that Britain simply needed to return to the Gold Standard at the pre-war parity, and from that, prosperity would follow. John Maynard Keynes, however, was of the view that, rather than wait for the economy to right itself, active steps should be taken immediately to counteract the existing problem. It was at this time that Keynes began to challenge existing economic theory, which divided time into the short and long-term; the solution, according to Keynes, lay in a large-scale, public works programme.
The lessons of the 1920s are obvious in retrospect but they needed Keynes to articulate them at the time. If unemployment was high and persistent, and if there were multiple factors which caused it, then politicians should not to wait for the economy to find its ‘equilibrium’, in the hope that unemployment would fall. The policy approach was to be creative in order to solve the existing problem now. Theoretically segmenting time into separate periods is synthetic, and is an active policy of negation.
The difference as to the type of problem, and the solution required, is, really, besides the point. The lessons of the 1920s for today are important. It is clear that the Bank of England believes that inflation is transient, but the global economy will be faced with continued supply shocks for the foreseeable future. The world’s breadbasket has become a theatre for war and destruction, with The Economist suggesting that the cost of rebuilding Ukraine could be up to $500 billion. The longer the war lasts, the more disruptive it will be to energy and food supplies.
That is to say nothing of the supply chain issues that will continue to afflict the global economy, largely due to the zero-COVID policy pursued by President Xi of China. If significant parts of the world’s industrial base is continually subject to lockdowns, with the uncertainty this breeds, the global economy will continually be subject to supply constraints. We in the UK can do little about that. However, monetary policy can be used to dampen inflation, so that it does not get out of control. Quantitative easing must give way to quantitative tightening.
The lessons of the interwar period are twofold. Firstly, the time for policy action is now. Secondly, public policy must be bold. Keynes destroyed the artificial distinction between the short and long-run that classical economics had erected, and elevated the role of the policymaker in the process. These lessons were significant in the 1920s and 1930s, and they remain significant today.