Innovative Incomes Policies: A Skeptic’s View

  • Thomas Mayer


The substantial inflation we have experienced for more than ten years now has been remarkably stubborn. This may suggest that it is not just the result of a temporary lapse in macropolicy or of OPEC’s misbehavior, but that it is the payoff of following employment-oriented policies rather than price level-oriented policies. Once the public realizes that the government will try to keep recessions short, it responds to falling demand, not by reducing prices, but by reducing output.1 Since the public knows better than to trust the government’s statements about what it will do and learns only by experience, a mere announcement that the government will now no longer tolerate inflation would not suffice, and it would take a long and severe recession to bring the inflation rate down substantially by monetary and fiscal policies. Hence, it is not surprising that incomes policies have been advocated. But traditional incomes policies have compiled a sorry record both in the United States and in foreign countries, so that there is much to be said for trying to develop new kinds. This is so regardless of whether one believes that the causes of inflation are to be found in “demand-pull or in “cost-push.” Even if an inflation is due entirely to demand-pull, it could take a great deal of unemployment to eliminate it by demand management if firms and labor expect that aggregate demand will soon become excessive again.


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© Springer Science+Business Media Dordrecht 1981

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  • Thomas Mayer

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