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The politics of inflation and economic stagnation: theoretical approaches and international case studies.

This volume is the outgrowth of a conference held by The Brookings Institution in 1978 to examine the elements making for the persistent inflation and economic stagnation among the major industrial countries from the mid-1960's to the 1980's. The composition of the authorship of this treatment is unusual, as is the orientation. The 15 contributors of individual chapters are political scientists, historians, sociologists, as well as economists. Their frame of reference was to analyze the interaction of national political and social forces with the market conditions making for inflation and the deterioration of economic conditions. The editors, Leon N. Lindberg of the University of Wisconsin and Charles S. Maier of Harvard University, have marshaled the several contributions and their own perceptive syntheses and conclusions into a logical whole.

The need for an institutional approach to stagflation is explained by several of the authors. Albert O. Hirschman of Harvard observes that the elaborate economic theories of inflation dominate the field because they can be utilized for policy advice, while economists tend to treat the deeper political and social roots n vague notions such as "rising expectations," "faltering social cohesion," and "governability crisis." Furthermore, conventional economic analyses treated the events associated with inflation in the 1970's as random influences, even as they became so continuous as to suggest systemic conditions. Maier points out that the major analysis by the Organization for Economic Cooperation and Development in 1977 of inflation and recession, while recognizing that there had been basic changes in behavior patterns and power relationships internationally and within countries, attributed these to "an unusual bunching of unfortunate disturbances unlikely to be repeated on the same scale, the impact of which was compounded by some avoidable errors in economic policy."

While some events may be random, and policy errors may be made, persistent economic conditions require more incisive examination of the underlying political and social conditions. The authors have achieved this through a crosssectional treatment of individual national case studies of Japan, Italy, West Germany, and Sweden in contrast with experience in the United States, the United Kingdom, and Latin America, on which are also based theoretical discussions regarding the roles of trade union wage restraint, public expenditures, governmental policy, democracy, and central banks. The authors demonstrate that both economic ends and means are political acts. Nations decide on their priorities, with the preferences and observed needs determined by cultural and historic traditions in setting the mix of growth, employment, price stability, and equity.

The responses of the leading industrial countries to inflation between 1970 and 1982 are categorized by Lindberg into three configurations. "Open and unstructured confrontation" characterized the United States, United Kingdom, Canada, Australia, and Italy, with policy actions utilized to attain power and income claims, and few means available for circumscribing conflict. "Muted confrontation and structured bargaining" characterized West Germany, Austria, the Netherlands, and the Scandinavian countries, with explicit bargaining among Scandinavian groups, including labor and business, and the State, to allocate real income losses. The third category, "statist or controlled management," characterized France and Japan, with governing elites with power to channel investment, encourage industrial concentration, determine acceptance of altered monetary constitution, and ability to guarantee income and employment security. In the first configuration, labor was relatively weak and in an adversarial position with management. In the second, labor was strong, unions and employers were centrally organized for bargaining, and cooperative relations existed within the normal competitive roles of capitalism. In the statist mode, labor was weak and fragmented, business was centralized and well organized.

The authors comment on the heavy economic toll taken by the deliberately restrictive economic policies of the United States, the United Kingdom, and Canada, in coping with inflation, with moderate improvement in the United States, but continued substantial unemployment in the United Kingdom. Up to the early 1980's, restrictive policies apparently worked more efficiently in West Germany and Japan where economic decisions maintained a closer balance with long developed government guarantees and institutional arrangements.

Some of the smaller countries, which had to accept higher unemployment rates, eased the burdens with improved welfare and job training programs. Sweden, Norway, and Japan kept rates of unemployment low by encouraging wage and price restraint, or through manpower, investment, and industry policies directed at the supply side of the economy. Lindberg concludes that economic strategies that strip away long established guarantees "in the name of liberating market forces and subjecting economic and political transactions to the discipline of the market may produce a politics and economics of disinflation that is more destabilizing than the disturbances produced by the inflation of the 1970's."

The experience described in the volume is cited as basis for the conclusion that modern, democratic, capitalist economies must adapt to technological and structural changes through large bureaucratic organizations and by recognizing a broad distribution of power. "The approaches that Japan, West Germany, Sweden, and Austria have taken to economic change seen to have important advantages. They counsel employment-oriented policies, active inclusion of workers inproductivity and even in investment decisions at the plant level and in economic policymaking at the national level, and government participation in carrying out the strategies of industrial adaptation."

The authors find that while neo-Keynesianism could not meet the test of price and wage stability in the 1970's, neither is primary reliance on the market acceptable, in that it has resulted in hih unemployment and regressive transfers of income. New initiatives are needed and possible "if there is to be an alternative to smashing unions, forcing concessionary wages as an anti-inflationary strategy, and eroding the welfare state." With appropriate cautions, they suggest that corporatism, the policy of involving spokesmen for labor, business, and the state in tripartite consesual bargaining, as in Scandinavia, Austria, and the Netherlands, can provide the means for democratic coordination at the national level for consideration of economic policies. But tehy acknowledge that corporatist arrangements are not readily imported. In the countries where they are well established, they are grounded in historic indigenous conditions.

In the United States, where close relations between labor, management, and government remain for development, the elected legislature could be the focus for considering alternative economic policies, including investment, with advisory national commissions grouping labor and management representatives. The empirical evidence suggests that this would be a worthwhile effort in the face of the disruptive effects of continuing economic instability and industrial transformation.
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Author:Goldberg, Joseph P.
Publication:Monthly Labor Review
Article Type:Book Review
Date:Dec 1, 1985
Words:1058
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