Democracy & Profligacy: Will MMT Destroy the World? Part II

[Continued from Part I]

In Part One I ask:
Name examples where peacetime, politically stable countries (with no foreign-currency denominated debt) have ever spent themselves into inflation?

I received a first potential case, the so-called “Barber Boom” in the UK in the early 1970s (which of course segued into the global inflationary spikes of the the two oil supply shocks that affected just about every country in the world).

Later, someone else gave three possible cases and then three more when I suggested that three cases is not very statistically convincing.

Barber Boom

The first Serious Response: I received (again, see my various posts on why hyperinflation, Weimar/Zimbabwe etc. “examples” are not relevant) was the “Barber Boom” in the UK.

But looking into the Barber “Boom,” it was primarily due to an ill-advised tax-cut in a “hot” economy. “In the 1972 budget, the chancellor Anthony Barber made a dash for growth – with large tax cuts against a backdrop of high economic growth.” ( Source). Combined with the same “liberalisation” of the banking system that was the beginning of the beliefs that would eventually lead to the S&L scandals in the US and the 2007 global financial meltdown. “In the revamped [Barber] regime, bank lending rose from £71 million to £1.33 billion.” (Source). As we will see, this same “liberalization” (which is just the polite way of saying control fraud) was at least part of the cause of one of the other proffered examples.

At any rate, the whole “Barber” affair is hardly of great significance to begin with, and clearly had many forces behind it other than simply government spending leading to inflation. I certainly wouldn’t want to base an entire (neoclassical) “spending-leads-to-inflation” belief on it.

I continued to ask the question any time the “spending→inflation” connection was brought up by an economist.

The usual answers were again the irrelevant currency collapse situations I mention above (Zimbabwe etc.) if any response were given at all. No one ever gave—not once (besides the discredited Barber Boom example) another case where government spending in a peacetime politically stable economy had led to problematic inflation.

Not once.

Finally, Chris Edmond, an “FTPL” type at the University of Melbourne, gave 3 more possible answers (the twitter thread itself, due to the condensed nature of tweets, was a little confused, in the sense there is a difference in a belief in “debt” ratios, which involve taxation as well as spending [and taxes drive currency], or just spending.)

Before continuing it is important to note that in addition to the peacetime, stable government criteria, I exclude the twin supply-side (real economy) global price level spikes in the ’70s/early ’80s (1973 Yom Kippur/OPEC and 1979 Iranian Revolution). These clearly were supply-side shocks (and made worse by Volcker, and only finally reduced by supply-side fixes (by the Texas Railroad Commission/Jimmy Carter in 1978) and technological/social and supply change).

So: what were Edmond’s examples? The question came up in an exchange with Steven Hail (University of Adelaide):

Edmond replied to me; his first three possible examples were:

• New Zealand throughout the 1980s
• France in the early 1980s
• Israel mid 1980s hyperinflation

When I mentioned that 3 examples was hardly the alluded-to “history littered with counterexamples” he added 3 more:

• Spain in the mid 1960s
• Portugal late 1980s early 1990s
• South Korea 1990

I think in three of his examples he “misspoke” on the dates (granted, it was just a twitter exchange; but that is half of his examples[!]) I discuss the latter three examples here. Part III discusses the first three examples).

South Korea

South Korea had no serious inflationary problems in “1990” and the inflation problems they did have in the 1970s are clearly the same twin spikes from the real-resource (oil supply shocks) that caused inflation worldwide, regardless of all the varying fiscal and monetary policies across countries.

South Korea Inflation Rate 1960-2021:

Portugal

Similarly with Portugal: we see the 70s spikes from the oil shock we see globally, (and related to the hyperinflation articles mentioned above, the 1974 Carnation Revolution: political instability is often the cause of currency instability). We’ll discuss the relatively more mild “late 1980s early 1990s” episode below.

 

The”late 80s and early 90s” period seems to be due to the shocks to the Portuguese economy from its entrance into the EU.
Maior queda nos bens e serviços transaccionáveis aconteceu entre 1988 e 1993 (tsf.pt)

Spain

On Spain, I wonder if Edmond also “misspoke,” in meaning the mid-1950s, not mid 1960s. There had been significant inflation in the 1950s, with another similarly sized spike in the 1960s (and note, as always, the oil shock inflation of the 1970s being far worse).

It is true the Spanish economy was very “hot” in the mid-1960s to the point of becoming inflationary. But it would be hard to blame government spending for price rises in literally the second hottest economy in the world (“During the 1960s, Spain experienced further increases in wealth. International firms established their factories in Spain: salaries were low, taxes nearly nonexistent…Spain became the second-fastest-growing economy in the world, alongside Brazil and just behind Japan. The rapid development of this period became known as the “Spanish Miracle”.  (Remember: “Taxes drive currency”). https://en.wikipedia.org/wiki/Francoist_Spain. Many things contributed to inflation, but extreme economic growth not directly caused by government spending does not seeem to support an argument that government spending leads to inflation.

In the 1950s, it seems some of the inflation was of the classic exchange rate variety: “The growing demands of the emerging middle class—and of the ever-greater number of tourists—for the amenities of life, particularly for higher nutritional standards, placed heavy demands on imported food and luxury items.” These are the downfalls to tourism as a basis for the modern developing countries that Fadhel Kaboub explains so well here and here. (I could not find a chart showing inflation prior to 1958, already as high as the peak inflation of the 1960s). https://en.wikipedia.org/wiki/Economic_history_of_Spain#The_Franco_Era,_1939%E2%80%9375

Part III continues with Edmond’s first three examples:

• New Zealand throughout the 1980s
• France in the early 1980s
• Israel mid 1980s hyperinflation

PS On the above examples, especially with Spain and South Korea, there are few developing countries in the world who wouldn’t love to be in the situation they were in during the time period Edmond mentions. That is, even if some of the inflation were coming from government spending, they were doing something right, becoming industrial powerhouses (South Korea) or stable affluent societies (Spain and Portugal). Thus my mention always of “problematic.”