Cost-Push Inflation: An Issue Resolved, or Simply Dismissed?

At The Everyday Economist some months back, Josh Hendrickson captured my attention with his Nominal Income and the Great Moderation. In that post, Hendrickson introduced a forthcoming paper and said:

As I argue in the paper, during the Great Inflation period of the 1970s, members of the FOMC regularly asserted that the process of inflation determination had changed. Relying on public statements and personal diary entries from Arthur Burns, I demonstrate that there is little evidence that the Federal Reserve was less concerned with inflation during the 1970s. Rather, the view of Burns and others was that inflation was largely a cost-push phenomenon. Burns thought that incomes policies were necessary to restore price stability and stated that “monetary and fiscal tools are inadequate for dealing with sources of price inflation that are plaguing us now.”

The shift in policy, beginning with Paul Volcker, was an explicit attempt to stabilize inflation expectations and this was done deliberately at first through monetary targeting and ultimately through the stabilization of nominal income growth. Gone were notions of cost-push versus demand-pull inflation.

I can see a natural progression there: from the thought that "incomes policies were necessary" to policies for "the stabilization of nominal income growth." Incomes policies means wage-and-price controls. The method is crude, but the objective of wage and price controls is precisely "the stabilization of nominal income growth."

Beside the point. What concerns me is "the view of Burns and others was that inflation was largely a cost-push phenomenon." That, and the apparent fact that this issue of cost-push was never resolved. It was simply dismissed.

"Gone were the notions"

At this writing there remain just six comments below Josh Hendrickson's post. Make that five comments and a pingback.

First, Nick Rowe quoted Hendrickson -- a piece of the excerpt above, actually:

Josh: “Rather, the view of Burns and others was that inflation was largely a cost-push phenomenon. Burns thought that incomes policies were necessary to restore price stability and stated that “monetary and fiscal tools are inadequate for dealing with sources of price inflation that are plaguing us now.””

And he remarked:

People forget (and maybe younger people never knew) just how common that view was in the 1970′s. It was common among economists as well as the general population. It was almost the orthodoxy of the time, IIRC. Tighter monetary policy would just raise interest rates, which would increase costs, and make inflation even worse.

It was a common view at the time, Nick says, that cost-push forces were at work. Noted. In the next comment, Josh Hendrickson agreed with Rowe, saying

Burns’ view is consistent with the orthodoxy of the time — as epitomized, for example, by Samuelson and Solow (1960).

"Consistent with the orthodoxy of the time." A common view.

In the third comment, Marcus Nunes agreed as well. He offered a post of his own, on the same topic. (I spent a lot of time with the post from Marcus.)

In the fourth comment, Bill Woolsey asked

There were really _economists_ who thought that “tighter money” would raise inflation through a cost-push mechanism?

Woolsey says he'd heard the argument, but always figured it expressed "special interest" concerns.

So let me ask a question now, about Woolsey's question: Why does he ask? Is it because the cost-push issue was so well resolved that it never arose in all of Bill Woolsey's experience? Or is it that the matter was carelessly dismissed, as opposed to actually being resolved? I don't have the knowledge to answer that question, but it sure feels like the matter was carelessly dismissed.

The last comment is mine. I quoted the economist Robert V. Roosa from the September 1971 Fortune magazine:

And yet another factor has been the undue reliance on restrictive monetary policy to limit demand, with the perverse result of making interest rates themselves a major cost-push force.

After the Roosa quote I said, "I’ll swap that for two or three hobbyist-level links explaining what’s wrong with the idea."

Ten months later, still no response. To me, the issue looks unresolved.