“Thus, we need to develop an equalization strategy that is simultaneously a comprehensive anti-inflation program: low interest rates, high employment, a higher minimum wage supported by a stronger union movement, a maximum-minimum pay ratio, and a national prospective inflation adjustment. Neither taxes nor transfers play the critical role here, as the idea is to bring about an equalization of economic incomes before taxes and transfers, not afterwards.”
The problem that I have with this statement is that economists will tend not to be convinced by it. The 1980 problems that led to the abandonment of the ‘old ways’ were very real - and the ‘old ways’ really did not seem to work at the time.
Also, referring to the 1950-1970 period and suggesting that things solved themselves, as Galbraith is in danger of suggesting (‘major inflations are caused by wars’ p233), does not sound convincing either. There was some real policy making then - that somehow lost its power around 1980.
Where Galbraith suggests a more modest role for the Central Bank, I also think that economies cannot afford losing the Central Bank as a ‘fighter of last resort’ - who has to raise the rate of interest if all other methods fail. So some of Galbraiths specifics would have to go, though the general line of reasoning is laudable.
Galbraith’s analysis of the regime switch is correct, but he does not provide the true cause. My point therefor remains: If politicians and their economists don’t understand my DRGTPE analysis, and the mechanisms of differential indexation and the tax void and the consequences thereof, then these policy makers might well be right to prefer fighting inflation even at the cost of unemployment. [129]
In my view, for sure, the fellow economists who would dismiss Galbraith’s argument would be too fast too. Galbraith’s argument actually is balanced and to the point. Yes, a return to the ‘old ways’ of sharing the reponsibility on fighting inflation and unemployment is useful. But Galbraith is too optimistic about the fire power of his guns. His scheme requires more for it to work. Indeed, I think that it are the tools that are provided by my own analysis that would warrant that such a system can work - as it worked in 1950-1970.
Galbraith usefully criticises monetary policy for its impact on the distribution of income. The mechanism is peculiar strong in the US where the rich pay relatively few taxes. If the Fed raises interests rates - and thus, in the current economic system, unemployment too - then it also ‘taxes’ the middle class with both an ‘interest tax’ paid to the rich and a ‘social security insurance tax’ paid to the poor. In 1998, Alan Greenspan, Fed chairman, argued about the distribution of income: “Yes, I am very concerned, but the Fed can’t do anything about it.” Galbraith shows this to be wrong, and argues that the pre-1980 Fed was involved in doing something about it, and that a restructured Fed can be involved again.
Galbraith’s analysis is fitting for a book on inequality - but I think that a middle class person would not need the inequality argument to be opposed to such taxes. Alan Greenspan now is an American Hero - and I think that he deserves much of that credit - but Galbraith provides a narrative that would cause many Americans to reconsider their views.