Disinflation, Structural Change, and Distribution

Abstract

There exists a deflationary bias in the contemporary international economy, and this has significant domestic distributional consequences for all states in the system. After investigating its sources, I consider the consequences of and possible solutions to this bias. I review the modern debate over inflation and macroeconomic policy and argue that some small but positive rate of inflation is necessary to achieve optimal economic growth. This is demonstrated to be consistent with most otherwise competing schools of economic thought, such as Keynesianism and monetarism. However, public dissatisfaction with the inflation of the 1970s, coupled with the rise of conservative governments (and new economic theories), allowed highly disinflationary structural and institutional changes to take place without sufficient attention to political consequences. Those changes privilege sectors in society willing to sacrifice some economic growth to assure very low levels of inflation. International financial deregulation reinforces a nominally apolitical anti-inflation coalition by limiting macroeconomic policy autonomy, which reduces the viability of relatively expansionary policies, while at the same time helping to sustain the view that such measures are inherently flawed. Greater sensitivity to the distributional consequences of inflation, and reform in the international financial system, such as the introduction of a Tobin tax, could mitigate the existing deflationary bias.