Thomas Palley:
Well, the first thing to note about inflation is that there are many different kinds of inflation. They all have different logics and different effects, and that’s something that is not taught in textbooks but ought to be. It’s also something that the economics profession doesn’t really get, or at least does not emphasize sufficiently.
I distinguish between six major kinds of inflation. One is demand-pull inflation, which is the story of “too much money chasing too few goods” — that’s the nutshell way of talking about it.
A second form of inflation is conflict inflation, which is conflict between capital and labor over the distribution of income.
A third form of inflation is supply-side inflation, which concerns global commodity price shocks. Here, the classic example is the OPEC oil price shocks of the 1970s.
A fourth form of inflation is imported inflation, when inflation is caused by exchange-rate depreciation and a rise in the price of imports — and I suppose to the extent that our current inflation is supply-chain inflation, it could be interpreted as fitting in this category.
The fifth form of inflation is what I call high inflation. This is often associated with large budget deficits and dysfunctional politics where a government needs funding, but it can’t get it together to fund itself with appropriate taxation, so budget deficits are the way they do it, which produces inflation.
Lastly, the sixth form of inflation is hyperinflation, which is a rare event. It’s usually associated with wars in which the supply side of the economy has been destroyed, or with failed states or kleptocratic governments that have destroyed the conditions for doing business.
The Phillips curve is about demand-pull inflation. The controversies raised by Milton Friedman were about the Phillips curve, which means that they are about demand-pull inflation.
The orthodox story that is told today is that there’s a temporary, short-run, negative trade-off between unemployment and inflation — or at least that the economy generates a pattern of outcomes in the short run that looks like such a trade-off. But if policy makers try and exploit that trade-off, it will crumble, and they will be forced to go back to what is called the natural rate of unemployment — only now with a higher inflation rate than before and no reduction in unemployment.
Basically, that view is the legacy of Milton Friedman. Though I am critical of the Friedman view, I still think he made an important contribution. He focused on the issues that were at stake, which are: how are wages set, what is the role of inflation expectations, and is there a systematic trade-off between inflation and unemployment that can inform policy, especially monetary policy. He did a service by framing the argument. The problem is that I think Friedman came out on the wrong side of that argument.