Monday, May 28, 2012

Cost-Push vs. Demand-Pull Inflation: Monetary and Fiscal Policy Continue to Attack the Wrong Problem

What we spend, matters. If we spend money, there's no associated interest cost and we don't have to pay the money back. If we spend credit, we have the cost of interest to deal with. And the repayment of principal.
Our economic policies took money out of circulation and encouraged the reliance on credit. "What we spend" became more costly. The factor cost of money increased.
A factor cost is something like wages or profit, or something that competes with wages and profit. The cost of interest is a factor cost that competes with wages and profit.
The cost of interest is an "extra" cost, a largely unnecessary cost in our economy. Yes of course we need to use credit. But we don't need to use credit for everything. But we do. So, we have this extra cost to deal with, the factor cost of money. And it creates cost-push conditions. And cost-push conditions cause inflation. Inflation, or decline.
Read it at The New Arthurian Economics
The Cost-Push Economy
The Arthurian

An old post but a beauty. The difference between demand-pull and cost-push inflation is incredibly important for determining the correct policy response and has been largely misunderstood for several decades. Reliance of money-like instruments (credit) has dramatically changed the balance of “What we spend” and thereby altered the source of inflation. This change may also help explain why, since the 1980’s, The Economy Needs a Bubble! Until this distinction is better and more widely understood, monetary and fiscal policy may continue to attack the wrong problem.


  1. "UNIVERSAL MINIMUM WAGE. What do you think?" Harvard Business Review:

    Re: "UNIVERSAL MINIMUM WAGE. What do you think?" Harvard Business Review:
    "by Mubaraq Tope Akere on Sunday, 6 May 2012 at 22:48":

    1. One immediate question regarding a universal minimum wage is which countries will pay what share? Ideally the wealthy countries would, to a large degree, subsidize the less well off nations. This is a far more expansive variation of current policy in the US, whereby richer states subsidize the poorer states. In contrast, the EU today provides a clear example of how difficult gaining public support for this type of policy is among a monetary union, let alone the entire world.

      James Surowiecki had a recent post on people's inclination to seek fairness above well-being ( While a Universal Minimum Wage could possibly improve global GDP/well-being, I don't think it holds any political feasibility for at least several decades, if ever during our lifetimes.