Transformational Growth and Full Employment
Edited by Edward J. Nell and Mathew Forstater
Chapter 7: The History of Abba Lerner’s Supply-side Inflation
7. The history of Abba LernerÕs supply-side inflation Lynn Turgeon* Abba LernerÕs Ôfunctional financeÕ arose out of the unusual conditions associated with fighting World War II: full employment, effective price and wage controls and interest rates with a lid of approximately 2 per cent. Nevertheless Lerner came up with an important conclusion applicable to the postwar economy: taxes should be collected only to prevent or reduce inflation, never for revenue purposes; and a government can function without imposing any taxes as long as there is no threat of inflation.1 Unfortunately, after the Treasury Accord of March 1951, it was assumed by all and sundry, including the Federal Reserve Board, that there was some threat of inflation, presumably of a demand-pull nature. Thus tax increases were imposed or attempted on several occasions, in particular throughout most of the Korean War. When price controls were eliminated by Eisenhower at the end of that war, the price level, as an indication of false inflationary expectations, actually fell a little. If we can assume (along with Alan Greenspan) an upward bias in our measures of inflation, we might claim that there was insignificant inflation in the 1950s and until the latter part of the decade of the 1960s. It is the purpose of this chapter to examine LernerÕs interpretation of economic policy, in comparison to other Keynesians, looking at the second Eisenhower recession; the ÔNew EconomicsÕ of KennedyÐJohnson; the Nixon ÔNew Economic PolicyÕ; and the two rounds of hefty OPEC...
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