Inflation like the Lernaean Hydra?

The somewhat risky analogy of comparing the eternal recommencement of the fight against inflation with one of the twelve labours of Hercules (killing the Lernaean Hydra, the dragon with nine heads that grew back twice as many when cut off) is not completely out of place if we consider the permanent conflict between maintaining price stability and the search for full employment.

There have certainly been, in recent history, fairly long periods (the 90s in particular) with almost no inflation, performances obtained thanks to productivity gains (thanks to IT) and a significant immigration of well-made brains, making up for the lack of qualified labor. But these effects, positive on growth potential, were not intended to be eternal and have gradually dissipated, allowing the usual inflation/recession dilemma to resurface.

The first alternative was first tackled, by raising interest rates so sharply that the economy tipped into recession. Then the second was tackled, by flooding the market with liquidity, even taking rates into negative territory if necessary. As a result, inflation picked up again, rates started to rise again, growth fell back… and so did the rise in prices. So, moderately reassured, the door was once again opened to cautious reductions in key rates – perhaps, according to the latest news, to two quarters of a percentage point instead of just one in the United States, and to one or even two at the ECB. A similar path – sometimes anticipated, sometimes delayed for various reasons specific to the Swiss case – at the Swiss National Bank, which does not operate in a vacuum.

Although in decline, and as such reassuring, the residual increase is nevertheless not uniform, and it has not escaped the watchmen that basic inflation persists. Yet it is this that we are still struggling to cut off, like the heads of the Hydra.

The ultimate way to overcome this would be to reduce, and if possible eliminate, the gap between sectoral labour shortages and persistent underemployment. Because it is this gap that, without corrections, the revival of growth inevitably reignites inflation, and conversely, the fight against it can only worsen unemployment.

But this means exists, at least on paper. By better targeting returns to employment (in other words: by preferably training workers in the professions where the shortage of personnel is most marked), we would slow down the rise in wages resulting from sectoral shortages, and by this means we would prevent the increase in prices that is maintained by the wage/price spiral, without having to automatically resort to restrictive monetary policies that restrict demand and thereby slow down the economic situation.

Herculean task

This often neglected relationship between the nature of supply and the evolution of demand for employment is undoubtedly completely foreign to monetary methods, conventional or not, of combating inflation, but it would be worth studying it better, and above all, drawing inspiration from it.

The task – no pun intended – will seem Herculean; it will be especially long-term, because it will involve a profound transformation of habits and structures of professional training, not to mention that it would restrict individual freedoms of choice. But financial incentives, better adjusted than those traditionally used, could do the job without additional budgetary burden.

Found an error? Please report it to us.