Ideologies and political values also differ and they have

POLICY MATTERS

Political and value-related differences can be detected in other aspects of the economy. Here is, among others, the issue of inflation or put differently, the case of price stability. Socials democratic governments are thought to toler-ate inflation, but are sensitive on unemployment and income differential, while conservative governments tend to do their utmost to uphold the purchasing power of the currency, even if price level stabilization may lead to temporary in-crease in unemployment. There is an unpleasant trade-off, in many instances, between increase in the price level and the increase of unemployment rate.

28 PÉTER ÁKOS BOD: ECONOMIC POLICY MAKING

You may beat price increases through drastic policy cures that, unfortunately, have a side effect: it increases the number of the unemployed. You as a min-ister of finance still want to protect the purchasing power of the currency, but you must know the ‘price’ of it in terms of some slowdown in economic output, and with is, less demand for labour.

Chart 1/5

Inflation rates in selected OECD countries, 2011-2019

https://data.oecd.org/price/inflation-cpi.htm

The black line registers the OECD inflation average since 2011. Against this background, one can judge the inflationary performance of the countries cho-sen here for comparison. Mexico, blue line, has had an above-average infla-tion history in recent years (and before that, too). Hungary, coloured yellow, had a period of inflation above the average but fell below it in the mid-period, after the financial crisis of 2008/2009. The end-value is well above 3 per cent (which is the target for medium term inflation set by the Hungarian central bank). This figure in itself is not problematic, still, if you take a longer look, you may call Hungary a relatively inflation-prone country. Germany, or Switzerland, the Netherland, not presented here, can be seen as bastion of price stability, with price increases systematically below the OECD average. Japan, however, has registered price index below the zero line, meaning that the country has experienced a period of deflation – which is the opposite of inflation. Deflation has been rare until recently, while inflation has been with us for decades. In earlier decades, Italy had a long period of high inflation, under the Lira period – but that was before entry into the euro zone. Now, Italians may have lots of economic problems but lack of price stability is not among them this time: their headline inflation lines are most of the time below the OECD average. United

WHY STUDY COMPARATIVE ECONOMIC POLICY-MAKING? 29

Kingdom, having its currency of its own, has proved to be slightly more infla-tionary than the rest of the OECD club. A headline inflation rate of 2.6 per cent, as recorded in the summer of 2017, was not worrying but still was a sign of prices moving measurably up. What is behind such an acceleration of inflation at a time when the business cycle is not especially strong may be the weaken-ing of the pound.

Inflation measured by consumer price index (CPI) is defined as the change (typically increase) in the prices of a basket of goods and services that are customarily purchased by the households. This is the headline inflation that appears on front page if it happens to be too high, or in the business pages in small letters if its annual growth rate is just normal. Inflation rate is a proper measure of the erosion of the currency’s purchasing power; still an annual one to two per cent increase of price level is seen “just good”. Why zero is not

“good”? Why “inflation targeting” aims at maintaining a small but positive rate of increase, rather than zero?

First, a consumer price index is counted by measuring the period-to-period price changes of a pre-determined set of consumer goods and services, as-suming that quality and characteristics are constant. In reality, quality of goods is not the same. If better and more reliable cars, faster computers, more eco-nomic appliances come to market with the same or just slightly higher price tag, a simple measurement of the new prices to the old may report inflation – when there is none. This is a methodological reasoning why a bit of price level increase is wanted. The other reason has to do with buyers’ pshychol-ogy. Fixed, or particularly declining, price level may discourage buyers to buy.

If potential buyers postpone their shopping intentions in expectation of lower future prices, that would do harm to business. For these and other reasons the European Central Bank (ECB) defines price stability as annual CPI increase remaining in the band between zero and 2 per cent, closer to the latter value.

Higher than that headline inflation, particularly a two-digit annual consumer price increase is something that any proper central bank would avoid or fight against with all measures at its disposal.

For some years, interestingly, inflation was not a major concern for policy makers. Low oil and other commodity prices and cheap industrial goods pro-duced by Chinese and similarly low wage producers kept down global price level even before the financial crisis of 2008-2009. During the financial turmoil, people were not eager to buy that much, and reduced demand is deflationary.

But low and falling global prices are not always the case: for long decades, fighting inflation was a major policy task for central banks and governments.

The decision to go ahead with a price-level stabilization policy is a hard one:

you as a key minister may not avoid it once sales prices grow fast. What you choose is probably much influenced by your government’s values and ideol-ogy (right or left), and the political conditions. If the next general election is

30 PÉTER ÁKOS BOD: ECONOMIC POLICY MAKING

just months away, your government will probably step back from bold policy measures that promise a slowdown in inflationary trends. Such a manoeuver may by justified professionally – but would lead to axing thousands of jobs – you’d rather not do that. That is called Realpolitik – a German word but a rather general phenomenon in democracies.

Another distinguishing aspect of policy-making is the economic theoretic background (if any) of policymakers. They may follow Keynesian demand man-agement or may choose to apply supply side or monetarist policies (on Key-nesianism, see in later chapter). Or politicians may simply resort to a ’policy cocktail’ of their own concoction. In the same country, successive govern-ments may follow very different policies, depending on party affiliation or on personal factors such as the beliefs and values of key decision makers.