The ‘miracles’ of inflation
Is the job of finance minister still the most difficult one in a government? Not necessarily, say former finance ministers, comparing the requirements in the past and present.
In the years after 2009, during Greece’s debt crisis, the major problem was deflation: Prices kept falling, the values of businesses, land, real estate and labor collapsed, gross domestic product (GDP) fell, the ratio of GDP to debt worsened, and overindebted countries like Greece were under the close supervision of the markets (and/or a troika) for a possible default. The main requirement of that time was to make cuts in nominal wages, daily wages and pensions, and reduce social policy spending. Stuck between Scylla (bankruptcy) and Charybdis (austerity), the Ministry of Finance was walking a tightrope, without a safety net.
From the onset of the pandemic, economic conditions have been changing everywhere in the world. Central banks are financing government budgets directly or indirectly, the familiar “magic money trees” have appeared around the world and inflation is performing its double “miracle”: On the one hand, it raises the values of businesses, land and real estate, increases the nominal value of of gross domestic product and improves the GDP-to-debt ratio. The first “miracle” is that debt seems to become more easily sustainable, as if (by magic) the burden is lessening, and as if serious structural changes have taken place in the economy – when all this is but virtual reality.
But the biggest “miracle” concerns wage labor incomes. In previous decades of high inflation, there were major conflicts over wage indexation, such as decisions to reduce nominal wages and daily wages. Things that were done with tough decisions by the Ministry of Finance now happen quietly, almost automatically. Inflation primarily impoverishes wage earners by eroding their purchasing power and secondarily through indirect taxation – 12.1% inflation becomes 25% or 30% or more for salaries of 700-1,200 euros. Inflation does the “dirty work.” And the Finance Ministry appears to be scrambling to find fiscal space to support households – once a Procrustes of wages, now a benevolent benefactor.
Could dealing with the crisis have become such a simple job? That it is enough to hand out state support to everyone through borrowing or from the overperformance of indirect taxation due to inflation, to take some (de facto, limited) relief measures so that things do not lead to a social collapse and, for the rest, let inflation redistribute income at the expense of wage labor, hoping it will also strengthen business profits and stabilize economic recovery? Or does it turn out that the work of the Ministry of Finance cannot be so simple and easy, even in today’s conditions, if it is to be effective?
