Brazil Nuts

Since our editorial on cost-ofliving escalators in Brazil [“Up the Down Escalator,” March 29], the New York Times has published articles by Soma Golden and Marvine Howe criticizing Milton Friedman’s support of Brazil-style escalators. “Professor Friedman,” says Golden, “carefully skirts the events of 1964 to 1967, when the most dramatic cuts in Brazil’s inflation rate occurred.” But Friedman is quite clear that what makes the post-1967 experience unique is that growth accelerated as inflation declined. From 1964 to 1967, the slowdown of monetary growth did cut inflation, as Friedman’s theory would lead one to expect, but the average annual increase in real output was less than 4 per cent—barely enough to keep up with Brazil’s 2.8 per cent annual population growth. Since 1967, when the “monetary correction” was instituted, the rate of saving more than doubled and real growth has not fallen below 9 per cent in any year.

“If everyone is truly protected from inflation,” asks Professor Ronald Krieger, “what incentive would the government have to slow down the economy and squeeze price levels down?” But Brazil’s lesson is that the economy doesn’t have to “slow down” to reduce inflation. Most disruptions and paralyzing uncertainty associated with fluctuating price levels, can, despite the limitations of price indices, be alleviated through cost-of-living adjustments. That means that slowing inflation need not be a political liability: it would not create massive unemployment, which occurs when employers are locked in to long-term wage agreements based on an earlier inflation. It is unrealistic to assume that an escalator adds to what would otherwise be a modest increase in nominal wages, prices, or interest rates. Similarly, starting an inflation would no longer be a political asset: an unexpected increase in inflation would not stimulate employment by temporarily lowering real wages and interest rates, nor would it increase the tax take by diluting exemptions and pushing people into higher brackets. By itself, wide use of escalators will neither “institutionalize” nor raise or lower inflation—that depends on the rate of increase of the money supply.

About the Author

Alan Reynolds

Alan Reynolds, National Review’s economics editor from 1972 to 1976, is a senior fellow at the Cato Institute and the author of Income and Wealth.

Featured Tags

Since our editorial on cost-ofliving escalators in Brazil [“Up the Down Escalator,” March 29], the New York Times has published articles by Soma Golden and Marvine Howe criticizing Milton Friedman’s support of Brazil-style escalators. “Professor Friedman,” says Golden, “carefully skirts the events of 1964 to 1967, when the most dramatic cuts in Brazil’s inflation rate occurred.” But Friedman is quite clear that what makes the post-1967 experience unique is that growth accelerated as inflation declined. From 1964 to 1967, the slowdown of monetary growth did cut inflation, as Friedman’s theory would lead one to expect, but the average annual increase in real output was less than 4 per cent—barely enough to keep up with Brazil’s 2.8 per cent annual population growth. Since 1967, when the “monetary correction” was instituted, the rate of saving more than doubled and real growth has not fallen below 9 per cent in any year.

“If everyone is truly protected from inflation,” asks Professor Ronald Krieger, “what incentive would the government have to slow down the economy and squeeze price levels down?” But Brazil’s lesson is that the economy doesn’t have to “slow down” to reduce inflation. Most disruptions and paralyzing uncertainty associated with fluctuating price levels, can, despite the limitations of price indices, be alleviated through cost-of-living adjustments. That means that slowing inflation need not be a political liability: it would not create massive unemployment, which occurs when employers are locked in to long-term wage agreements based on an earlier inflation. It is unrealistic to assume that an escalator adds to what would otherwise be a modest increase in nominal wages, prices, or interest rates. Similarly, starting an inflation would no longer be a political asset: an unexpected increase in inflation would not stimulate employment by temporarily lowering real wages and interest rates, nor would it increase the tax take by diluting exemptions and pushing people into higher brackets. By itself, wide use of escalators will neither “institutionalize” nor raise or lower inflation—that depends on the rate of increase of the money supply.