The essence of Krugman’s argument is that we are not watching a rerun of the 1970s because this time round there is no mechanism for creating a price-wage spiral. That is because unions are now dead so that workers are unable to ask for wage increases that match prices. As an example, Krugman contrasts the United Mine Workers contract of 1981 which bargained a three year 11% annual average wage increase with current conditions. Where now are the unions demanding 11% a year increases?
Indeed, where are the unions, period?
Today’s reality is indeed characterised by absence of a price-wage spiral mechanism, and it is the reason why the Fed’s easy monetary policy is unlikely to cause general inflation. However, that raises a critical additional point.
Recognising that the inflation of the 1970s was the result of a price-wage spiral triggered by conflict with unions over income distribution, compels rejection of the theory of the natural rate of unemployment. This theory has dominated economists’ thinking about inflation for over a generation and has twisted public thinking.
