Historical Origins of the Cost-Push Fallacy

B y the end of 1998, the disinflation of the 1990s had brought the U.S. price level close to absolute stability. The same disinflation witnessed a remarkable resurgence of what used to be called cost-push theories of price-level movements to explain it. Such theories, of course, attribute inflation and disinflation to a host of nonmonetary, supply-oriented influences that alter the unit cost and profit markup components of the prices of individual goods. Cost-push theories form an integral part of the so-called new economic paradigm, or new economy thesis, which American pundits report predominantly in the popular rather than the scholarly press. Proponents of that paradigm cite such cost-reducing forces as increased global competition and rapid technological progress as the chief factors holding inflation at bay. Other frequently mentioned sources of cost disinflation—all seen as exerting downward pressure on rates of wage increase—include (1) worker job insecurity, (2) increased competition in labor markets, and (3) the declining power of labor unions in the United States. Even these factors hardly begin to exhaust the list. Deregulation, falling computer prices, falling growth rates of health care costs: all have been proffered as cost-disinflators. Most recently, cost-push explanations of disinflation have emphasized falling import costs stemming from the Asian financial crisis, with its associated distress sale of Asian goods and plummeting foreign exchange value of Asian currencies. With such pressures holding inflation in check, cost-pushers feel free to recommend that monetary policy become expansionary in pursuit of rapid growth.