To the opposite of what we frequently hear, the end of inflation is good news: it will not announce a long stagnation period but corresponds to the new situation of developed economies. It can lead to a long phase of prosperity if consequences have been identified and appropriated policies have been adopted.
Among the causes of inflation first appears, in theory, the supposed scarcity of raw materials and the difficulties to adjust supply and demand. Even if we don’t come back to the pessimistic assertions of the “Club de Rome” which, in the middle of the Seventies, maintained, without any nuances, that the oil and natural gas reserves were limited and that the world will soon be short of them, it has been thought, for a long time, and not only regarding fossil fuels, that this scarcity was a sure point and it will provoke, as a consequence, significant prices increases. Shale oil and natural gas fields growing production brought a scathing denial, even when that was only concerning the U.S. It is not difficult to imagine, for instance, what could happen when Russia decides to explore Siberia subsoil. Regarding metals resources, their prices fluctuate along with markets anticipations but no real scarcity is considered. Current tensions on some materials are linked to the development of batteries for electric cars. But this phenomenon is focused on one specific application and cannot have significant impact on prices because raw materials share in the value of the final product is low. Scarcity is not about to come, whether neo-Malthusians like it or not.
The second factor which weights on prices is innovation. This trend is not only affecting the production of goods, where productivity gains are still important. It also regards services. The increase of the number of platforms and applications offer to consumer provisions of services with much lower prices compared to traditional retail networks. The generalization of on-line financial services reduces their costs. Information transmission and exchange became almost free of charges. The pressure on competitiveness generated by the freedom given to enterprises to propose their prices and the opening of borders have allowed to transfer productivity gains all around the world to everybody’s benefit. France is a good example. For decades, it was thought that to fight against endemic inflation our country was suffering the solution was to give to the State the right to control prices. That policy was progressively abandoned in the middle of the Eighties and that French disease was eradicated. The reduction of the bureaucratization of the economy and globalization are irreversible phenomena. Progress generated by innovations are not any more confined in the country where it was put into practice and everybody can now profit from it, notably through a price fall.
So the end of inflation in developed countries is long-lasting but it has nothing to do with deflation provoked by a weak demand as during the Thirties. Rather than making reference to passed plans, it is necessary to study the consequences of that new situation in order to transform economic policy tools. The first consequence is a transfer of resources from the States in favor to households and at a lesser extent toward enterprises. During almost forty years, the State has taken advantage from inflation through two ways. Its receipts were inflated because the most important among them, VAT, was directly linked with prices evolution and one of its most important expenses, public debt charge and refinancing were reduced every year thanks, again, to inflation, with the exception, in France, it is true to note it, of the disastrous 7% 73 bond, called the “Giscard bond” which was indexed on gold. In the same time, the real value of household assets in bank deposits and saving account was depreciated by inflation.
Its end provoked a turnaround. Fiscal receipts did not anymore profit from the inflation bonus. The State had to borrow more and, on the top of that, its debt was not, as in the past, reimbursed with depreciated money. On the contrary, household savings was protected. The value of their assets continuously increased when the State had its own one reduced due to indebtedness. But European criteria, regarding public finance management, the 3% deficit and the 60% debt ratios against GDP were imagined during the Eighties in that time inflationist environment and they were easy to meet, notably the public debt one. When nominal GDP increases strongly due to prices rise and past debt exposure is measured with the issuance value, it is easier to stabilize the ratio. Obviously, it is not any more the case today and that makes public policies more difficult to run.
Beyond monetary policy, it is the political tools under the control of the States which will have to be reexamined. During the past, a restrictive monetary policy with credit more expensive or through the limitation of its growth permitted to put a pressure on demand and to fight against tensions on prices. That action became without any purpose and we even reached to that paradox where it is asked to central banks to act, on the opposite, to obtain some inflation, 2 % in the eurozone for instance. On the opposite, and that was one of the lessons Keynes gave us, whose thought was much richer than we think today, the States could increase public expenditures and the budget deficit to make the activity rebounding when it was necessary. It is now impossible because public indebtedness is too high.
So, how, in France and in Europe, adapt public policies to this new environment? A first track is about tax policy. In concentrating taxes on revenues and household consumption, because corporate taxes are not providing with more than 15% of the total receipts in France, the State doesn’t take advantage of the country enrichment to which it contributes to in providing the protection of assets and people and through the construction of infrastructure which increase the value of private real estate assets. It is necessary to rebalance the bases of levies. The creation of a tax based on real estate assets is a first but timid step. The second track to explore at the European level is related to the reform of the Maastricht criteria which became obsolete and which are not fulfilled by anybody, including Germany whose public debt ratio is above 60% for fifteen years. These criteria must take into account each country wealth and the household saving rate to reflect the ultimate solvability of each one and their ability to reimburse. The disappearance of inflation has artificially made tougher the constraints generated by these criteria when, in some countries, and especially in France, financial risks became less important. Moreover, that unsuitable framework has contributed to take people out of the European project.
The disappearance of inflation is good news. It profits to everyone except to States. Political leader duty is to include that point in their thinking and in their action. Failing it, they will lose the benefits of that indisputable progress and Europe will be used as a scapegoat.