I try to admit it when I’m wrong.

I’m not sure what the point of this blog would be if that wasn’t going on. That’s it’s point for me anyway. But we can’t get engagement from Alex or Sinclair on their ideas.

You call a rise in prices of “resources, including labour” a change in relative prices. What is the change in ‘relative’ prices relative to? It looks to me like the price of all resources rises – presumably in the empirical world there’s a spread of price rises – with some average overall price rise being involved. That looks like a change in the price level to me.

You then contrast this with ‘inflation’. Now I expected you to say – along the lines of Brendan’s discussion with James in the earlier thread that ‘inflation’ is an ongoing change in prices. Whereas what we’re witnessing is (according to certain assumptions) a one off change.

But you don’t say that.

You say “Inflation occurs when the value of money itself falls.”

Well, call me old fashioned but I can’t see the difference in the general price level rising and the value of money falling.

Then you propose this idea that tax cuts will increase employment. I don’t follow this. As I understand it, if tax cuts increase demand beyond a certain level the RBA will feel forced to raise rates to restore price stability – and when will they be comfortable that they’ve achieved that? At about the level they were at before the tax cuts.

So I can’t see how you can say that the tax cuts increase employment. (Indeed it’s hard to see them doing it even temporarily, because the RBA will react pretty immediately and is forward looking as are the markets).

So it’s all a mystery to me. As you can see, James analysis leads to similar conclusions about your argument (that it is fallacious) via a quite different route. I’d be grateful for some explanation of what that argument is and how it survives our critiques.

Managing inflation through the tax rates is taking us back to the 70′s. In other words it is sheer twaddle.

Inflation- currency debasement- is a monetary problem and nothing else while tax policy is all about raising money to finance government expenditure.

Robson”s point is a good one. Why have a central bank if you can manage currency debasement through tax rates? Just keep changing the tax rates every month to hit the CPI target. That ought to do it. Piece of cake, right?

James, try this thought experiment. Take Mugabe land. Raise the tax rate 30% and then see what happens to the 1 mill% inflation rate. It wouldn’t budge simply because the printing presses are on 24/7.

We were messing with tax rates all through the 70s as a demand management exercise and it was a sorry Keynesian mess. Every budget produced changes to tax rates and inflation simply went one way. Inflation is monetary problem and that can only be managed through monetary policy.

Why not manage fiscal policy through the monetary levers then. Oh, we already do that.

“Yes, of course, in an overheated economy a tax increase would dampen inflation. I cant believe its even an issue.”

Follow the money chain, james and you will have yoru answer. the money has to come from somewhere, right? The central bank put the money in circulation in the first place, which is then taxed and returned to the government in the form of a surplus through taxes. If you think the surplus being returned is inflationary than you need to ask why that money was printed in the first place. Look no further than Martin Place.

A surplus is an exercise in wastful futility. The money ought to be returned to its rightful owners.