I responded to the level of the assertion. What you suggest won't work in an environment of rising interest rates for it is those things you mention that are curtailed first by rising rates. That's the whole point.
You need to read Schumpeter and recognize the necessity of the destructive part of the economic cycle. Consider, no Fed member acts as though they believe in it, although they assign reading it to their students. It may be the case that destruction of good ideas is more important than the construction of more of them.
The most efficient path for energy to travel is through the wave form. The same is true for economies. An economy expands faster than is stable and creates excesses which have to be eliminated. They are when the economy contracts. Authority doesn't want this contraction, and so they manipulate macroeconomic variables in order to smooth it out. This causes the ups and downs of the wave to have greater amplitude and frequency and the smoothing only embeds the negative factors so that they rise to far greater proportions than if authority didn't interfere. You'll never get control freaks to believe this, so you have to change the system and eliminate the freaks. That won't be done when we are indifferent from the feelings of security that superficial wealth brings.
The wealth effect now is substantially developed so that people think they can afford to pay higher prices. They may grumble a little but the purchase is made and it will be made grudgingly at substantially higher prices. Interest rate increases don't effect this kind of final demand as nearly as much as it effects planned costs and decisions to enhance efficiency of output.
Also, you are wrong to claim that labor cost doesn't cause inflation. Labor can raise compensation demands in excess of the value of output and independently of all other factors and considerations, prices must rise. This isn't a matter of elective price increases to maintain margins, it's a matter of survival so that even if a company is losing money at the margin, it will pass on the higher labor costs anyway. Investments in enhanced efficiency only go to help keep market share. In the current environment decisions to proceed with enhancements are falling.
The only reason labor hasn't inflated wages is the existence of competition from foreign labor. Greenspan thinks WinXXX productivity gains are responsible for subdued inflation over the last ten years, but the reality is that if labor had made excess wage demands, all these mechanisms would have found a way to out source production to lower cost foreigners. In light of that threat labor has held the line. It was more than just a threat since foreigners built plant here to get around the prevailing and still intact trade barriers.
Americans have elected to not raise trade barriers even higher during the past decade, but this is ending now. Various industries have been priced out of the market mainly due to their cost of labor. They can't compete with foreign labor cost so they will demand a subsidy from the people in the form of tariffs to keep on operating. At first the people like the idea because there is some sort of noble commiseration with the plight of labor, but when they get the bill, they blame the corporations for raising prices. It's another aspect of the wealth effect.
A lack of competitive alternatives to domestic labor doesn't necessarily cause "cost push" inflation, because the necessary circumstance is wealth and money availability. FED is making money cheap and plentiful since they are supplying more of it than is necessary to achieve equilibrium. In an environment of dear money which the market always finds but never to excess, labor is muzzled and laborers earn the maximum relative to the degree of their desire to compete against others. Problems of cost push, demand pull, trade and excise or hidden taxes, don't arise. They do arise when the FED interferes with the market's determination of the proper cost of money, because it is perfectly indeterminate by judgement and computation to accomplish what the market pricing mechanism does at the infinitesimal margin. |
