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Speaking of the Phillips curve, I was reminded of something I recently read:

Leash the Dogma

Without torturing every permutation of this relationship, suffice it to say that the foregoing clouds of noise and weak relationships show up in every other statement of the inflation-unemployment tradeoff, regardless of whether one uses levels, changes, trailing data, subsequent data, CPI inflation, core inflation, or mixtures of all of these.

What's perplexing about this entire inflation-unemployment argument is that the original "Phillips Curve" proposed by A.W. Phillips in 1958 was a relationship between unemployment and wage inflation, based on century of data where Britain was on the gold standard and general price inflation was virtually non-existent. So the Phillips curve is actually a relationship between unemployment and real wage inflation.

The resulting relationship can be stated very simply: wages rise, relative to other prices, when unemployment is low and labor is scarce; wages fall, relative to other prices, when unemployment is high and labor is abundant. The chart below nicely illustrates this relationship in U.S. data. It relates current unemployment to subsequent real wage inflation.

If this is true, utilising it to say something about general inflation is to push it, but it can work as long as general inflation is mostly dictated by wages and not say the price of oil or imported deflation from a nearby currency area, or any other factor.

by fjallstrom on Mon Oct 28th, 2019 at 11:02:02 AM EST
[ Parent ]
Well, the 'failure' of the Phillips Curve to which Friedman attributed the 'failure' of Keynesian macro analysis occurred shortly AFTER the US went off the gold standard and in the face of import driven inflation in the price of oil in the '70s. So historically contingent conditions seem to hold the day vs immutable laws supposed to hold everywhere and always. Another stake through the vampire propagandist Milton Friedman.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Oct 28th, 2019 at 11:39:08 AM EST
[ Parent ]
The questions about the Phillips Curve only highlight a bigger problem in economics. To the extent the profession addresses how to manage an economy, the consensus in the USA and Europe seems to be to restrict intervention to monetary policy. Japan and China have adopted much more fiscally interventionist policies and have had impressive results.

Economics is inherently about money and wealth, though the profession itself discretely avoids discussions of those subjects whenever possible. That task is reserved for anthropologists of wealth and power and for sociologists, whose insights, often penetrating, can and are successfully ignored by professional economists for the most part. This has the effect of leaving the profession insular and isolated from all but the very wealthy to whose prejudices leading economists pay strict attention.

It is unfortunate that there are so few prominent people who can, as Queen Elizabeth did in 2009, ask the profession how they could have gotten things so wrong. Surely there must be a better solution than having more inquiring monarchs.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Oct 28th, 2019 at 10:00:19 PM EST
[ Parent ]
Well Duh!  That last paragraph merely says that when an item is scarce it's price rises and when it is abundant the price falls.
Self-evident.
by StillInTheWilderness on Wed Oct 30th, 2019 at 02:35:51 PM EST
[ Parent ]

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