Monday, February 27, 2017

Jason Smith — NAIRU and other connections between inflation and employment


If you are still following this discussion, Jason Smith has some interesting observations.

Information Transfer Economics
NAIRU and other connections between inflation and employment
Jason Smith

27 comments:

Ralph Musgrave said...

I left the following comment there.

I'm thrilled to learn there is no connection between unemployment and inflation. As I've been saying to NAIRU bashers for 20 years and as Simon Wren-Lewis recently said: in that case why don't we have a massive increase in demand and reduce unemployment to near zero?

NAIRU bashers invariably go quiet when asked that question. And the reason is stark staring obvious: they know perfectly well that THERE IS a relationship between inflation and unemployment!!!

Bob said...

We should risk it.

Ralph Musgrave said...

Bob:

I agree in the sense that governments and central banks should constantly be testing to what extent inflation really is a problem. E.g. given a rise in demand, you never know: it might turn out to be possible to get unemployment down to a lower level that was previously thought possible. But you can guarantee inflation will get too high before zero unemployment is reached.

Auburn Parks said...

Ralph-

Nobody says there is no relationship between supply, employment, and inflation.

We are saying that the Orthodox concept of NAIRU, their estimates of Nairu, and most importantly how they use NAIRU to implement policy is all wrong and damaging to the economy.

AXEC / E.K-H said...

The fatal mistake of the discussion is to accept the NAIRU-Phillips curve (with the well-known disclaimers) and to focus on the economic policy implications with regard to the given situation in the US/UK/etc. But there is NO use to discuss policy if the underlying theory is defective.

The fact of the matter is that the Phillips curve is misspecified since Samuelson/Solow.* Because there is NO such thing as a NAIRU-Phillips curve all political discussion is vacuous.

Egmont Kakarot-Handtke

* For details see ‘NAIRU, wage-led growth, and Samuelson’s Dyscalculia’
http://axecorg.blogspot.de/2015/01/nairu-wage-led-growth-and-samuelsons.html

Tom Hickey said...

Probably better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule, or if there is, a lot of smart people have failed to find it and establish it as either necessary logically (mathematically) or empirical based on tested performance of a rule.

The relationship between employment and inflation appears to be contingent and based on a number of factors, including institutional factors, that result in dynamic conditions involving uncertainty.

AXEC / E.K-H said...

Tom Hickey

You say: “The relationship between employment and inflation appears to be contingent and based on a number of factors, including institutional factors, that result in dynamic conditions involving uncertainty.”

This is entirely vacuous econ-waffle. Imagine, as a contrast, a physics teacher tells his students about gravitation: “The relationship between velocity and mass appears to be contingent and based on a number of factors, including history-specific factors, that result in dynamic conditions involving uncertainty.”

It is pretty obvious that economists have NOTHING of substance to say. Why do they not simply shut up?

The elementary dependency between employment and inflation and a number of other factors is given with this objective systemic equation that is composed of MEASURABLE variables
https://commons.wikimedia.org/wiki/File:AXEC46.png

This equation is the economic equivalent to Galileo’s Law of Fall and thus the ultimate econ-waffle stopper.

Egmont Kakarot-Handtke

Auburn Parks said...

Egmont-

Economics is not a natural science like physics or chemistry, so to complain that explaining economic concepts accurately doesnt sound the same way as a physics explanation is to confuse the fundamental nature of the two endeavors. There is a simple reason why physics like precision and predictability is inapplicable to economics, and its because of the reasons Tom provided.

AXEC / E.K-H said...

Auburn Parks

You say: “There is a simple reason why physics like precision and predictability is inapplicable to economics, and its because of the reasons Tom provided.”

The simple reason is scientific incompetence. For details see ‘Failed economics: The losers’ long list of lame excuses’
http://axecorg.blogspot.de/2017/01/failed-economics-losers-long-list-of.html

Egmont Kakarot-Handtke

Ralph Musgrave said...

Brian,

For the second time, you claimed “Nobody says there is no relationship between supply, employment, and inflation.” My answer is the same as before: what does Brian Romanchuk mean by saying NAIRU should be “bashed, smashed and trashed”. Seems a pretty outright condemnation of the whole idea to me.

Tom,

You say “Probably better to say that there is no necessary or constant relationship…”. Quite agree. But whoever said there WAS a constant relationship? Certainly not the Fed. Anyone with a bit brain ought to realise that NAIRU will vary with a whole host of variables: standards of education, recent unemployment levels (hystersis) and so on.

EK-H,

You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefor it does not have a precise value. The amount of iron in the Moon has a very very precise value indeed. Ask God how much iron there is on and in the Moon and he’d tell you the figure to the nearest 0.00000001%. In contrast, astronomers might not know the quantity to better than plus or minus 10% for all I know. It is therefor perfectly permissible to write equations or get involved in discussions which assume a very very precise value for the amount of iron in the Moon. Same goes for NAIRU.

Much of the stuff I’ve written makes the latter assumption: it is helpful to make that assumption sometimes.


Auburn Parks said...

No egmont, its not about scientific idioicy. Its about the nature of the subject. Economics is not different than social psychology in this regard.

Ralph-

NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelearitng inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct.

What is the unemployment rate that would correspond to accelearating inflation right now Ralph?

Auburn Parks said...

The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs.

There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on.

AXEC / E.K-H said...

Ralph Musgrave

You say: “You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefore it does not have a precise value.”

You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: “NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false.”* The measurement problem is a side issue.**

Egmont Kakarot-Handtke

* See ‘NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather’
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
** See ‘NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy’
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

AXEC / E.K-H said...

Auburn Parks

The moronic part of economists, i.e. the vast majority, maintains that economics is a social science. Time to wake up to the fact that economics is a system science.#1

Economics is NOT a science of individual/social/political behavior — this is the social science delusion — but of the behavior of the monetary economy . All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/ Darwinism, political science, social philosophy, history, etcetera) and are taken in from these by way of multi-disciplinary cooperation.#2

The economic system is subject to precise and measurable systemic laws.#3

Egmont Kakarot-Handtke

#1 See ‘Lawson’s fundamental methodological error and the failure of Heterodoxy’
http://axecorg.blogspot.de/2016/03/lawsons-fundamental-methodological.html
#2 See ‘Economics and the social science delusion’
http://axecorg.blogspot.de/2016/03/economics-and-social-science-delusion.html
#3 See ‘The three fundamental economic laws’
http://axecorg.blogspot.de/2016/03/the-three-fundamental-economic-laws.html

Tom Hickey said...

But whoever said there WAS a constant relationship? Certainly not the Fed.

Not now. They had to learn this by first the NAIRU model that assumed a natural rate and cet. par., and then the difficulty of writing a rule that could be applied across time.

Too many confounding factors involved that are not directly related to employment or the interest rate.

And there are still people calling for a rule.

Noah Way said...

"Economic science" is an oxymoron.

AXEC / E.K-H said...

Noah Way

You say: “’Economic science’ is an oxymoron.”

It is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Political economics has produced NOTHING of scientific value in the last 200+ years. The four majors approaches — Walrasianism, Keynesianism, Marxianism, Austrianism — are mutually contradictory, axiomatically false, and materially/formally inconsistent.

A closer look at the history of economic thought shows that theoretical economics (= science) had been hijacked from the very beginning by the agenda pushers of political economics. These folks never rose above the level of vacuous econ-waffle. The whole discussion from Samuelson/Solow’s unemployment-inflation trade-off to Friedman/Phelps’s natural rate to the rational expectation NAIRU is a case in point.

The NAIRU-Phillips curve has zero scientific content. It is a plaything of retarded political economists. Samuelson, Solow, Friedman, Phelps, and the rest of participants in the NAIRU discussion up to Wren-Lewis are fake scientists.*

Egmont Kakarot-Handtke

* See also ‘Modern macro moronism’
http://axecorg.blogspot.de/2017/02/modern-macro-moronism.html

Matthew Franko said...

"better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule,"

Good line here Tom... they dont have a function...

But I would point out that with the employment issue, we have had an unregulated system interface (open borders) for decades which is ofc going to result in chaos..

Ralph Musgrave said...

EK-H,

I see: so you're saying the "underlying employment theory" of NAIRU "is false": i.e. you're saying there is no relationship between inflation and unemployment.

Why then don't you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!

Reason you don't advocate that is that, like all the other NAIRU deniers, you know perfectly well that THERE IS a relationship between inflation and unemployment.!!

AXEC / E.K-H said...

Ralph Musgrave

It would be fine if you could first learn to read and to think and to do your economics homework.

The point at issue is the labor market theory and the remarkable fact of the matter is that economists have after 200+ years NO valid labor market theory. The proof is in the NAIRU-Phillips curve. So what these failures are in effect doing is giving policy advice without sound theoretical foundation. Scientists don’t do this.

What is known since the founding fathers about the separation of politics and science is this: “A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision.” (J. S. Mill)

The first point is that economists violate the separation of politics and science on a daily basis.#1 The second point is that their unwarranted advice is utter rubbish because they have NO idea how the economy works. The problem society has with economists is that it would be much better off without these clowns.

You ask me: “Why then don’t you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!”

Answer: The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians. In addition, an economist who understands how the price and profit mechanism works does not make such a silly proposal, only brain-dead political agenda pushers do.#2

What I am indeed advocating is that retarded econ-wafflers are thrown out of economics and that economics gets finally out of what Feynman aptly called cargo cult science.#3

Economists claim since more that 200 years that they are doing science and this is celebrated each year with the ‘Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel’. Time to make this claim come true.

The only thing economist like you can actively do to contribute to the progress of economics is switching on TV and watching 24/365.

Egmont Kakarot-Handtke

#1 See ‘Scientific suicide in the revolving door’
http://axecorg.blogspot.de/2016/11/scientific-suicide-in-revolving-door.html
#2 See ‘Rethinking deficit spending’
http://axecorg.blogspot.de/2016/12/rethinking-deficit-spending.html
#3 See ‘Economists and the destructive power of stupidity’
http://axecorg.blogspot.de/2017/02/economists-and-destructive-power-of.html

Ralph Musgrave said...

EKH,

"The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians."

"The business of the economist" is not just "true theory": it is also to give the best economic advice they can even where the theory is clearly defective. In the case of the relationship between inflation and unemployment, the EXACT nature of that relationship is not known with much accuracy, but governments just have to take a judgement on what level of unemployment results in too much inflation. Ergo economics have a duty to give the best advice they can in the circumstances.

Re social problems, your above quote also doesn't alter the fact that economists are in a position to solve HUGE social problems if they promote an increase in demand where that is possible. So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It's blindingly obvious.

Like all the other NAIRU deniers, you know perfectly well there is a relationship between inflation and unemployment!!

David Swan said...

To say that there is "a" relationship between inflation and unemployment does not even remotely support the claims inherent in the NAIRU, nor does it justify its use to guide the macroeconomic framework. NAIRU does not claim that there is "a" relationship between inflation and unemployment (that lesser claim is covered adequately by the Phillips Curve). NAIRU claims that low levels of unemployment generate ACCELERATING inflation (i.e. "hyperinflation"), a claim based on pure sophistry and nothing else. If you would like to support the NAIRU's utterly fallacious claim that low unemployment generates ACCELERATING inflation, then please provide data to support that claim.

Furthermore, "a" relationship between unemployment and inflation in no way justifies the central bank intervention of choking off economic growth to prevent "too many jobs". Is the inflation harmful or benign? With the historical perspective available to us from nearly 5 decades of NAIRU, all that is required is to look at the chart of hourly wage growth vs productivity and observe that real wages growth took a sharp right turn at the very time NAIRU was implemented worldwide. There has not been one iota of real wage growth since the 70's (despite low inflation), whereas the real wage grew steadily prior to that (despite moderate inflation). If that is the price of "protecting" us from inflation, then in what way is it beneficial to do so?

Brian Romanchuk said...

I see Ralph Musgrave referred to my article again.

Good Lord, how can I make what I wrote simpler to understand?

The DEFINITION of NAIRU is the level of the unemployment rate at which the price level starts to accelerate. Sure, there's usually another variable in there mucking up the works, but it's going to be a second order effect in the current environment.

- If you hand me a time series of the NAIRU, I could demonstrate how the predicted acceleration does not match observed data.

- If you cannot hand me such a time series, that is a strong indication that no such series exists. In which case, you're wrong, and I'm right.

AXEC / E.K-H said...

Ralph Musgrave

You say: “Ergo economics have a duty to give the best advice they can in the circumstances.”

The only duty of scientifically incompetent economists is to throw themselves under the bus. Economists are a menace to their fellow citizens as Napoleon already knew: “Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust.” (Viner)

Economists do NOT solve social problems they ARE a social problem.

You repeat your silly question: “So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It’s blindingly obvious.”

Yes it is blindingly obvious that deficit spending does NOT solve social problems but CREATES the social problem of an insanely unequal distribution (see the references above).

This follows from the true labor market theory which is given with the systemic employment equation.#1 “The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the current situation to rise faster than the average price. THIS opens the way out of mass unemployment, deflation, and stagnation and NOT the blather of scientifically incompetent orthodox and heterodox agenda pushers.”#2

Right policy depends on true theory: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Economists do not have the true theory. They have NOTHING to offer. The NAIRU-Phillips curve is provable false. Because of this ALL economic policy conclusions drawn from it are counterproductive, that is, they WORSEN the situation. So, Samuelson, Solow, Friedman, Phelps and the other NAIRU-Phillips curve proponents bear the responsibility for mass unemployment and the social devastation that comes with it.

From the fact that the NAIRU labor market theory is false follows that economists are incompetent scientists and that ALL their economic policy proposals are scientifically worthless.

Egmont Kakarot-Handtke

#1 See ‘NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather’
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
#2 See ‘NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy’
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

John said...

I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it.

AXEC / E.K-H said...

NAIRU and economists’ lethal swampiness
Comment on David Glasner on ‘Richard Lipsey and the Phillips Curve Redux’

David Glasner contributes to the NAIRU discussion#1 by reproducing essential content of his 2013 paper. Back then he propagated Lipsey’s concept of multiple equilibria or band of unemployment (NAIBU) which is consistent with a stable rate of inflation. The NAIBU concept is a fine example of the tendency of economists to soften, relativize, qualify, and semantically dilute every concept until it is senseless and useless.

It is the very characteristic of economics that there are no well-defined concepts and this begins with the pivotal economic concepts profit and income. The habit of swampification keeps the discourse safely in the no man’s land where “nothing is clear and everything is possible” (Keynes) and where anything goes.

Swampification is what Popper called an immunizing strategy. The beauty of vagueness and ambiguity is that it cannot be falsified: “Another thing I must point out is that you cannot prove a vague theory wrong.” (Feynman)#2

David Glasner applies the concept of evolution in order to swampify the NAIRU: “The current behavior of economies … is consistent with evolutionary theory in which the economy is constantly evolving in the face of path-dependent, endogenously generated, technological change, and has a wide range of unemployment and GDP over which the inflation rate is stable.”

In other words, presumably there is a relationship between unemployment and inflation but nobody knows what it is. While science is known to strive for uniqueness, economics is known to strive for ambiguity and obfuscation. This swampiness is rationalized as realism. After all, reality is messy, isn’t it?

To recall, the Phillips curve started as a simple and remarkably stable EMPIRICAL relationship between wage rate changes and the rate of unemployment. The original Phillips curve was reinterpreted and thereby messed up by Samuelson and Solow who introduced the economic policy trade-off between inflation and unemployment which was finally thrown out again with the NAIRU.

A conceptional error/mistake/blunder slipped in with the bastardization of the original Phillips curve that was never rectified but in effect buried under a huge heap of inconclusive economic shop talk. This means that until this very day economics has no valid theory of the labor market.

See part 2

AXEC / E.K-H said...

Part 2

So, the microfounded NAIRU-Phillips curve has first of all to be rectified.#3 The macrofounded SYSTEM-Phillips curve is shown on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png

From this correct employment equation follows in the MOST ELEMENTARY case that an increase of the macro-ratio rhoF=W/PR leads to higher total employment L. The ratio rhoF embodies the price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0, then there are three logical cases, that is, THREE types of inflation.
(i) If the rate of change of the wage rate W is equal to the rate of change of the price P, i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are. That is, NO amount of inflation or deflation has any effect on employment. Inflation is neutral, there is no trade-off between unemployment and inflation.
(ii) If the rate of change of the wage rate is greater than the rate of change of the price then employment INCREASES. There is a POSITIVE effect of inflation on employment.
(iii) If the rate of change of the wage rate is smaller than the rate of change of the price then employment DECREASES. There is a NEGATIVE effect of inflation on employment.

So, it is the DIFFERENCE in the rates of change of wage rate and price and not the absolute magnitude of change that is decisive. Every PERFECTLY SYNCHRONOUS inflation/deflation is employment-neutral, that is, employment remains indefinitely where it actually is. The neutral inflation can start at ANY point between full and zero employment. The crucial fact to notice is that there is no such thing as “inflation”, there are THREE types of inflation.

The systemic employment equation defines the causal relationship of “inflation” on employment. However, there is the inverse causality of employment on “inflation”.

Common sense suggests that positive inflation (ii) is more probable the closer actual employment is at full employment and negative inflation (iii) is more probable the farther away actual employment is from full employment. In other words: the market economy is inherently unstable. The feed-back loop between employment and “inflation” is the very antithesis to the idea of equilibrium. To recall, the NAIRU is DEFINED as an equilibrium. Standard economics has built equilibrium right into the premises, i.e. into the axiomatic foundations. All of economics starts with the idea that the market economy is an equilibrium system. It turns out that this premise is false, just the opposite is the case.

Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false.

Egmont Kakarot-Handtke

#1 See ‘NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather’
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
and ‘NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy’
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
#2 “By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, ‘When you are dealing with psychological matters things can’t be defined so precisely’. Yes, but then you cannot claim to know anything about it.”
#3 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421