Matias Vernengo — Phillips curve? What curve?

The Phillips curve is one of those 'regularities' that is more likely to exist in an economist mind than in reality.

Naked Keynesianism
Phillips curve? What curve?
Matias Vernengo | Associate Professor of Economics, University of Utah

Here is Bill Mitchell on the MMT stance wrt the Phillips curve:

In macroeconomic theory, the so-called Phillips curve occupies a central place – it is “god-like” and represents the relationship between unemployment and inflation. Various theorists have constructed this relationship in different ways and the policy development that followed reflected these differences.

So “Keynesians” believed there was a stable trade-off whereby unemployment would be kept low as long as governments pursued high levels of effective demand. The “cost” would be some finite inflation rate. Economists – worked on designing the “optimal” trade-off between the twin evils – unemployment and inflation.

They overlaid what were called “social preference functions” designed to represent the way the citizens considered the trade-off, with the Phillips curve which was meant to illustrate the actual trade-off. The tangency of these functions became the policy goal and the tools to achieve that goal were provided by the macroeconomic theorists.

This approach was clearly based on a recognition that a buffer stock was present (unemployment) and it was used to maintain price stability.

The NAIRU-era (following Friedman and Phelps’ “natural rate” theories) rejected the trade-off notion and instead argued that the “long-run” Phillips curve was vertical (that is, no trade-off) and governments would only generate inflation by trying to pursue low unemployment rates. This marked the rise of monetary policy and the growing passivity of fiscal policy, in practice.

The early developers of MMT (Wray, Mosler, Bell/Kelton, Fullwiler, myself) – again differentiating MMT from earlier Chartalist and “theories of state money” etc – sought to challenge these natural rate theories of the Phillips curve. We had lots of discussions in the mid-1990s about this issue.
By more correctly specifying the way the monetary system operated post 1971 and the opportunities that currency-sovereignty provided to governments, we were seeking to advance ideas that were anathema to the NAIRU-dominated, government-budget-constraint thinking that were universally held and vigorously defended by the most powerful and leading economists of our time.

One of the essential theoretical components of this work – based on the fundamental understanding of how the currency was in fact a public monopoly where the monopolist could set the price – was to address the major constraints on activist fiscal policy posed by the NAIRU school. That is, we were directly challenging the dominant theoretical orthodoxy by proposing a way to achieve full employment with price stability (that is, without having to create entrenched unemployment).
As my colleague Randy Wray noted in a Keynote Speech last December, our development of the theoretical analysis of employment buffers in contradistinction to unemployment buffers:

"… turned the Phillips Curve on its head: unemployment and inflation do not represent a trade-off, rather, full employment and price stability go hand in hand."

You have to understand that point to comprehend why MMT introduces the notion of a Job Guarantee as a term to describe a policy approach based on employment buffers.

A complete macroeconomic framework has to address issues relating to full employment and price stability. One might not be very interested in the “Phillips curve” aspects of the theory and prefer to specialise in some component of the MMT approach (perhaps even more practical elements) – such as, study how banks work etc. There is nothing wrong with that – our time and patience is limited after all.

But it still remains that the body of theoretical work now known as MMT does directly and intrinsically address the major macroeconomic debate about the trade-off between inflation and unemployment – which I would add – is still the dominant discussion around town anyway.

And the way MMT does that is intrinsic to the theoretical framework and logically consistent with it. It is crucial to understand that notions of price stability all have some buffer stock underpinning them. As noted above, the mainstream NAIRU theories deploy a buffer stock of unemployment to control price inflation.

The policy question that then arises is whether an unemployment buffer stock approach is superior to an employment buffer stock approach in controlling inflation and maintaining full employment.

In the two blogs I mentioned earlier, I provide chapter and verse as to why an employment buffer stock approach is superior. I won’t repeat those arguments here.

But don’t be misled. Those who reject the employment office stock approach recurse back into mainstream thinking, which uses unemployment as the price anchor. That is, their macroeconomic approach is neo-liberal in flavour, whether they understand how the banking system works or not.

Bill Mitchell, Questions and Answers 3, excerpted from Question 2.