Tuesday, January 15, 2019

Mish Shedlock — Yet Another Fed Study Concludes Phillip's Curve is Nonsense

The Phillips Curve, an economic model developed by A. W. Phillips purports that inflation and unemployment have a stable and inverse relationship. 
This has been a fundamental guiding economic theory used by the Fed for decades to set interest rates. Various studies have proven the theory is bogus, yet proponents keep believing.…
Without the Phillips Curve, the current approach to monetary policy is groundless other than "discretionary." There is no rule.

And it's not just the Phillips Curve that is nonsense. So is the concept of the natural rate of interest, which is theoretical (assumption-dependent) rather than observable. The assumptions don't hold water, and the results based on targeting a natural rate of interest and non-accelerating rate of unemployment (NAIRU) have little empirical justification, either using a rule or discretion have not been impressive, to say the least.

Oh, and the Fed has no satisfactory theory of inflation. How to target something that isn't identified, especially when it is based on "expectations."


Ralph Musgrave said...

There's no relationship between inflation and unemployment (a la Phillips Curve or NAIRU)? This is good news. Well then let's have a massive increase in demand and apparently unemployment will crash to near zero. No need to bother with the Job Guarantee....:-)

Bob Roddis said...

1. Mish is an Austrian.

2. The "natural rate of interest" is the interest rate or rates that would exist in a free market which we most definitely do not have. There is no way to know what those rates might be unless and until they occur in the market. There is no way that a fiat funny money regime can know what they would be so as to mimic them.

3. The destruction of the "Phillip's Curve" just means that "stimulus" does not cure unemployment in the long run. Instead, unemployment is the inevitable outcome of prior "stimulus" which is its cause.

AXEC / E.K-H said...

False economic theory makes bad economic policy
Comment on Mish Shedlock on ‘Yet Another Fed Study Concludes Phillip’s Curve is Nonsense’

Mish Shedlock summarizes: “Proponents of the Phillips Curve keep looking for ways in which it works. Yet, another study concludes it doesn’t. The Phillips Curve, an economic model developed by A. W. Phillips purports that inflation and unemployment have a stable and inverse relationship. This has been a fundamental guiding economic theory used by the Fed for decades to set interest rates. Various studies have proven the theory is bogus, yet proponents keep believing.”

The Phillips Curve (better: bastard Phillips Curve) is the centerpiece of standard employment theory. Economists get employment theory wrong for 200+ years. The Phillips Curve has always been the highly visible landmark of economists’ scientific incompetence.

“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)

The materially/formally inconsistent Phillips Curve has to be replaced by the correct macroeconomic Employment Law. For details see

NAIRU, wage-led growth, and Samuelson’s Dyscalculia

Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster

NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy

Full employment, the Phillips Curve, and the end of Gaganomics

Egmont Kakarot-Handtke

Noah Way said...

Don’t feed the trolls.

Ralph Musgrave said...

For the millionth time, Bob Roddis complaians about "fiat funny money", but fails to tell us what sort of money he DOES WANT.


Bob Roddis said...

I want money that maintains its value over the years.


Wow. You people really do not know anything about Austrian School concepts, analysis, historical interpretations. Nothing.

I know! Let's reject a school of thought without examining it in the slightest. And, for good measure, let's pretend it doesn't even exist!

I don't know what universities you people attended but "Don't Feed the Troll" doesn't count as an argument.

Andrew Anderson said...

A key distinction is that between the government as issuer of a currency and the non-government agents and sectors as users of a currency. Households, firms, state and local governments, and member nations of a monetary union, are all currency users from The Natural Rate of Interest is Zero [bold added]

Except for mere physical currency (fiat), coins and Central Bank Notes, aka "cash", households, firms, and state and local governments may NOT use currency (fiat) in convenient, inherently risk-free account form at the Central Bank like depository institutions, aka "the banks" may do but must instead use bank deposits which are mere liabilities for fiat which banks themselves may also create ("Bank loans create bank deposits/liabilities for fiat") thereby diluting bank deposits that originate with the monetary sovereign.

So not only is the general population largely forbidden to use fiat, it must instead use DILUTED bank deposits.

Not that banks should be forbidden to create deposits but certainly government privileges enable them to safely create vastly more deposits than they could otherwise as 100% private businesses with 100% voluntary depositors.

Does that sound fair to anyone?

S400 said...

”I want money that maintains its value over the years.”

A money horder. And those horders are not good for the real economy.

S400 said...

And still Bob doesn’t say what sort of money that is.

Bob Roddis said...

A money horder. And those horders are not good for the real economy.

That's totally baseless nonsense upon which fiat money "theory" relies. You cannot begin to demonstrate the truth of that assertion with evidence or logic. And you won't even try.

Bob Roddis said...

It might help if you people knew what "dollar" actually is. Edwin Vieira, Jr. explains it all.


S400 said...

Andl Bob doesn’t say what sort of money he wants. If he does he may appear even more foolish.

AXEC / E.K-H said...

Bob Roddis

You say: “I want money that maintains its value over the years.”

Economic theory can show you the way but, of course, neither Austrianism nor MMT.

Let us start with the simplest possible economic configuration. The elementary production-consumption economy is defined with this set of macroeconomic axioms: (A0) The economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Under the conditions of market clearing X=O and budget balancing C=Yw in each period, the price is given by P=W/R (1), i.e. the market clearing price is equal to unit wage costs. This is the most elementary form of the macroeconomic Law of Supply and Demand.

The price is determined by the wage rate, which takes the role of the nominal anchor, and the productivity. From (1) follows W/P=R (2), i.e. the real wage is equal productivity. Productivity determines the real value of money.

If one wants absolute price stability in the elementary production-consumption economy from beginning to eternity one has to apply the simple rule: change of wage rate = change of productivity.

Needless to emphasize that things become a bit more complex if investment, saving, government, and foreign trade is added. This, though, does NOT alter the core rule that the wage rate has to move synchronously with the productivity.

A fiat money system with perfect price stability is possible. Austrians have been too stupid to figure this out.

Egmont Kakarot-Handtke

Bob Roddis said...

i.e. the market clearing price is equal to unit wage costs

There is no reason that this is always the case or even ever the case. In the long run, the "market clearing price" will have to be higher than cost in order for a business to survive. However, for a particular sale, cost is irrelevant to the subjective valuation of the ultimate buyer.

Cutthroat Island:

Budget $98 million
Box office $10 million


AXEC / E.K-H said...

Bob Roddis

You say: “However, for a particular sale, cost is irrelevant to the subjective valuation of the ultimate buyer. ”

Oh no, the Austrian value theory. Take notice that the derivation of the market clearing price above relates to the economy as a whole and NOT to a particular sale. The argument is based on objective-systemic macroeconomic axioms and not on silly Austrian individualistic subjectivism.

The macroeconomic profit Q≡C−Yw in the elementary production-consumption is zero because of the condition of budget balancing. This is fully compatible with, for example, the film industry making a huge profit and the rest of the economy making a loss of equal magnitude.

Macroeconomic profit, too, is an objectively given and well-defined magnitude. It does not come of wishful thinking or individual necessity but from dissaving, i.e. C greater Yw. Microeconomics in all variants is known by now as a methodological failure.

Get it, Austrianism is dead since its inception. The fact that it still appeals to brain-dead blatherers has to be taken as supporting evidence.

Egmont Kakarot-Handtke

Bob Roddis said...

There is no such thing as the "macro economy" except, perhaps, as a sometimes useful metaphor. Except it is mostly an unhelpful metaphor used mostly to obscure and confuse.

Thus, there are no "objective-systemic macroeconomic axioms". Just saying that there are such axioms doesn't make it so.

AXEC / E.K-H said...

Bob Roddis

The Austrian core assertion is that laissez-faire would result in a stable economy with overall optimal outcomes. This assertion has never been proved. The provable fact of the matter is that the market economy is inherently unstable.#1

So, the very premise of Austrian economics is false and because of this, the whole verbal superstructure is false. Austrian economics is scientifically worthless and Austrians’ vacuous blather is only good for political agenda pushing.

You say: “There is no such thing as the ‘macro economy’.” You are a casualty of the methodological blunder called Fallacy of Insufficient Abstraction. Macroeconomic profit, for example, is measurable with the precision of two decimal places. Austrians cannot tell to this day what profit is.

It is macroeconomics that is objective. Microeconomics, on the other hand, has never been anything else than psychological/behavioral blather and pointless motive speculation.#2 Austrianism is a case in point.

Egmont Kakarot-Handtke

#1 Proof of the inherent instability of the market economy

#2 The economist as second-guesser, mind reader, and folk psychologist