Is There Really A Trade-Off Between Inflation And Unemployment? — Brian Romanchuk

Rather than attempt to explain what the mainly neoclassical economists are going on about, I want to step back and try to translate their debate into terms that would be understood by people who do not share the same assumptions. I am pretty sure that post-Keynesian economists have a lot to say about the topic as well, but once again, they tend to be discussing wonkish points that would elude an outsider.…

I have an engineering background, and engineering is largely the science of trade-offs. I have no strong objections to qualitative discussions, but I would argue that we need to at least know the sign of the exchange ratio between two variables in order to say that there is a trade-off between them.

Very simply, if we can have a policy that lowers both the unemployment rate and the inflation rate (or at least leaves inflation unchanged), we cannot pretend there is a meaningful "trade-off" between them.

And this is hardly theoretical: in the United States, we saw a near monotonic decrease in the unemployment rate after the Financial Crisis, yet the inflation rate has done absolutely nothing interesting....

Bond Economics
Is There Really A Trade-Off Between Inflation And Unemployment?
Brian Romanchuk

Origin of the 2 Percent Inflation Target — J. Barkley Rosser

So it was 1990 that the New Zealand central bank became the first in the world to impose an inflation target of 0-0.002....

Econospeak
Origin of the 2 Percent Inflation Target
J. Barkley Rosser | Professor of Economics and Business Administration James Madison University

Is There a Relationship between Inflation and Unemployment? — Menzie Chinn

While the equation fits relatively well, clearly it’s not perfect. As of 2019Q2 (first two months), year-on-year PCE inflation is underpredicted by 40 bps. I estimated the equation on a restricted sample ending in 2014; this imparts only a marginal difference — so it’s not that something has changed substantially over the last 4 and a half years. Rather the specification could be improved.

In other words, perhaps a different measure of NAIRU, or a nonlinearity might improve the fit. However, these specification or measurement errors do not invalidate the concept of the Phillips curve. More graphs (from my undergrad course), using the output gap, here.

For more on a cross country basis, see a recent working paper by Blanchard, Cerutti, and Summers (2015). They show that the slope of the Phillips curve has dropped around the early 1990’s; those who rely upon very old stylized facts might be excused for thinking the Phillips curve had gone AWOL.

Econbrowser
Is There a Relationship between Inflation and Unemployment?
Menzie Chinn | Professor of Public Affairs and Economics, Robert M. La Follette School of Public Affairs, University of Wisconsin–Madison, co-editor of the Journal of International Money and Finance, and a Research Associate of the National Bureau of Economic Research International Finance and Macroeconomics

See also

Information Transfer Economics
The Phillips Curve: An Overview
Jason Smith

Bill Mitchell – The NAIRU/Output gap scam reprise

It is Wednesday and despite being on the other side of the Planet than usual (in Helsinki at present) I am still not intending to write a detailed blog post today. I am quite busy here – teaching MMT to graduate students and other things. But I wanted to follow up on a few details I didn’t have time to write about yesterday concerning the role that NAIRU estimates play in maintaining the ideological dominance of neoliberalism. And some more details about the Textbook launch in London on Friday, and then some beautiful music, as is my practice (these days) on Wednesdays. As you will see, my ‘short’ blog post didn’t quite turn out that way. Such is the tendency of an inveterate writer.

Macroeconomics Textbook Launch – London, Friday, March 1, 2019

There are a few places left and the list closes 17:00 (Wednesday).
If you want to come, please E-mail me and I will get your name put on the door.

The program for the Book Launch in London of Friday is more or less decided:

17:00 Doors open (light refreshments will be served)Doors open (light refreshments will be served)17:20 A welcome from Macmillan International Higher Education & introduction to the launch of Mitchell, Wray & Watts: Macroeconomics 1e – (Philip Rees/Jon Peacock/Jon Finch)17:30 An introduction to the book! – Dr Sandy Hager (City University)17:45 Integrating the MMT approach into the delivery of Macroeconomics HE courses – Professor Heikki Patomaki (Helsinki University)18:00 A word from our author! – Professor Bill Mitchell (University of Newcastle, Australia & Director of CofFEE – (Centre of Full Employment & Equity, University of Newcastle))18:15-18:30 Q&As (compered by Philip Rees, Macmillan)18:45 Finish
Location: The event will be held at the Macmillan publishers complex at the Springer Nature – Stables Building, Trematon Walk, Kings Cross, London from 17:00 to 19:00.

Here is a short video introducing the features of the new textbook

Bill Mitchell – billy blog
The NAIRU/Output gap scam reprise
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Bill Mitchell — The NAIRU/Output gap scam

There is a campaign on the Internet calling itself CANOO (the Campaign against nonsense output gaps) which one Robin Brooks, economist at the Institute of International Finance and former Goldman Sachs and IMF employee, is pursuing. You cannot easily access his written memos on this because the IIF forces you to pay for them. However, there is nothing novel about his claims and the points he is making are well-known. However, they are points that are worthwhile repeating at loud volume because the implications of the ‘nonsense’ are devastating to the well-being of workers, particularly those most vulnerable to precarious work and unemployment. So while the CANOO is just dredging up old issues I am very glad that it is. The concept of biased estimates of output gaps and so-called ‘full employment unemployment rates’ goes to the heart of the way the neoliberal economists, who dominate policy making units in government and places like the IMF, the OECD and the European Commission, create technical smokescreens to justify their dirty work. The more people find out about the basis of the scam the better. I have been working on this issue (estimating, writing and publishing) since the late 1970s as a graduate student. So welcome Robin Brooks, and make a lot of noise....

Bill Mitchell – billy blog
The NAIRU/Output gap scam
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brian Romanchuk — Bear Market Meditations

Many of Brian's posts are somewhat specialized and of interest chiefly to those involved in bond markets and fixed income assets, or who seek a more detained understanding from a Post Keynesian perspective that is also in paradigm with MMT. 

This installment will be of interest to everyone with an interest in MMT and Post Keynesian economics and its approach to finance, as well as anyone interest in the general features of the current market. 

Easy read even with a pretty minimal understanding of the subject, as most people following MMT may be presumed to have acquired. If you haven't been following Brian, this is a good place to begin.

Bond Economics
Bear Market Meditations
Brian Romanchuk

Lars P. Syll — Busting the NAIRU myth

Making policy based on fairy tales.

Lars P. Syll’s Blog
Busting the NAIRU myth
Lars P. Syll | Professor, Malmo University

Steve Goldstein — Opinion: Proposals to guarantee jobs spotlight uncomfortable truth about Fed

Federal Reserve always wants millions of people to be out of work…

Put more bluntly, it’s worth at least thinking about what Bernie Sanders would do to mitigate the impact of Jerome Powell.

Buffer stock of employed versus buffer stock of unemployed.

MarketWatch
Opinion: Proposals to guarantee jobs spotlight uncomfortable truth about Fed

Steve Goldstein | DC Bureau Chief

See also

Why the Fed should give everyone a checking account

Greg Robb | Senior Economics Reporter

See also

But the threat of sanctions as a tool to protect U.S. intellectual property (IP) is a canard — we’re not concerned that China is stealing our IP, we’re scared that it is out-innovating the West and is ahead in AI.

US getting out-innovated?

Opinion:Why Chinese companies including Alibaba and Tencent have an edge over U.S. rivals

Brad Slingerlend | co-portfolio manager of Janus Henderson Investors’ Global Technology Fund

Brian Romanchuk — The Theoretical Incoherence Of Full Employment Arguments

One quite often runs into arguments that rely on assuming full employment, and then relating that policy decisions. In my view, such arguments are fundamentally weak; we need to refer to actual model results to discuss policy. In this article, I explain why an attempt to apply a NAIRU argument to a Job Guarantee is misguided. The analysis is unusual: instead of discussing a single model, the behaviour of an entire class of reasonable economic models is analysed. This reflects the attitude towards model uncertainty that animates robust control theory.

Since my thesis is that full employment arguments are mathematically incoherent, I had little choice but to lapse into a stilted mathematical writing style. My apologies....

Wonkish.

Bond Economics
The Theoretical Incoherence Of Full Employment Arguments
Brian Romanchuk

Update.

I have little doubt that my previous article on J* -- a definition that I invented -- was confusing to most of my readers. As I wrote, I reverted to a mathematical style of writing. It is likely that inventing a concept and proving it does not exist is a pastime that would mainly be of interest to mathematicians (and philosophers). However, I have a real-world target in mind: NAIRU. All we need to do generalise the theorem procedure, and we can prove that a similar concept -- U* -- does not exist in the current institutional structure. We can then use that information to annihilate any definition of NAIRU that ends up being equivalent to U*.

Why not take on NAIRU directly, a reader might ask? This is because economists are not mathematicians. They use any number of different concepts, and assume that they are the same thing. It is a waste of time trying to prove the incoherence of each of these concepts; we just prove that U* cannot exist, and we can then just prove the equivalence of any particular definition of NAIRU to U* as needed.

Obviously,. that seems to be a rather grandiose assertion. I could easily be wrong. The most obvious hurdle is that there could be a flaw in my J* non-existence proof. I have thrown it out there, and I am waiting for it to be shot down. A more intelligent approach would have been to approach people privately and get their opinion, but hey, I decided to roll the dice.

From J* To U*: What My Conjecture Is About 

Brian Romanchuk — On Using NAIRU To Analyse A Job Guarantee

Professor Simon Wren-Lewis wrote "Some thoughts about the Job Guarantee," in which he makes an attempt to analyse a Job Guarantee using the NAIRU concept. The analysis suffers from the well-known defects of NAIRU.

In the article, he argues that a Job Guarantee implementation would cause a one-time upward shock to wages. He argues that this is not "acknowledged" by MMT authors, even though it appears this effect is common knowledge to anyone who has read the MMT literature. As a result, that is a curious argument. However, he then flips to an analysis where the Job Guarantee has no effect on inflation....

Bond Economics
On Using NAIRU To Analyse A Job Guarantee
Brian Romanchuk

Do Phillips Curves Conditionally Help to Forecast Inflation?

Abstract

This paper reexamines the forecasting ability of Phillips curves from both an uncon- ditional and conditional perspective by applying the method developed by Giacomini and White (2006). We find that forecasts from our Phillips curve models tend to be unconditionally inferior to those from our univariate forecasting models. Significantly, we also find conditional inferiority, with some exceptions. When we do find improvement, it is asymmetric – Phillips curve forecasts tend to be more accurate when the economy is weak and less accurate when the economy is strong. Any improvement we find, however, vanished over the post-1984 period.

Federal Reserve Bank of Philadelphia
Do Phillips Curves Conditionally Help to Forecast Inflation?
Michael Dotsey, Shigeru Fujita, and Tom Stark

Lars Syll — More NAIRU bashing

Roger Farmer takes down NAIRU.

As Lars points out this would be inconsequential now and merely of historical interest if assumptions about NAIRU and the Phillips curve were not integral in building New Keynesian models that are still influential in policy.

Lars P. Syll’s Blog
More NAIRU bashing
Lars P. Syll | Professor, Malmo University

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

Brian Romanchuk — NAIRU (Again)

SWL: Accepting the concept of the NAIRU does not mean you have to agree with their judgements. But if you want to argue that they could be doing something better, you need to use the language of macroeconomics.

As an applied mathematician, Brian showed how macroeconomists don't know what they are talking about with respect to NAIRU when using the language of macroeconomics because the concept is empty.

And no advanced math required to do it. Just basic logic and philosophy of science.

Philosophy is a battle against the bewitchment of our intelligence by means of our language. — Ludwig Wittgenstein, Philosophical Investigations, § 109

There are many parallels between economics and philosophy, one of the most evident is unfounded assumptions presumed to be self-evident. Scientific method was developed to circumvent this.

BR: The whole point of the standard NAIRU definition is that it is easy to observe: you just need to back out the acceleration of inflation (keeping in mind there may be other variables whose influence needs to be isolated). However, in the real world, the observed unemployment rate is affected by institutional factors -- which do not exist in a NAIRU model. Since the end result is that NAIRU estimates are inherently unreliable, the concept is wrong by definition.

This is why most mainstream macro has retreated to discussing output gaps of various types. Output gaps have to be inferred via various statistical techniques, and they are inherently fuzzier. It may be that Professor Wren-Lewis has some of these more recent models in mind when he is referring to NAIRU; but that makes as much sense as referring to post-1990 Fed Policy as monetary base targeting.

If you want to use standard academic terms, NAIRU is falsifiable, and was in fact falsified. The generalised output gaps that popped up to replace NAIRU are pretty much unfalsifiable.

To a philosopher standing outside economics looking in, it appears that many economists are so intellectually committed to finding a solutions that they convince themselves and each other that they have found one when they have not.

We have got on to slippery ice where there is no friction and so in a certain sense the conditions are ideal, but also, just because of that, we are unable to walk. We want to walk: so we need friction. Back to the rough ground! — Ludwig Wittgenstein, Philosophical Investigations, § 107

Bond Economics

NAIRU (Again)
Brian Romanchuk

Jo Michell — Thoughts on the NAIRU

If you are following this.

Critical Macro Finance

Thoughts on the NAIRU
Jo Michell

Brian Romanchuk — NAIRU And The Santa Claus Test

Although economic squabbling is fun to follow, a lot of it is the result of the use of fuzzy language. As a result, there is no way of advancing the conversation; arguments are just people clinging to different definitions. The use of mathematics in economics is supposed to eliminate this squabbling; unfortunately, the mathematical models themselves rarely fit reality. However, we need to translate the debates into operational discussions, to see whether they can be applied to the real world. If we turn to my previous article about NAIRU, we need to ask ourselves -- does the definition of NAIRU we are using pass the Santa Claus test?

Bond Economics
NAIRU And The Santa Claus Test
Brian Romanchuk

Brian Romanchuk — NAIRU Should Be Bashed, Smashed, And Trashed

Professor Simon Wren-Lewis recently wrote an article "NAIRU Bashing," in which he attempts to salvage some value out of the concept. As observed by Ramanan, his defense of NAIRU can be summarised as: There Is No Alternative (TINA), A lot of what Professor Wren-Lewis wrote might appear similar to what I have written on the topic. (I will publish the relevant excerpt from Interest Rate Cycles: An Introduction shortly, in case readers would wish to contrast and compare.) However, the belief that there is no alternative to NAIRU is silly. If economics were scholarly (as I discuss here), knowledge would be additive, and we would not have such debates....

Bond Economics
NAIRU Should Be Bashed, Smashed, And Trashed
Brian Romanchuk

Sandwichman — FLEXIT

You can see immigrants. You can't see NAIRU or flexible labor market policies. Most people wouldn't know a NAIRU from a Nehru jacket and have probably never heard of flexible labor market policies.

There is a simple logic behind the "growth through austerity" policies beloved by Cameron and Osborne: "wages are too damn high." But there is also a more technical-sounding obfuscation. This more convoluted explanation is that there is a long-run, "natural" rate of unemployment that is unaffected by aggregate demand, therefore fiscal stimulus will result in inflation. Thus the only non-inflationary way to reduce unemployment is to fine tune this hypothetical natural rate by removing labor market rigidities.

Sounds plausible. What it means in practice is "wages are too damn high." In the 19th century, this superstition was known as the wages-fund doctrine. Also known as this magazine of untruth.…

Econospeak
FLEXIT

Sandwichman

Sandwichman — Neo-liberalism and the European Social Model

From "The Dysfunctional Nature of the Economic and Monetary Union," Philip Arestis, Giuseppe Fontana and Malcolm Sawyer:..

Identifies and describes the enemy and the enemy's policy, strategy and tactics.

Econospeak
Neo-liberalism and the European Social Model

Sandwichman

Lars P. Syll — NAIRU religion

Olivier Blanchard learns worse than nothing from his stint as chief economist for the IMF.

Lars P. Syll’s Blog
NAIRU religion
Lars P. Syll | Professor, Malmo University