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How Milton Friedman's NAIRU Has Increased Inequality, Damaging Innovation and Growth naked capitalism

By Servaas Storm and C. W. M. Naastepad , both Senior Lecturers in Economics at the Delft University of Technology

For many years, economic fatalism ruled the roost: markets are sovereign, governments must never interfere, social democracy is passé, and politics is effectively dead. The big bang of the crisis has ended this fatalism, and is—albeit slowly—leading to calls for a fairer capitalism (as by the Occupy movement).

What has been not widely understood however is that inequality actually matters: the deeper roots of the financial crisis lie in deregulated labour markets and the consequent wage squeeze and sharp rise in inequality. Alan Greenspan spoke appreciatively of “traumatised workers”, who out of fear of job loss accepted deteriorating working conditions, longer hours, stagnant pay (in real terms) and sharply rising inequalities, because all this supposedly helped to keep down inflation, raise firms’ profits and investments, thus promoting growth with low unemployment (the Great Moderation). In actual fact, the wage squeeze depressed aggregate demand and lowered inflation, and thus prompted monetary policy to react by maintaining low interest rates—cheap credit in turn allowed private household and corporate debt to increase beyond sustainable levels. The flip side of this has been an increase in profits, unprecedented income concentration at the top and superabundant liquidity in financial markets, all of which transformed financial markets into unstable institutions, unable to self-correct.

Greenspan’s stance reflected the conventional wisdom, codified in the theory of the non-accelerating-inflation rate of unemployment (NAIRU). It must take the blame for unleashing and at the same time legitimizing a vastly unequal and ultimately unsustainable growth process. It holds that in the longer run, an economy’s potential growth depends on—what Milton Friedman called—the “natural rate of unemployment”: the structural unemployment rate at which inflation is constant. This NAIRU depends on the extent to which labour markets deviate from the benchmark competitive labour market model as a result of regulatory interventions in the form of minimum wages, employment protection legislation, unemployment benefits and wage-bargaining institutions, many of which are designed to reduce inequalities in pay, provide security to workers and reduce inter-firm competition. The more regulated is the labour market, the higher must be the NAIRU and the lower is potential growth. It follows that if one wants to reduce structural unemployment, the only way to achieve this is by abolishing regulatory interventions in the labour market; the price of a dynamic economy and low unemployment is heightened inequality and “traumatised workers”. A second implication of NAIRU economics is that neither central bank policy nor fiscal policy does affect natural unemployment; macro policy is presumably ineffective.

We argue in our book “Marcoeconomics Beyond the NAIRU” that NAIRU doctrine is wrong, because it is a partial, not a general, theory. Specifically, wages are treated as mere costs to producers. Higher real wage claims necessarily reduce firms’ profitability and hence, if firms want to protect profits (needed for investment and growth), higher wages must lead to higher prices and ultimately run-away inflation. The only way to stop this process is to have an increase in “natural unemployment”, which curbs workers’ wage claims.

What is missing from this NAIRU thinking is that wages provide macroeconomic benefits in terms of higher labour productivity growth and more rapid technological progress. This happens for three reasons. First, higher wages raise demand and this increases profits as well as investments; new investments, embodying the latest, most productive technologies, in turn raise productivity. Second, growth raises productivity directly, because it makes possible a further deepening of the division of labour and greater learning-by-doing by firms. Third, higher wages induce firms to step up the pace of labour-saving technological progress. The bottom line is that higher wages raise demand, promote technological progress and increase labour productivity, thereby offsetting at least part (and perhaps all) of the negative impact of higher wages on profits.

NAIRU wisdom holds that a rise in the (real) interest rate will only affect inflation, not structural unemployment. We argue instead that higher interest rates slow down technological progress — directly by depressing demand growth, and indirectly by creating additional unemployment and depressing wage growth. As a result, productivity growth will fall, and the NAIRU must increase. Macroeconomic policy does in other words have permanent effects on structural unemployment and growth―the NAIRU as a constant “natural” rate of unemployment does not exist. This means we cannot any longer absolve central bankers from charges that their anti-inflation policies contribute to higher unemployment. They have actually done so: our estimates suggest that overly restrictive macro policies, in the OECD countries, have actually and unnecessarily thrown millions of workers into unemployment by a policy-induced decline in productivity and output growth. This self-inflicted damage must rest on the conscience of the economics profession.

In our general approach, there is no conflict between growth and egalitarianism ― the trade-off is fictitious, not a natural state of affairs. The reason is that labour productivity growth is higher in economies having more regulated and co-ordinated industrial relations systems. The explanation for this is that the more co-operative are the social relations of production, the more strongly workers will reciprocate firms by providing higher productivity — which is good for profitability and investment. We find, for the OECD countries, that the net impact of regulation is to actually reduce unemployment. High structural unemployment in the OECD cannot therefore be blamed on “excessive” regulation (as in NAIRU doctrine), but must be blamed on the slowdown of demand growth and structurally higher real interest rates. This point is illustrated best by Europe’s heavily regulated, egalitarian and open Nordic countries, which manage to combine growth, technological dynamism and low unemployment. Most other OECD countries, in contrast, have been paying the price of rising inequality (in the last two decades) for no good reason. A fairer capitalism is definitely possible. NAIRU-based economics is an obstruction to more sensible, co-operative and egalitarian macro-management of our economies and it has to change— for economics to revive its earlier sense of purpose and worthiness, which it has lost over the past three decades.


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[Jul 05, 2017] NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false

Notable quotes:
"... 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 accelerating 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. ..."
"... 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. ..."
"... 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.** ..."
"... "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 don't have a function... ..."
"... 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. ..."
"... 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. ..."
Jul 05, 2017 | mikenormaneconomics.blogspot.com

Ralph Musgrave said... February 28, 2017 at 4:06 PM

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.. February 28, 2017 at 4:39 PM .

No Egmont, its not about scientific idiocy. 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 accelerating 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.. February 28, 2017 at 4:42 PM .
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.. February 28, 2017 at 4:43 PM .
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.. February 28, 2017 at 5:11 PM .
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.. February 28, 2017 at 6:19 PM .
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.. February 28, 2017 at 7:30 PM .
"Economic science" is an oxymoron.
AXEC / E.K-H said.. March 1, 2017 at 5:39 AM .
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.. March 1, 2017 at 8:13 AM .
"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 don't 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.. March 1, 2017 at 10:20 AM .
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.. March 1, 2017 at 1:43 PM .
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.. March 1, 2017 at 2:14 PM .
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.. March 1, 2017 at 3:23 PM .
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.. March 1, 2017 at 3:38 PM .
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.

AXEC / E.K-H said.. March 1, 2017 at 4:42 PM .
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.. March 2, 2017 at 9:53 AM .
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.. March 5, 2017 at 5:29 AM .
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.. March 5, 2017 at 5:34 AM .
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

[Jun 12, 2017] Monopoly power can increase nairu, while suppressing unions can decrease nairu

Jun 12, 2017 | economistsview.typepad.com

djb , June 10, 2017 at 01:42 AM

Fed Needs a Better Inflation Target - Narayana Kocherlakota

yes for a given amount of monopoly power, which the fed does not really control,

the most the fed can do is work on the real interest rates

but if we have less monopoly power that would reduce the part of nairu that is also known as involuntary unemployment, and help real wages, without having so much inflation

in other words closer we get to full a perfectly componetitive market, the less change of accelerating inflation because in a perfectly competitive market , firms are price takers not price makers

in a perfectly competitive market, the unions couldn't drive inflation, without monopoly power there is no accelerating inflation period

the fed cant control that only the legislature and judiciary can control the ext of monopoly power

the point is the can only target inflation and real interest rates

but there are other factors that can get us to full employment, ie eliminate involuntary employment, that affect inflation wages and employment in different ways and different directions

and those factors other than inflation and interest rates that affect involuntary unemployment seem to be ignored when we are having these discussion

pgl - , June 10, 2017 at 01:49 AM
Good point. Thanks for remembering this is an economist blog.
djb - , June 10, 2017 at 07:34 AM
NAIRU is painted as some dyed in the wool equilibrium point that the universe will always tend

you know the "natural level" of unemployment

you know where 'NATURE" wants to go

fact is it is no such thing

monopoly power can increase nairu

suppressing unions can decrease nairu,

both hurt workers

djb - , June 10, 2017 at 07:37 AM
a stronger safety can increase nairu and help wages

[May 31, 2017] Nairu does not make sense

Notable quotes:
"... Of course part of the point of 401(k) and similar plans is to "align" workers with the company and companies in general, aside from paying them in stock rather than cash. I suspect it works more so than it doesn't, overall. ..."
"... Sarcasm or satire, yes. I'm not claiming that the narrative is "correct", but that it exists. Surely you must have heard of "alignment" between shareholders and employees. Usually used to justify large stock grants to executives, but also applicable more broadly. ..."
"... And in the case of vesting, (3) employees are supposedly reluctant to "leave money on the table" by quitting before the stock is vested. This must work in aggregate or companies wouldn't do this. ..."
"... Honestly cm, I have not heard about the alignment between shareholders and employees. That doesn't mean it doesn't exist, I realize that. ..."
"... I don't have any stats to cite but I would say that is ridiculous. I would say that almost all people who are characterized as working class make their income through their labor. Not from some stock ownership. ..."
"... It is supposedly common for startups to pay below-market (compared to established companies) to their employees, with the promise of appreciation of stock grants after an IPO/acquisition. Usually that's a bad deal for most employees, as the IPO may not happen, or when it happens, their stock has been heavily diluted. ..."
"... In established companies, stock-based compensation can be more substantial for managerial or professional staff, but not life-changing - e.g. you may get a 5-20% upgrade on your salary depending on how important you are considered, which is nice, but it will not change the fact that you still have to show up for work every day. ..."
Feb 17, 2017 | economistsview.typepad.com

Jerry Brown -> Poison Pen... February 17, 2017 at 02:18 PM

What country (or planet) are you referring to when you say Workers are primarily stock holders? It ain't this country.

cm -> Jerry Brown... February 17, 2017 at 10:44 PM

It is a commentary on a narrative. Of course part of the point of 401(k) and similar plans is to "align" workers with the company and companies in general, aside from paying them in stock rather than cash. I suspect it works more so than it doesn't, overall.

Jerry Brown -> cm... February 17, 2017 at 10:52 PM

Say What?? Are you saying that Poison Pen was being sarcastic? I hope he was. Or are you saying that narrative is correct?

cm -> Jerry Brown... February 18, 2017 at 12:03 AM

Sarcasm or satire, yes. I'm not claiming that the narrative is "correct", but that it exists. Surely you must have heard of "alignment" between shareholders and employees. Usually used to justify large stock grants to executives, but also applicable more broadly.

Companies have several programs: ESPP (employees can buy a limited amount of company stock at a 15% discount), 401(k) retirement accounts that may contain company stock or other investment funds, stock and stock option grants (employees are not buying the stock but get it as part of a regular or retention bonus program, usually with vesting - commonly your grant will vest over 4 years).

The idea behind all programs involving company stock is (1) disbursing stock is usually cheaper to the company than cash, for the same nominal amount - for large programs where administration overhead is amortized, (2) employees are supposedly "incentivized" to act to increase the stock price.

The latter is believable at higher management levels, for lower level employees it is supposed to increase their motivation to put business priorities before their own, how much it works is anybody's guess.

cm -> cm... February 18, 2017 at 12:07 AM

And in the case of vesting, (3) employees are supposedly reluctant to "leave money on the table" by quitting before the stock is vested. This must work in aggregate or companies wouldn't do this.

If somebody absolutely wants to quit because of a bad situation or a sufficiently compelling offer, they will. But it raises the bar. Also I have heard about companies sufficiently interested in hiring somebody with "handcuffs" offering compensation, i.e. effectively buying out your unvested stock (or replacing it with their own extra grant).

Jerry Brown -> cm... February 18, 2017 at 12:50 AM

Honestly cm, I have not heard about the alignment between shareholders and employees. That doesn't mean it doesn't exist, I realize that.

Regardless, I would want to see a bunch of stats that showed that workers were primarily (or "predominately" was the actual word used) stock holders and that they derive a meaningful part of their yearly income through that ownership while they are working.

I don't have any stats to cite but I would say that is ridiculous. I would say that almost all people who are characterized as working class make their income through their labor. Not from some stock ownership.

cm -> Jerry Brown... February 18, 2017 at 02:25 PM

I am not claiming that workers are primarily stockholders. I am claiming that companies have programs to issue, or sell stock at a discount, or match 401(k) contributions up to a limit (in all applicable cases with our without vesting) to their employees. 401(k) and ESPP probably have to be offered to everybody, stock grants are usually selective. (Probably restricted by grade level and job function.)

The primary motivations for companies are that stock is usually cheaper for them than cash, and the retention effect of vesting. Employee alignment with the stock price is also a narrative, but it is not clear to me who believes it.

Are you disputing that companies are interested in pushing narratives of their labor relations that are beyond just "you work here and we pay you", and are in fact doing this?

cm -> Jerry Brown... February 18, 2017 at 02:33 PM

It is supposedly common for startups to pay below-market (compared to established companies) to their employees, with the promise of appreciation of stock grants after an IPO/acquisition. Usually that's a bad deal for most employees, as the IPO may not happen, or when it happens, their stock has been heavily diluted.

In established companies, stock-based compensation can be more substantial for managerial or professional staff, but not life-changing - e.g. you may get a 5-20% upgrade on your salary depending on how important you are considered, which is nice, but it will not change the fact that you still have to show up for work every day.

[May 31, 2017] Defence of NAIRU and Phillips curve is an attempt to defend indefensible

Notable quotes:
"... Almost three and a half years ago, I published a post about Richard Lipsey's paper "The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium. ..."
"... One important early post-WWII debate, which took place particularly in the UK, concerned the demand and inflationary pressures at which it was best to run the economy. The context for this debate was provided by early Keynesian theory with its absence of a unique full-employment equilibrium and its mainly forgotten, but still relevant, microeconomic underpinnings. The original Phillips Curve was highly relevant to this debate. ..."
Mar 03, 2017 | uneasymoney.com

Almost three and a half years ago, I published a post about Richard Lipsey's paper "The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium." The paper originally presented at the 2013 meeting of the History of Econmics Society has just been published in the Journal of the History of Economic Thought , with a slightly revised title " The Phillips Curve and an Assumed Unique Macroeconomic Equilibrium in Historical Context ." The abstract of the revised published version of the paper is different from the earlier abstract included in my 2013 post. Here is the new abstract.

An early post-WWII debate concerned the most desirable demand and inflationary pressures at which to run the economy. Context was provided by Keynesian theory devoid of a full employment equilibrium and containing its mainly forgotten, but still relevant, microeconomic underpinnings. A major input came with the estimates provided by the original Phillips curve. The debate seemed to be rendered obsolete by the curve's expectations-augmented version with its natural rate of unemployment, and associated unique equilibrium GDP, as the only values consistent with stable inflation. The current behavior of economies with the successful inflation targeting is inconsistent with this natural-rate view, but is consistent with evolutionary theory in which economies have a wide range of GDP-compatible stable inflation. Now the early post-WWII debates are seen not to be as misguided as they appeared to be when economists came to accept the assumptions implicit in the expectations-augmented Phillips curve.

Publication of Lipsey's article nicely coincides with Roger Farmer's new book Prosperity for All which I discussed in my previous post . A key point that Roger makes is that the assumption of a unique equilibrium which underlies modern macroeconomics and the vertical long-run Phillips Curve is neither theoretically compelling nor consistent with the empirical evidence. Lipsey's article powerfully reinforces those arguments. Access to Lipsey's article is gated on the JHET website, so in addition to the abstract, I will quote the introduction and a couple of paragraphs from the conclusion.

One important early post-WWII debate, which took place particularly in the UK, concerned the demand and inflationary pressures at which it was best to run the economy. The context for this debate was provided by early Keynesian theory with its absence of a unique full-employment equilibrium and its mainly forgotten, but still relevant, microeconomic underpinnings. The original Phillips Curve was highly relevant to this debate.

All this changed, however, with the introduction of the expectations-augmented version of the curve with its natural rate of unemployment, and associated unique equilibrium GDP, as the only values consistent with a stable inflation rate. This new view of the economy found easy acceptance partly because most economists seem to feel deeply in their guts - and their training predisposes them to do so - that the economy must have a unique equilibrium to which market forces inevitably propel it, even if the approach is sometimes, as some believe, painfully slow.

The current behavior of economies with successful inflation targeting is inconsistent with the existence of a unique non-accelerating-inflation rate of unemployment (NAIRU) but 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. This view explains what otherwise seems mysterious in the recent experience of many economies and makes the early post-WWII debates not seem as silly as they appeared to be when economists came to accept the assumption of a perfectly inelastic, long-run Phillips curve located at the unique equilibrium level of unemployment. One thing that stands in the way of accepting this view, however, the tyranny of the generally accepted assumption of a unique, self-sustaining macroeconomic equilibrium.

This paper covers some of the key events in the theory concerning, and the experience of, the economy's behavior with respect to inflation and unemployment over the post-WWII period. The stage is set by the pressure-of-demand debate in the 1950s and the place that the simple Phillips curve came to play in it. The action begins with the introduction of the expectations-augmented Phillips curve and the acceptance by most Keynesians of its implication of a unique, self-sustaining macro equilibrium. This view seemed not inconsistent with the facts of inflation and unemployment until the mid-1990s, when the successful adoption of inflation targeting made it inconsistent with the facts. An alternative view is proposed, on that is capable of explaining current macro behavior and reinstates the relevance of the early pressure-of-demand debate. (pp. 415-16).

In reviewing the evidence that stable inflation is consistent with a range of unemployment rates, Lipsey generalizes the concept of a unique NAIRU to a non-accelerating-inflation band of unemployment (NAIBU) within which multiple rates of unemployment are consistent with a basically stable expected rate of inflation. In an interesting footnote, Lipsey addresses a possible argument against the relevance of the empirical evidence for policy makers based on the Lucas critique.

Some might raise the Lucas critique here, arguing that one finds the NAIBU in the data because policymakers are credibly concerned only with inflation. As soon as policymakers made use of the NAIBU, the whole unemployment-inflation relation that has been seen since the mid-1990s might change or break. For example, unions, particularly in the European Union, where they are typically more powerful than in North America, might alter their behavior once they became aware that the central bank was actually targeting employment levels directly and appeared to have the power to do so. If so, the Bank would have to establish that its priorities were lexicographically ordered with control of inflation paramount so that any level-of-activity target would be quickly dropped whenever inflation threatened to go outside of the target bands. (pp. 426-27)

I would just mention in this context that in this 2013 post about the Lucas critique, I pointed out that in the paper in which Lucas articulated his critique, he assumed that the only possible source of disequilibrium was a mistake in expected inflation.

If everything else is working well, causing inflation expectations to be incorrect will make things worse. But if there are other sources of disequilibrium, it is not clear that incorrect inflation expectations will make things worse; they could make things better. That is a point that Lipsey and Kelvin Lancaster taught the profession in a classic article "The General Theory of Second Best," 20 years before Lucas published his critique of econometric policy evaluation.

I conclude by quoting Lipsey's penultimate paragraph (the final paragraph being a quote from Lipsey's paper on the Phillips Curve from the Blaug and Lloyd volume Famous Figures and Diagrams in Economics which I quoted in full in my 2013 post.

So we seem to have gone full circle from the early Keynesian view in which there was no unique level of GDP to which the economy was inevitably drawn, through a simple Phillips curve with its implied trade-off, to an expectations-augmented Phillips curve (or any of its more modern equivalents) with its associated unique level of GDP, and finally back to the early Keynesian view in which policymakers had an option as to the average pressure of aggregate demand at which economic activity could be sustained.

However, the modern debated about whether to aim for [the high or low range of stable unemployment rates] is not a debate about inflation versus growth, as it was in the 1950s, but between those who would risk an occasional rise of inflation above the target band as the price of getting unemployment as low as possible and those who would risk letting unemployment fall below that indicated by the lower boundary of the NAIBU as the price of never risking an acceleration of inflation above the target rate. (p. 427)

[May 31, 2017] The underlying assumption that there is an exogenous NIARU (non-inflation-accelerating rate of unemployment) imposing an unavoidable constraint on macroeconomic possibilities is open to serious question on both historical and analytical grounds

NKlein1553 said...

William Vickrey on structural unemployment:

http://www.columbia.edu/dlc/wp/econ/vickrey.html

"The underlying assumption that there is an exogenous NIARU (non-inflation-accelerating rate of unemployment) imposing an unavoidable constraint on macroeconomic possibilities is open to serious question on both historical and analytical grounds.

Historically, the U.S. enjoyed an unemployment rate of 1.8% for 1926 as a whole with the price level falling, if anything. West Germany enjoyed an unemployment rate of around 0.6% over the several years around 1960, and most developed countries have enjoyed episodes of unemployment under 2% without serious inflation.

Thus a NIARU, if it exists at all, must be regarded as highly variable over time and place. It is not clear that estimates of the NIARU have not been contaminated by failure to allow for a possible impact of inflation on employment as well as the impact of unemployment on inflation.

A Marxist interpretation of the insistence on a NIARU might be as a stalking horse to enlist the fear of inflation to justify the maintenance of a "reserve army of the unemployed," allegedly to keep wages from initiating a "wage-price spiral."

One never hears of a "rent-price spiral", or an "interest-price spiral," though these costs are also to be considered in the setting of prices."

[May 30, 2017] How Milton Friedmans NAIRU Has Increased Inequality, Damaging Innovation and Growth

Notable quotes:
"... Never underestimate an [neoliberal] economist's ability to ignore reality. ..."
"... In a kleptocracy, looters are not called looters. That might cause the serfs to rebel. So they are called "creators" instead, and their stolen loot becomes the just and righteous reward for their work. Indeed it is the manifestation of natural law without which society and the economy would fall into darkness, etc., etc. ..."
"... NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned exactly as it was supposed to. ..."
"... NAIRU is the perfect example of purpose-driven science, and Milton Friedman et al and NAIRU rank right up there with the German racial scientists and eugenics and social Darwinism when it comes to justifying pure evil. ..."
"... The idea that there really is no "Gault" in a modern economy is not new. J.K. Galbraith described the inherent interdependence between management and workers in his book The New Industrial State in which he coined the term "technostructure" to describe how modern industry no longer could realistically claim to run by a single person. Instead, the rise of scientific and business specialties made nearly all employees of a business vital. No one, especially the CEO, could really claim to all the profits. ..."
"... Relative wealth is the key to power and concentrated wealth to absolute power, the holy grail. Thus inequality is not an unintended consequence at all; it's the neolibs' actual goal, a feature not a bug. Power is their ultimate narcotic. And their pursuit of it is relentless and violent. ..."
"... I believe this is the elemental nature of our criminal elite that people must understand, first and foremost, before change is remotely possible. Unfortunately it's difficult for sane people to comprehend such madness, and they continue to believe people like Obama have a conscience, that Congress really seeks the greater good, that our warriors really want to avoid war. They can no more relate to people like Jamie Dimon, Lloyd Blankfien, or Benjamin Shalom than they can to a pedophile or a rapist. They have no common reference with the enemies of humanity. ..."
"... Feudalism wasn't concerned with economic growth and performance. Those ideas came with the Enlightenment and the Modern eras, and the end of monarchy. My point was to use "vassal" in the sense of someone who owe allegiance to a master but is not a slave. ..."
"... Mexico, you made the claim that NAIRU was "purpose-driven science". I countered with the point that NAIRU was pseudo-science and that economics is not a science. Neither statement has anything to do with indicting science. ..."
Aug 26, 2013 | www.nakedcapitalism.com
Edward Lambert , August 26, 2013 at 12:57 am

Great article!!! The drum beat continues Productivity is definitely constrained by tight consumer liquidity from weak labor compensation.
Economists are going to learn a big lesson, when they see unemployment get stuck above 6.7%. They will try to explain it by pointing to problems in the economy or government. But the dynamic to limit employment is already established and it is due to low labor share. My calculations say the limit is 7.0% but I am allowing some margin of error.

The next two years should certainly be enlightening for many economists, including Krugman, Delong and Thoma. They do not see the effective demand limit coming.

diptherio , August 26, 2013 at 9:22 am

Never underestimate an [neoliberal] economist's ability to ignore reality.

Impishparrot , August 26, 2013 at 1:08 am

Hello? All talk of policy and regulations have left-out the workers. They make shit and they buy shit. Without them, how would multi-national corporations be able to afford the lawyers, lobbyists, members of Congress – both House and Senate, and it would now appear, members of the US Supreme Court.

Min , August 26, 2013 at 3:21 am

"Higher real wage claims necessarily reduce firms' profitability and hence, if firms want to protect profits (needed for investment and growth), higher wages must lead to higher prices and ultimately run-away inflation. The only way to stop this process is to have an increase in "natural unemployment", which curbs workers' wage claims.

"What is missing from this NAIRU thinking is that wages provide macroeconomic benefits in terms of higher labour productivity growth and more rapid technological progress."

True. But that aside, the original argument is a non-sequitur. Certainly, a fight between labor and capital over how to share the economic pie can lead to inflation, but it does not follow that full employment leads to accelerating inflation instead of converging inflation or fairly constant inflation. The NAIRU argument takes the behavior of capital as given and puts the onus of responsibility on labor. It amounts to special pleading.

BTW, it is not unusual in human systems to have conflicts that threaten to become a runaway feedback cycle. But somehow that rarely happens, for reasons that are not always clear. We still do not understand human systems all that well.

nonclassical , August 26, 2013 at 12:48 pm

..Greenspan's (therefore Rand "goddess") ideological position is based upon equal access and most especially information to markets this "equality" is undone by secrecy, insider trading, HFT, etc, etc.

In other words, it's all ideological-never existed, anywhere, any time, in reality..

Hugh , August 26, 2013 at 4:20 am

In a kleptocracy, looters are not called looters. That might cause the serfs to rebel. So they are called "creators" instead, and their stolen loot becomes the just and righteous reward for their work. Indeed it is the manifestation of natural law without which society and the economy would fall into darkness, etc., etc.

"Greenspan's stance reflected the conventional wisdom , codified in the theory of the non-accelerating-inflation rate of unemployment (NAIRU). It must take the blame for unleashing and at the same time legitimizing a vastly unequal and ultimately unsustainable growth process."

NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned exactly as it was supposed to.

"firms want to protect profits (needed for investment and growth)"

No. Firms are inanimate. They do not want anything. Nor is it the case that their managements want to protect their profits for the purpose of investment and growth. In a kleptocracy, management wishes not just to keep but increase profits in order to loot them.

The authors of this article, like those they criticize, leave out the social purposes for why we have an economy and why we allow corporations to exist. Both look on the economy as a natural process governed by natural laws (that is what this article is about: which laws best describe the economy), and not the human enterprise it is. The real measure of the economy is whether it is producing the society we want to live in. Classical measures, such as growth and productivity, may be irrelevant or even at odds with this construction.

from Mexico , August 26, 2013 at 7:23 am

Hugh said:

NAIRU is not to blame but the looters who espoused it. They are afterall the crafters of the conventional wisdom. There were no mistakes. As looting-enabling propaganda, NAIRU functioned exactly as it was supposed to.

Exactly!

NAIRU is the perfect example of purpose-driven science, and Milton Friedman et al and NAIRU rank right up there with the German racial scientists and eugenics and social Darwinism when it comes to justifying pure evil.

David Lentini , August 26, 2013 at 10:06 am

I isn't fair to call NAIRU "science", since it, like economics, isn't scientific in any way. Science has enough problems without having to take on charlatans like Friedman.

Friedman's work, as exemplified by NAIRU, is pseudo-science used to justify the demands of the industrtialists and financiers to remove governmental economic regulation. It's an example of what I like to call "Laissez-Faire Lysenkoism ", after the infamous Soviet agronomist who rigged his experiments and data to demonstrate that communism had a biological basis.

I agree very much with the article's analysis and conclusions. But I want to add two things:

1. The idea that there really is no "Gault" in a modern economy is not new. J.K. Galbraith described the inherent interdependence between management and workers in his book The New Industrial State in which he coined the term "technostructure" to describe how modern industry no longer could realistically claim to run by a single person. Instead, the rise of scientific and business specialties made nearly all employees of a business vital. No one, especially the CEO, could really claim to all the profits.

2. I think the question of economic performance is too narrow. The real issue ultimately is power. At some point, wealth will become so concentrated that the rich won't care about economic performance; they'll just make vassals and slaves of the rest of us. At some point money per se will become obsolete, since everything will be owned by a few anyway.

Massinissa , August 26, 2013 at 10:22 am

On number 2, I don't remember Feudalists ever worrying about economic growth, except when it came to how much grain they could extract from their serfs.

It doesn't matter all that much to the ruling classes how much growth there is or not as long as they control all that there is.

If low growth means easier control, then they will prefer that. Though I must say im not sure that low growth does mean easier control.

Doug Terpstra , August 26, 2013 at 4:43 pm

Dave's close, but you got it! Neoliberal economics is not interested in a dynamic economy, in optimum output, or in aggregate wealth-creation, and most certainly not in shared prosperity (egad!). It is only relative wealth that concerns our neoliberal elite.

Relative wealth is the key to power and concentrated wealth to absolute power, the holy grail. Thus inequality is not an unintended consequence at all; it's the neolibs' actual goal, a feature not a bug. Power is their ultimate narcotic. And their pursuit of it is relentless and violent.

I believe this is the elemental nature of our criminal elite that people must understand, first and foremost, before change is remotely possible. Unfortunately it's difficult for sane people to comprehend such madness, and they continue to believe people like Obama have a conscience, that Congress really seeks the greater good, that our warriors really want to avoid war. They can no more relate to people like Jamie Dimon, Lloyd Blankfien, or Benjamin Shalom than they can to a pedophile or a rapist. They have no common reference with the enemies of humanity.

David Lentini , August 26, 2013 at 5:16 pm

Feudalism wasn't concerned with economic growth and performance. Those ideas came with the Enlightenment and the Modern eras, and the end of monarchy. My point was to use "vassal" in the sense of someone who owe allegiance to a master but is not a slave.

As for the other points you made, I was trying make those too: At some point the inequality makes modern economics irrelevant.

from Mexico , August 26, 2013 at 10:37 am

David Lentini says:

I isn't fair to call NAIRU "science", since it, like economics, isn't scientific in any way.

No true Scotsman, hun?

I think the indictment of science is far broader than mere economics.

from Mexico , August 26, 2013 at 10:46 am

And by the way, who gets to decide what is science and what is pseudo-science? How does the layman tell the difference?

David Lentini , August 26, 2013 at 11:28 am

I'll assume that you're not just baiting me. Or are you taking the side of the climate-change deniers? Try starting with the basic definitions:

http://en.wikipedia.org/wiki/Science

You can also take the time to read the classics of Bacon, Descartes, Newton, et al.

A succinct definition of "science" is not that easy. But I argue that scientific statements at the least have to be robust-they have to be capable of reliable confirmation i.e., identical conditions should lead to the same observations, in other words "predictability" (Popper's "falsification" is a useful rule of thumb); a new theory should be able to explain or describe all relevant phenomena described by older theories as well as new phenomena to maintain unified explanation.

As I've argued many times on this 'blog, economics fails both tests. Instead economists offer statements that ape scientific forms, what I call "pseudo-science". They do this out of ignorance and a desire to cow the public (including scientists).

And we're all entitled to review the facts and make our judgment in light of the definitions and uses of the term "science".

I don't see your point in attacking science, which you of course never define. I believe that humanity needs a view of life that is far broader than provided by science alone. But the scientific view is still vital to our lives. The problem is that far too many have become mesmerized by the usefulness of science in addressing certain types of questions, and have been trying to force their own investigations into a scientific mold rather than admitting that the scientific method cannot address all questions equally well.

from Mexico , August 26, 2013 at 3:52 pm

Well for me, the question is still who gets to decide what is science and what is pseudo-science?

The school of hard knocks has taught us that none of the above are trustworthy or reliable. The historian of science Naomi Oreskes gives a great talk about this phenomenon here:

http://www.blogtalkradio.com/virtuallyspeaking/2012/04/12/naomi-oreskes-tom-levenson-virtually-speaking-science-1

This means that one is therefore forced back onto their own lights.

Which brings us back to the question: How does the layperson tell the difference between science and pseudoscience? I don't know many laypersons who have read Bacon, Newton or Descartes.

And what if they've read Hume, Kant or Nietzsche? Then they come away with a very different idea of what science is. For example:

Thus, though metaphysics is an illusion from the point of view of science, science in turn becomes but another state of illusion as far as absolute truth is concerned. In The Birth of Tragedy Nietzche already attacks the scientific optimism of his time under the guise of "Socratism." The "theoretic man" pursues truth in the delusion that reality can be fathomed, and even purged of evil, by rational thought and its applications. But faith in the omnipotence of reason shatters, for the courageously persistent thinker, not only on the fact that science can never complete its work but chiefly on the positive apprehension that reality is irrational. As Nietzsche writes later, "We are illogical and therefore unjust beings from the first, and can know this : that is one of the greatest and most insoluble disharmonies of existence."

–GEORGE A. MORGAN, What Nietzsche Means

David Lentini , August 26, 2013 at 5:24 pm

Mexico, I already answered that question. I really don't care what Naiomi Oreskes thinks; I think for myself. And I don't have much patience for people who won't make the effort to learn enough about science to answer the question for themselves.

There's a world of difference between Oreskes's writings about the abuse of science to further partisan political positions, and the meaning of science itself and deciding what qualifies as science. Just make the effort to learn and stop quoting everyone else.

As for your quote about Nietzsche, all this argument leaves is the usual relativistic confusion. And that just invites abuse. Science and the scientific method can be defined well enough to distinguish reliable claims from charaltanism. If you want absolutes, you might just as well accept what the most powerful tell you to accept.

from Mexico , August 26, 2013 at 8:39 pm

Oh I get it!

You get to decide what science is and what pseudo-science is.

It's like Humpty Dumpty said:

'I don't know what you mean by "glory",' Alice said.

Humpty Dumpty smiled contemptuously. 'Of course you don't - till I tell you. I meant "there's a nice knock-down argument for you!"'

'But "glory" doesn't mean "a nice knock-down argument",' Alice objected.

'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean - neither more nor less.'

'The question is,' said Alice, 'whether you can make words mean so many different things.'

'The question is,' said Humpty Dumpty, 'which is to be master - that's all.'

–LEWIS CARROL, Through the Looking Glass

OldFatGuy , August 27, 2013 at 12:10 pm

Yes, someone does get to decide. Because there ARE universal truths, like it or not.

For example, the world is not flat. Period. All the relativism in the world won't change the fact that the world is NOT flat.

Arguing against fact doesn't make one some sort of relativist intellectual (is that a term??) it makes one WRONG. And the only way humanity can ever transcend chaos is to acknowledge those truths that are universal. We, as a species, are still nowhere near there, and it's like trying to play a baseball game with no foul lines, basees, umpires, or even a ball. Yes, if life were like a baseball game there are entire groups of people today that argue it can be played without a ball. We'll never get beyond this chaos and into a peaceful order until we all get on more or less the same playing field, and the only way to do that is to acknowledge truths (or rules, like foul lines, in baseball).

Science is but one avenue to identify those truths. There are others.

David Lentini , August 26, 2013 at 11:06 am

Mexico, you made the claim that NAIRU was "purpose-driven science". I countered with the point that NAIRU was pseudo-science and that economics is not a science. Neither statement has anything to do with indicting science.

If you argue about flaws in science, whatever that means,n then start a new thread.

Hugh , August 26, 2013 at 2:59 pm

Science is a method, but what that method is applied to and how its results are interpreted are not. Science is also a human activity and so must be viewed through the lens of our humanity, not as objective truth external to us.

allcoppedout , August 26, 2013 at 4:33 am

Lord save us! Humans are biological systems and such systems have all kinds of modularity to protect various sub-systems and the overall system from collapse.

So where is a modular economics?

Growth? What's that? A sensible, scientific notion of it would be a system that raises everyone a lot, curtails rich by-products that capture politics and load the many with economic rents, educates to planet level responsibility, reduces work and squalid energy burning and related wars

We should be seeking stability and incorporating real well-being and a new understanding of growth. Growth as we have it is a Gucci handbag while others live on a squalid jack tuna boat earning almost nothing for your fish, eaten with a fancy T-shirt on proclaiming 'save the dolphins', served with salad picked by migrant workers to keep your figure trim along with the coke you snort.

What growth should be one of the first questions of economics, followed by how we might create a modular financing of what we should be doing. Without such, no subject.

Aussie F , August 26, 2013 at 7:33 am

In reality all the dynamism is in the state sector – from the internet, to superconductors, pharmaceuticals, biotechnology, containerisation. 'The market' just deals with copyright and marketing.

diptherio , August 26, 2013 at 9:30 am

Does this mean it's time to stop wearing my NAIRU jacket?

David Lentini , August 26, 2013 at 11:31 am

Only if it's a NAIRU straight jacket. :-)

[May 30, 2017] With unemployment measures irrevocably corrupted by political pressures, how one can be talk about validity of derivatives such as NAIRU, unless he/she is drunk

Feb 18, 2017 | economistsview.typepad.com
libezkova -> pgl..., February 18, 2017 at 05:34 PM
pgl,

This is all about mathiness and corruption of neoliberal economist, which is a real Fifth Column of financial oligarchy no question about it. With unemployment measures irrevocably corrupted by political pressures, how one can be talk about validity of derivatives based on them, unless he/she is drunk ?

In this sense NAIRU is yet another sophisticated neoliberal fake that help to drive the public policy in the interests of financial oligarchy under mathiness smoke screen and a bunch of corrupt neoliberal economics serving as a propagandist army of financial oligarchy.

It's time to revamp the old quote changing it to " When I hear the term NAURU...I reach for my gun!."

If course it would be too cruel to shoot all neoliberal economists, so reeducation camps should probably be considered.

I think only U6 has some connections to reality. And the discrepancy between official and Gallup value of U6 is 4%

In other words only the first digit is probably valid and the range is 10 to 20%.

== quote ==
For January 2016 the official Current U-6 unemployment rate was 10.1% up from last month's 9.1%. On the other hand the independently produced Gallup equivalent called the "Underemployment Rate" was 14.1% up from 13.7 in December and 13.0% in November. The current differential between Gallup and BLS on supposedly the same data is 4.0%!

marcus nunes : , February 17, 2017 at 12:44 PM
Alternative "NAIRU bashing": https://thefaintofheart.wordpress.com/2015/02/14/why-insist-on-searching-for-the-holy-grail-aka-nairu/
RGC : , February 17, 2017 at 04:11 PM
SWL is becoming aggressively neoliberal. There is no sound theoretical basis for NAIRU and no empirical reinforcement:

Time to Ditch the NAIRU

James K. Galbraith

The Journal of Economic Perspectives, Vol. 11, No. 1. (Winter, 1997), pp. 93-108

http://tek.bke.hu/files/szovegek/galbraith_time_to_ditch_the_nairu.pdf

pgl -> RGC... , February 17, 2017 at 04:37 PM
SWL strikes me as someone who goes well beyond the usual neoliberal laziness. Is that what you mean by "aggressive"?
RGC -> pgl... , February 17, 2017 at 04:45 PM
In reading his blog lately it seemed that he was very defensive about his economics and also angry at the Corbyn wing of Labour.
marcus nunes : , February 17, 2017 at 12:41 PM
"How do we link the real economy to inflation"? NAIRU a waste of time. Try aggregate nominal spending growth

http://ngdp-advisers.com/2017/02/08/fantasy-world-conventional-central-bankers-money-no-role/

libezkova : , February 18, 2017 at 06:17 PM
Sorry Anne, but neoliberal economists are really prostitutes of Financial oligarchy. Well paid, of course.

That's where NAIRU comes from. Phillips curve is a joke and always was. It's king of sad that it still mentioned in in non--humorous context:
https://thefaintofheart.wordpress.com/2012/07/20/seven-years-on-things-still-look-the-same/

The NAIRU essentially presupposes the existence of the wage-price spiral. Which can happen only if wages are either indexed to inflation by law, or there are strong trade unions to defend workers rights. Under neoliberalism both are those factors are suppressed and can be viewed as non-existent.

And the statement that the NAIRU myth belongs to the vocabulary of charlatans does not deviate from the serious character of the discussion. This is just a historical truth.

Hot of the presses: "Debunking the NAIRU myth" January 19, 2017 By Matthew C Klein

https://ftalphaville.ft.com/2017/01/19/2182705/debunking-the-nairu-myth/


== quote ==

First, some history. In 1926, Irving Fisher found a relationship between the level of unemployment and the rate of consumer price inflation in the US. In 1958, AW Phillips studied UK data from 1861-1957 and found a relationship between the jobless rate and the growth of nominal wages, although the relationship seems to have been an artifact of the gold standard given the vertical line he found in the postwar period:

Some people (wrongly) interpreted Phillips's data to mean that there was a straightforward trade-off between the inflation rate and the unemployment rate. Policymakers could just pick any spot on "the Phillips Curve" they want. Among a certain set, the big debates in the 1960s were about whether the government should target an unemployment rate of 3 per cent or 5 per cent.

This worked out poorly, but the reaction took the form of an equally dubious idea: the Non-Accelerating Inflation Rate of Unemployment, or NAIRU. In this view, the change in the inflation rate should be related to the distance between the actual jobless rate and some theoretical level. If the unemployment rate were above this "neutral" level the inflation rate would slow down and potentially turn into outright deflation. If the jobless rate were "too low", however, consumer prices would rise at an accelerating rate.

Suppose you believe NAIRU is a real thing. What would be the argument against pushing the unemployment rate as close to zero as possible? In theory, the cost of the policy would be ever-accelerating inflation, eventually perhaps leading to hyperinflation. But the reason to dislike excessive inflation is that it ultimately makes everyone poorer, which should, among other things, increase unemployment. (Just look at Venezuela, for a recent example.)

According to the wacky world of NAIRU, however, hyperinflation can coexist just fine with hyper-employment. Clearly there must be other mechanisms at work, or else we are leaving money on the table by allowing the jobless rate to ever rise above zero.
== end of quote ==

Some comments are interesting too:

grputland, Jan 22, 2017

To test the NAIRU hypothesis against historical data, shouldn't we plot unemployment vs. change in inflation? -- instead of CHANGE in unemployment vs. change in inflation?
Be that as it may:

If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given" rather than a function of policy.

If a certain tax feeds into prices, it leaves less room for wages to feed into prices before (according to NAIRU logic) inflation accelerates. So any tax that feeds into prices will tend to raise the NAIRU. This is especially the case if the tax causes the cost of labor for employers to be higher than workers' take-home pay.

Thus the NAIRU, if it exists, is not a counsel of despair, but rather a counsel to get rid of taxes that feed into prices (especially taxes on labor) and replace them, as far as necessary, with taxes that DON'T feed into prices -- that is, taxes on economic rents.

marcus nunes , Jan 20, 2017

NAIRU - RIP

https://thefaintofheart.wordpress.com/2015/02/14/why-insist-on-searching-for-the-holy-grail-aka-nairu/

Contrapunctus9, Jan 20, 2017

Many variables contribute to the inflation rate, certainly more than just domestic employment (and how it is calculated). The Fed's dual mandate is inflation and employment, so it makes sense that these are a focus of the Fed's communication. But the Fed tends to focus on the result rather than the cause. It is troubling that there is little discussion from most of the FOMC on inflation factors which are now more important than unemployment (currency values, foreign labor, technology, commodity demand and speculation, labor monopsony, underemployment, labor skill demand mismatch, etc).

Producer and consumer prices are increasing, largely due to China driven commodity prices. Managerial compensation and production hourly wages are increasing. But weekly wages are stagnant due to fewer hours. The Fed is ignoring the latter, even though it is what is more important to sustained core inflation.

Observer, Jan 19, 2017

Looking just at the U3 unemployment rate for the NAIRU without considering the still high U6 rate and lower labour participation rate in the US may be the issue. There's still labour market slack even though U3 is at its "full" employment level.

grumpy, Jan 19, 2017

Models have to be used with caution (they are only tools) and interpreted with awareness of the real world - including for example, the varying wage bargaining power of labour, which is different, post globalisation, to what it was in the '70s.

Who do you think wanted globalisation and liberalisation of trade, and why?

Many economists revere their models excessively.

[May 30, 2017] NAIRU worship at FED

Notable quotes:
"... In the 90s, Democrats like Yellen and Blinder were pushing Greenspan to raise rates when he located the trap line at a different location than they did and held off. ..."
"... A story that fits the actions. But I suspect misses the motive. Perhaps Green stain far from wanting to improve job markets i.e. defy the false wage repressing NAIRU taboo zone. He simply wanted the crazy stock bubble to continue to inflate... ..."
"... I assume Greenspan never really bought the NAIRU fairy tale. Anymore then I do. Otherwise he could never have so skillfully repressed bottom half wage rates for more then fifteen years. ..."
"... Kocker buys the general story as much as say larry sommers buys it. They simply, like Greenspan, move the mythic NAIRU up or down to support other motivations ..."
"... To simply deny the NAIRU ppens the pearly gates to a job class FED. Heaven forbid -- ..."
May 30, 2017 | economistsview.typepad.com

Paine, May 30, 2017 at 10:45 AM

The models are just rationalizations of a deeply embedded policy paradigm In place since Greenspan

The motivation: Wage rate regulation

Inflation of product prices by other means then wage costs is ignored. The relation between job market conditions and wage rate change
Is the core focus

If UE can go lower without wage rates accelerating. There is no urgency Ie There is no need to accelerate the present pace of normalizing the policy rate

Hence the informed expert opinion now calling for the FED to play it kool

However the wall street silk hat set takes a more cynical view

" why take a chance "

Christopher H., May 30, 2017 at 11:00 AM
Yes Sanjait and PGL are (willfully?) naive in their pleas for Obama's Fed to behave better.

It's not the models. It's not a bug it's a feature. The Fed has to be pushed by a popular movement which would also enact significant reforms on the fiscal side.

Paine, May 30, 2017 at 11:49 AM
No

Buys the basic wage trap line

"This may seem like a strange objective, given that Congress has charged the Fed with promoting "maximum employment," which sounds like "try to make employment as high as you can." But the Fed knows that if it pushes economic activity above its long-run level in pursuing that goal, it will eventually have to hit the brakes and bring growth below normal to cool the economy and keep inflation under control. The Fed doesn't want to be in that position, so it gets just as worried when unemployment falls below its target as it does when unemployment is too high. 1 As a result, when the economy is close to what the Fed sees as full employment, the central bank takes a decidedly anti-growth policy stance to keep employment in check."

Paine, May 30, 2017 at 11:55 AM
This is NAIRU worship. NK fails to bash this up. For example: How can we glibly conclude that over shoots must be over corrected. Seems on the face of it a convenient asymmetry: The system can run control ably Up. But not Down

The fed can lower UE step by step without some inevitable over shoot. But not back up. The reverse gear causes a destructive excessive jolt. Well maybe so

But we ought to really look this fearsome dynamic assymetric right in the eyes. For a long time. Not just assume its credible because it fits some morality play plot written to please wall street

Christopher H., May 30, 2017 at 11:57 AM
Kocherlakota buys it?

Depends where you locate the "basic wage trap line."

In the 90s, Democrats like Yellen and Blinder were pushing Greenspan to raise rates when he located the trap line at a different location than they did and held off.

Paine, May 30, 2017 at 12:08 PM
A story that fits the actions. But I suspect misses the motive. Perhaps Green stain far from wanting to improve job markets i.e. defy the false wage repressing NAIRU taboo zone. He simply wanted the crazy stock bubble to continue to inflate...
Paine, May 30, 2017 at 12:11 PM
I assume Greenspan never really bought the NAIRU fairy tale. Anymore then I do. Otherwise he could never have so skillfully repressed bottom half wage rates for more then fifteen years.
Paine - , May 30, 2017 at 12:15 PM
Kocker buys the general story as much as say Larry Summers buys it. They simply, like Greenspan, move the mythic NAIRU up or down to support other motivations

To simply deny the NAIRU ppens the pearly gates to a job class FED. Heaven forbid --

[May 30, 2017] The concept of NAIRU is false

Feb 18, 2017 | economistsview.typepad.com
Jerry Brown -> New Deal democrat... , February 17, 2017 at 10:03 PM
You might enjoy this blog
http://www.concertedaction.com/2017/02/17/simon-wren-lewis-nairu-and-tina/

Main points

I agree with both of those statements.

Ed Brown -> Jerry Brown... , February 18, 2017 at 08:58 AM
Jerry, http://tek.bke.hu/files/szovegek/galbraith_time_to_ditch_the_nairu.pdf
JF -> New Deal democrat... , February 18, 2017 at 06:46 AM
New Deal, I thought the hyper inflation of the 70s came about because pricing determinations all aligned in a ratcheting, a sign of a complete breakdown in market-based economics, inviting govt intervention to halt it.

Where was it proven that wages caused these results then?

The notion of wages being related to general pricing trends is clear during deflationary trends. Common sense, hurting and wages follow the downward spiral. If I asked a question about wages I might agree that the downward trend is being caused by the downward trend in general pricing and demand.

But it needs to be proven that there us a correlation and then a cause and effect reality when general prices are rising rapidly, if you are asking if wages are a cause if this rapid rise. The data do not now support this as you know.

The Fed needs to figure out what it can do when general prices begin to ratchet. I wish they would look at wages last, look at other factors and other 'tools' to influence pricing determinations, again, long before they use these false notions to justify attacking employment.

I want better economics and better logic, a different actions. For instance, can the Fed order the credit channels not to ratchet their pricings rapidly, this would have a direct influence on pricing. Can the Fed stop rolling over their book of assets with new purchasing subsidies to the financial asset marketplaces and instead lower the amount of buying and selling so that the markets see that low rates still exist (and so premia built into pricing need not use this as a reason to ratchet). Do something differently than slamming hard on the Volker rate-peddle and tell everyone to take it out on employment.

[Mar 26, 2017] There is no such thing as a natural rate of interest

Mar 26, 2017 | economistsview.typepad.com
RGC, March 26, 2017 at 07:06 AM
In short, there is no such thing as a "natural rate of interest".

........................

What then? It is difficult to say, exactly, whether the prevalent confusions are the result of sloppy thinking, an incoherent textbook pedagogy, or a deliberate desire to cover for the Federal Reserve and to obstruct potential criticism of the independent central bank. As a next step, let us ask: is there a better theory of interest rates out there, somewhere in the great work of the economists?

In the CEA paper, as in most of this so-called literature, the 20th century British economist John Maynard Keynes is not cited. Yet it is a fact that Keynes did write an influential book with the word "Interest" in the title. It was called The General Theory of Employment Interest and Money, published in 1936. In which Keynes states, of the classical theory of interest – that theory of loanable funds overlying a natural rate – that his own analysis "will have made it plain that this account of the matter must be erroneous" (p. 177). Perhaps it is worthwhile to seek Keynes's counsel at this point?

Keynes's theory of interest does not rest on the capital stock. And in Keynes as in the real world, there is no "capital market" that equates household saving with business investment.

Instead, Keynes's theory of interest is about the market for money – a market that definitely does exist in the real world. He wrote: "The rate of interest is not the 'price' which brings into equilibrium the demand for resources to invest with the readiness to abstain from consumption. It is the 'price' which equilibrates the desire to hold wealth in the form of cash with the available quantity of cash" (p. 167). In other words, interest rates are a portfolio issue. They are determined in the money markets, by how – in what form – people with wealth choose, at any given time, to hold that wealth. You pay interest, in order to get people to hold their wealth in less-liquid forms, such as bonds – and this is what provides firms with a secure source of financing, which then permits them to invest.

Keynes's theory of interest is the pure common sense of how financial markets work. So why is it treated, by our leading liberal economists, as though it didn't exist? Why all this confusing folderol about natural and neutral rates? The apparent answer is damning. In the theories our economists like, a technical theory of interest creates a technical theory of income distribution, since interest rates govern the incomes of creditors against debtors, of the rich against the poor, of profits against wages. Thomas Piketty's recent book is a nice instance of this point, with its argument that the great inequalities of capitalism are due to interest rates higher than the rate of economic growth. If interest somehow reflects the physical productivity of the capital stock, then the consequences may be unfortunate – but they are inevitable and not something of which it is proper to complain.

http://www.paecon.net/PAEReview/issue78/Galbraith78.pdf

RGC -> RGC... , March 26, 2017 at 07:39 AM
"Why all this confusing folderol about natural and neutral rates? The apparent answer is damning. In the theories our economists like, a technical theory of interest creates a technical theory of income distribution, since interest rates govern the incomes of creditors against debtors, of the rich against the poor, of profits against wages..........If interest somehow reflects the physical productivity of the capital stock, then the consequences may be unfortunate – but they are inevitable and not something of which it is proper to complain."

[Is that clear enough?......Galbraith is accusing mainstream economists of acting as apologists for rentiers.]

[Mar 03, 2017] Debunking the NAIRU myth by Matthew C Klein

Notable quotes:
"... If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given" rather than a function of policy. ..."
Feb 19, 2017 | ftalphaville.ft.com

By: Matthew C Klein

It's important to try to estimate the unemployment rate that is equivalent to maximum employment because persistently operating below it pushes inflation higher, which brings me to our price stability mandate. –Janet Yellen, January 18, 2017

A little more than half the income generated in America is paid to workers and most of the money spent in America goes to personal consumption. So it's reasonable to think there is some relationship between the health of the job market and other important macro variables.

And, in fact, there is a robust connection between the change in the unemployment rate and the change in the real value of money spent on employee compensation per working-age American since the mid-1980s:

Real COE vs unemployment

That chart shows the link between two real variables that have a logical connection to each other. The question for NAIRU believers is: why should a purely real variable (unemployment) have any bearing on a purely nominal one (inflation)?

In particular, is it reasonable to think there is an unemployment rate below which inflation necessarily gets faster and above which the pace of consumer price increases slows down? And even if there were such an unemployment rate at any point in time, would it be stable enough to be useful for policymakers concerned with smoothing the business cycle?

Many, including Federal Reserve boss Janet Yellen, seem to think the answer is "yes", but the evidence points the other way, particularly since the mid-1980s.

First, some history. In 1926, Irving Fisher found a relationship between the level of unemployment and the rate of consumer price inflation in the US. In 1958, AW Phillips studied UK data from 1861-1957 and found a relationship between the jobless rate and the growth of nominal wages, although the relationship seems to have been an artifact of the gold standard given the vertical line he found in the postwar period:

Phillips Curve 1948-1957 original

Some people (wrongly) interpreted Phillips's data to mean that there was a straightforward trade-off between the inflation rate and the unemployment rate. Policymakers could just pick any spot on "the Phillips Curve" they want. Among a certain set, the big debates in the 1960s were about whether the government should target an unemployment rate of 3 per cent or 5 per cent.

This worked out poorly, but the reaction took the form of an equally dubious idea: the Non-Accelerating Inflation Rate of Unemployment, or NAIRU. In this view, the change in the inflation rate should be related to the distance between the actual jobless rate and some theoretical level. If the unemployment rate were above this "neutral" level the inflation rate would slow down and potentially turn into outright deflation . If the jobless rate were "too low", however, consumer prices would rise at an accelerating rate.

Suppose you believe NAIRU is a real thing. What would be the argument against pushing the unemployment rate as close to zero as possible? In theory, the cost of the policy would be ever-accelerating inflation, eventually perhaps leading to hyperinflation. But the reason to dislike excessive inflation is that it ultimately makes everyone poorer, which should, among other things, increase unemployment. (Just look at Venezuela, for a recent example.)

According to the wacky world of NAIRU, however, hyperinflation can coexist just fine with hyper-employment. Clearly there must be other mechanisms at work, or else we are leaving money on the table by allowing the jobless rate to ever rise above zero.

In case this argument seems strange, consider the following exchange the Fed had on this very topic back in July 1994 (emphasis added):

MR. LINDSEY. If we ran the model out, do we believe that if we applied some social rate of discount, the losses in output later on would be more than, less than, or equal to the gains in output in the short run [from letting inflation accelerate]?

MR. KOHN. The model itself doesn't have, I don't believe, losses in output from higher inflation rates.

MR. LINDSEY. Ever? We never have a net loss in output resulting from a choice to go for inflation?

MR. PRELL. It does not take, in terms of a normal simple cost of capital calculation, a very big inflation differential to get you a net loss in the present value in the long run.

CHAIRMAN GREENSPAN. The argument as to why we get a net loss is "the Federal Reserve will react–do something." But the question is, we are the Federal Reserve and why should we react if that's true?

MR. LINDSEY. If we don't believe that the present value of output in this economy will be lower by letting inflation alone, then we should let inflation go up. It's as simple as that Do we believe that printing money will increase the present value of output?

MR. BLINDER. Yes, I think we would. I believe that printing money will give the economy a temporary high that will not last and therefore in the integral sense that you said, yes, you get a larger integral of output over an historical period, if you never decided to end it–if you never said, when you got to 10 percent inflation, whoops, that wasn't very good, and you went back to lower inflation.

CHAIRMAN GREENSPAN. Yes, but why would you conclude that at that point when, because as Ed Boehne says, 11 percent is still better?

MR. BLINDER. If 11 percent is better than 10 percent, if there's no cost to inflation–I am a little bit surprised at the tenor of this conversation around here! [Laughter] There is some academic content that is–

CHAIRMAN GREENSPAN. In all seriousness, the question really gets to the models. Why would you believe that there is a cost of increased inflation from the models?

Greenspan never got a straight answer to his question but the consensus was that models based on NAIRU are basically wrong. Tellingly, it was none other than Janet Yellen who wrongly worried the unemployment rate was "too low" in the mid-to-late 1990s and would cause inflation to accelerate.

As it happens, the data don't support the idea of NAIRU either, at least not since the mid-1980s. The test would be to compare changes in the unemployment rate against changes in the inflation rate. If NAIRU made sense, there should be a strong inverse relationship between the changes in the two series. And yet:

NAIRU core pce vs unemployment since 1985

Regressing changes in core inflation against changes in the jobless rate gets you an r-squared of 0.11, which is basically meaningless. Moreover, that result is purely a product of the data points in the blue circle, which all occurred during the teeth of the financial crisis and could be blamed on the co-movement of employment and commodity prices. Take those out, and you end up with two perfectly unrelated series:

NAIRU core pce vs unemployment since 1985 excluding GFC

You get similar results if you use headline inflation rather than core inflation.

The intellectual confusion over the relationship between unemployment and inflation was especially salient during the Fed's own policy debates in the aftermath of the crisis. The unemployment rate rose by 5 percentage points between mid-1979 and late 1982. It also rose by 5 percentage points between early 2008 and late 2009. Moreover, the jobless rate stayed above 9 per cent through first nine months of 2011. The Fed staff expected this would produce massive disinflation, or even deflation, yet it never happened.

By the January 2011 FOMC meeting , it should have been clear the old models weren't sufficient. Instead of ditching the NAIRU concept, however, the Fed's staff and many of the regional presidents tried to rehabilitate it by arguing the NAIRU had changed. (There were lots of reasons provided, including the extension of unemployment insurance benefits and skill mismatches.)

With the admirable exception of Richard Fisher at the Federal Reserve Bank of Dallas, the overwhelming consensus was that the crisis had raised the "non-accelerating inflation rate of unemployment" by about 1.5 percentage points :

FOMC 2011 Jan NAIRU estimates table

Moreover, everyone except Fisher and the New York Fed's Bill Dudley thought the crisis produced such long-lasting damage that the NAIRU would still be higher by 2015 (!) than it was before 2007. In reality, of course, the Fed has been forced to steadily revise its NAIRU estimates lower as the unemployment rate gradually normalises and inflation remains quiescent. The net effect was this rather ridiculous chart:

NAIRU fomc midpoint

NAIRU isn't just a useless concept, it's a counterproductive one that encourages policymakers to focus on the jobless rate as a means to an end (price stability) even though there is zero connection between the two variables. The sooner NAIRU is buried and forgotten, the better.

Policy Tensor, 17 hours ago

Matthew, there's strong evidence that what drives US inflation (and more generally DE inflation) is not domestic slack but global slack. See https://policytensor.com/2016/12/17/global-slack-us-inflation-and-the-feds-policy-error/

grputland, Jan 22, 2017

To test the NAIRU hypothesis against historical data, shouldn't we plot unemployment vs. change in inflation? -- instead of CHANGE in unemployment vs. change in inflation?

Be that as it may:

If there is such a thing as a NAIRU, it is still a mistake to treat the NAIRU as a "given" rather than a function of policy. If a certain tax feeds into prices, it leaves less room for wages to feed into prices before (according to NAIRU logic) inflation accelerates. So any tax that feeds into prices will tend to raise the NAIRU. This is especially the case if the tax causes the cost of labor for employers to be higher than workers' take-home pay.

Thus the NAIRU, if it exists, is not a counsel of despair, but rather a counsel to get rid of taxes that feed into prices (especially taxes on labor) and replace them, as far as necessary, with taxes that DON'T feed into prices -- that is, taxes on economic rents.

Drago Jan 21, 2017

@ Ralph Musgrave So according to Galileo Galilei the earth is a perfect sphere. Great news. So presumably he believes there's some magical force of nature that keeps us all from falling into space, and apparently one can travel in a straight line and end up exactly where he departed.

Never read such twaddle.

Ralph Musgrave, Jan 21, 2017

@ Drago @ Ralph Musgrave Totally daft response to my points - but what I'd expect from the anti-NAIRU brigade. But for the benefit of the latter cerebrally challenged brigade, I'll spell out what I mean in more detail. I'd honestly appreciate a detailed and intelligent answer.

NAIRU is the idea that there is a relationship between inflation and unemployment: specifically, when demand rises and unemployment falls, inflation will at some point also rise (assuming the rise in demand continues).

Klein & Co claim that NAIRU relationship does not exist. That means, unless I've missed something, that if unemployment falls and continues to fall, inflation WILL NOT RISE, (because, to repeat, according to Klein & Co there is no relationship between inflation and unemployment).

Ergo it should be possible to implement a very large rise in demand plus a very large fall in unemployment, and according to Klein & Co there will be no automatic rise in inflation. Now what have I missed?

Drago Jan 21, 2017 ;

@ Ralph Musgrave @ Drago MCK perhaps went too far in saying that there is zero connection between inflation and unemployment, but the rest of his points stand.

And regarding my previous reply, I was merely alluding to the fact that what is intuitive is not always what is true.

NeilW@MMT Jan 22, 2017

@ Ralph Musgrave "So presumably he favors bumping up demand to the point where unemployment almost vanishes"

There won't if you hold the level of competition high and using buying power to stop price rises taking hold. The key is for a significant purchaser to refuse to trade at any suggested higher prices which then starves the system of aggregate demand forcing either innovation or failure. And you do that directly rather than trying to do it indirectly by trying, and failing, to price loans higher.

In a tight labour market the capital/labour ratio gets better which forces replacement of jobs with machinery and improved methods. If you can't get the staff you have to get cleverer with the ones you have.

Inflation is people trying higher prices and having them confirmed by market purchases. So you set up the system so it refuses to confirm them which forces time serialisation on the market at a lower price.

Everybody knows that the labour market pricing is controlled by trying to keep a pool of people out of work and not producing. It is a very sick design that impoverishes many, many people. And the policy concept on which it is based is a belief system, not even science. You can't see them. You can't measure them. You just have a bunch of 'Very Clever People' who make them up based upon what they feel and what they believe.

Far better to have a pool of people employed outside the private sector at a fixed living wage which the private sector has to bid against to get any labour. Then the labour market is always 'tight' against the living wage and excess bids of labour wages fall back to the living wage when the businesses fail. Both of which allow you to keep business competition white hot intense - which is what controls prices and drives productivity.

marcus nunes Jan 20, 2017

NAIRU - RIP

https://thefaintofheart.wordpress.com/2015/02/14/why-insist-on-searching-for-the-holy-grail-aka-nairu/

Contrapunctus9 Jan 20, 2017

Many variables contribute to the inflation rate, certainly more than just domestic employment (and how it is calculated). The Fed's dual mandate is inflation and employment, so it makes sense that these are a focus of the Fed's communication. But the Fed tends to focus on the result rather than the cause. It is troubling that there is little discussion from most of the FOMC on inflation factors which are now more important than unemployment (currency values, foreign labor, technology, commodity demand and speculation, labor monopsony, underemployment, labor skill demand mismatch, etc).

Producer and consumer prices are increasing, largely due to China driven commodity prices. Managerial compensation and production hourly wages are increasing. But weekly wages are stagnant due to fewer hours. The Fed is ignoring the latter, even though it is what is more important to sustained core inflation.

JustSmith Jan 20, 2017

Mr Klein, your work is usually excellent, but this, I am afraid, is very poor. Your regression analysis does not test for labour market slack (unemployment minus NAIRU); you do not discuss how the unemployment rate can be an imperfect measure of labour market slack if the structure of the labour market changes; no one has ever assumed the NAIRU is constant and policymakers are well aware of the pitfalls of using an unobservable quality; the Philips curve can shift and indeed monetary policy making is in no small part about trying to judge under what conditions it may shift.

Drago Jan 20, 2017

@ JustSmith Trying and failing....

Observer Jan 19, 2017

Looking just at the U3 unemployment rate for the NAIRU without considering the still high U6 rate and lower labour participation rate in the US may be the issue. There's still labour market slack even though U3 is at its "full" employment level.
Brito , Jan 19, 2017

" The test would be to compare changes in the unemployment rate against changes in the inflation rate."

Wait what? That doesn't test for NAIRU, that simply tests the Philips Curve, but the NAIRU and the Philips Curve is not the same concept.


"zero connection between the two variables."

What? How can there be zero connection? If the labour market becomes very tight, firms have to raise wages to attract workers. Are you saying wages cannot impact prices? That would be a bizarre claim. Wage price spirals are an observable phenomena. And what about simple supply & demand? At some point you're not going to be able to employ enough additional people to supply the rising demand for your product, this increased scarcity is likely to result in higher prices.

NeilW@MMT Jan 22, 2017

@ Brito "If the labour market becomes very tight, firms have to raise wages to attract workers. Are you saying wages cannot impact prices?"

Or do without the person, or invest in capital to replace the labour - because the capital/labour ratio just changed. Both of which drive productivity. Which is what we want.

Tight labour markets drive innovation, and if you keep the level of competition active at the front end then prices remain stable.

grumpy Jan 19, 2017

Models have to be used with caution (they are only tools) and interpreted with awareness of the real world - including for example, the varying wage bargaining power of labour, which is different, post globalisation, to what it was in the '70s.

Who do you think wanted globalisation and liberalisation of trade, and why?

Many economists revere their models excessively.

marcus nunes Jan 19, 2017

Yellen in the 90s and today

https://thefaintofheart.wordpress.com/2015/11/09/yellens-unchanging-beliefs/

marcus nunes Jan 19, 2017

For laughs:

https://thefaintofheart.wordpress.com/2012/07/20/seven-years-on-things-still-look-the-same/

user8347 Jan 19, 2017
What a silly piece. NAIRU, like many economic concepts, requires a ceteris paribus clause. Your unconditional evaluation of hypothesis is naive at best. If you're having a surge in productivity due to, say, tech, or globalization, all else is not equal.
Drago Jan 19, 2017
@ user8347 Regardless, even if such a thing as NAIRU exists, its value can only be estimated post factum, which makes it completely useless for policy purposes.
Ralph Musgrave Jan 23, 2017

@ Drago @ user8347

There's a whole string of other relationships in economics which cannot be estimated with any sort of accuracy. For example it is widely accepted that devaluation will sooner or later improve a country's balance of payments, but no one really claims to know by how much and by when. So what do we do: abandon currency re-alignments as a method of rectifying external surpluses or deficits?

And again, it is widely accepted that interest rate hikes curb demand, but no knows with any great accuracy exactly by how much. What do you suggest: abandon interest rate adjustments?

Postkey Jan 24, 2017

@ Ralph Musgrave @ Drago @ user8347

"What do you suggest: abandon interest rate adjustments?"

Maybe?

"The funny thing is: they haven't. In fact, among the more than 10,000 research articles produced by the major central banks in the two decades prior to the 2008 crisis, none explored the correlation or causation between nominal interest rates and nominal GDP growth. Fortunately, this task is not very demanding, and once we conduct such an examination, we conclude that, in actual fact, there is no evidence to back these assertions whatsoever. To the contrary, empirical evidence shows that the central banking narrative on interest rates is diametrically opposed to the observable facts in two dimensions: instead of the proclaimed negative correlation, interest rates and economic growth are positively correlated. Secondly, the timing shows that interest rates do not move ahead of growth, but instead are either coincidental or even follow it."

https://professorwerner.org/shifting-from-central-planning-to-a-decentralised-economy-do-we-need-central-banks/

yellowbrickroad Jan 26, 2017

@ Ralph Musgrave This is gold standard thinking Ralph. There is no balancing payment of gold to send to China any more.

Instead China's pounds are sitting in an account in London, right alongside yours and mine. What difference does it make to anything if for instance China were to buy something for you and now those Pounds sit in your account rather than China's??

What do you think that changes..?

Your neighbours bought Chinese TV's and now China is sitting on a bunch of Pounds it can't easily spend - except on property, and educating the children of the wealthy. The incorrect thinking that 'we need to get those Pounds back' just means that we're more likely to sell vital infrastructure to China.

How is that a good response? We're NEVER going to export as much to China as China exports to us, and selling them our vital infrastructure is the result the flawed logic of thinking that moving numbers from one account to another account in London is something we 'need' to do in order to balance things up.

What if you could erase your old misassumptions Ralph? Rather than falling back on automatic mistakes.

Viewed correctly, the Pound IS the export, and the trade already balances. It's just that we don't happen to measure it this way.. yet..

Ralph Musgrave Jan 26, 2017
@ yellowbrickroad @ Ralph Musgrave Your comment is totally an completely unrelated to the above article and to my comments. Never mind being right or wrong: you haven't the faintest idea what this debate is about.
Drago Jan 26, 2017
@ Ralph Musgrave @ Drago @ user8347 It's not a binary choice...
doodle Jan 19, 2017
Isn't the point that the NAIRU theory is based on the concept of a wage-price spiral which is only sustainable in a situation where wages are either indexed or there are strong trade unions? With the rise of the precariously employed, in the services sector, even if there are many other minimum wage jobs in town, the threat to leave is not going to result in meaningful pay increases.
Ralph Musgrave Jan 23, 2017
@ doodle

I suggest there is a NAIRU type relationship even absent trade unions: i.e. trade unions just boost or amplify the relationship. In other words, even given no trade unions and no employment protection, if there was a ridiculously large increase in demand (e.g. a ridiculously large helicopter drop), demand for labour would sky-rocket, and you'd get bumper wage increases and inflation as every employer scrambled to get labour to meet demand.

[Feb 25, 2017] NAIRU: Dangerous Dogma at the Fed

This is not a dogma. This is a convenient pretext for suppressing wages, which is part of FED agenda
Notable quotes:
"... When I wrote my piece on NAIRU bashing, I mainly had in mind a few newspaper articles I had read which said we cannot reliably estimate it so why not junk the concept. ..."
"... It conjures up lots of bad associations. ..."
"... Last month, Matthew C Klein wrote an article for Financial Times' blog Alphaville arguing against the concept of NAIRU. ..."
"... Instead of their statutory mandate, these central bankers sought guidance from the so-called non-accelerating inflation rate of unemployment, or NAIRU. Proponents of the NAIRU doctrine claim that some fixed level of unemployment exists that will yield a stable rate of inflation. If the actual unemployment rate surpasses this level, they say, the inflation rate will decline. If unemployment drops below this level, inflation will increase. Most economic research over the last two decades placed the NAIRU between 5.8 and 6.6 percent. ..."
Feb 25, 2017 | economistsview.typepad.com
RGC : , February 25, 2017 at 08:43 AM
Re: The NAIRU: a response to critics - mainly macro

[Simon is catching a lot of heat and is getting a little irritated.]
....................
The NAIRU: a response to critics

When I wrote my piece on NAIRU bashing, I mainly had in mind a few newspaper articles I had read which said we cannot reliably estimate it so why not junk the concept. What I had forgotten, however, is that for heterodox economists of a certain hue, the NAIRU is a trigger word, a bit like methodology is for mainstream economists. It conjures up lots of bad associations.

As a result, I got comments on my blog that were almost unbelievable. The most colourful was "NAIRU is the economic equivalent of "Muslim ban"". At least two wanted to hold me directly responsible for any unemployment at the NAIRU. For example: "So according to you a fraction of the workforce needs to be kept unemployed." Which is a bit like saying to doctors: "So according to you some people have to be allowed to die as a result of cancer."
...........
[PostKeynesians fire back]:
........
Simon Wren-Lewis, NAIRU And TINA

Last month, Matthew C Klein wrote an article for Financial Times' blog Alphaville arguing against the concept of NAIRU. Today, Simon Wren-Lewis published a reply to Klein on his blog defending NAIRU. SWL's argument is essentially that there is no alternative (TINA):

http://www.concertedaction.com/2017/02/17/simon-wren-lewis-nairu-and-tina/

RGC -> RGC... , February 25, 2017 at 08:54 AM
[By coincidence I posted this comment by Dean Baker yesterday]:

NAIRU: Dangerous Dogma at the Fed

BY DEAN BAKER

The Full Employment and Balanced Growth Act of 1978 established two goals to guide the
Federal Reserve's conduct of monetary policy: price stability and full employment, defined by
the Act as four percent unemployment. While the central bank has diligently pursued the first
goal, it has often given the second part of its mission short shrift. Indeed, past Fed policy
makers have publicly labeled four percent unemployment unobtainable for practical purposes.
..............
The experience of the last six years has unambiguously repudiated the NAIRU - at least insofar as an economic theory may ever be disproved with evidence.

Die-hard adherents simply proclaim the NAIRU a moving target that has shifted. But none of these advocates has explained convincingly why previous consensus estimates of the NAIRU went so far awry.

http://cepr.net/documents/publications/fmsno00.pdf

anne -> RGC... , February 25, 2017 at 08:57 AM
http://cepr.net/documents/publications/fmsno00.pdf

December, 2000

NAIRU: Dangerous Dogma at the Fed
By DEAN BAKER

The Full Employment and Balanced Growth Act of 1978 established two goals to guide the Federal Reserve's conduct of monetary policy: price stability and full employment, defined by the Act as four percent unemployment. While the central bank has diligently pursued the first goal, it has often given the second part of its mission short shrift. Indeed, past Fed policymakers have publicly labeled four percent unemployment unobtainable for practical purposes.

Instead of their statutory mandate, these central bankers sought guidance from the so-called non-accelerating inflation rate of unemployment, or NAIRU. Proponents of the NAIRU doctrine claim that some fixed level of unemployment exists that will yield a stable rate of inflation. If the actual unemployment rate surpasses this level, they say, the inflation rate will decline. If unemployment drops below this level, inflation will increase. Most economic research over the last two decades placed the NAIRU between 5.8 and 6.6 percent.

The operating differences between a legal target of four percent unemployment and a NAIRU target matter tremendously for the economy and the public....

[Feb 19, 2017] EconoSpeak Krugman, the Gang of Four and the NAIRU Straitjacket

Notable quotes:
"... Second, the empirical evidence for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit of full employment could be substantial. ..."
Feb 19, 2017 | econospeak.blogspot.com
First is Dean Baker's post about the latest Economic Report of the President's "insight into the question of how fast the economy can grow, and more importantly how low the unemployment rate can go."
Economists have long held the view that lower rates of unemployment would be associated with rising rates of inflation and vice versa. When the Federal Reserve Board decides to raise interest rates to slow the economy it is based on the belief that unemployment is falling to a level that would be associated with a rising rate of inflation.
Most economists now put the unemployment rate at which inflation starts to rise somewhere near the current 4.9 percent rate. (This is called the non-accelerating inflation rate of unemployment or NAIRU.) So does the ERP. But its analysis suggests a somewhat different story.
Second is Jamie Galbraith's 1997 -- that's almost 20 years ago -- Journal of Economic Perspectives article, " Time to ditch the NAIRU "
First, the theoretical case for the natural rate is not compelling. Second, the empirical evidence for a vertical Phillips curve and the associated hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak, and has become much weaker in the past decade. Third, viewed collectively, attempts to estimate the location of the NAIRU have become a professional embarrassment; disagreements remain on too many basic issues. Fourth, adherence to the concept as a guide to policy has major costs and negligible benefits. Conversely, the risks of dropping the natural rate hypothesis are minor, while the benefits from a sustained pursuit of full employment could be substantial.
G. Friedman's projections may well be wrong. But the argument that they are "implausible" is based on uncompelling theory, weak empirical evidence, embarrassing estimates and "a guide to policy [that] has major costs and negligible benefits."

But, hey, you can't criticize the top wonks if the they don't come right out and say it.

UPDATE: John T. Harvey writes, at Forbes:

In the words of Christina Romer, former chair of the Council of Economic Advisors under Barack Obama:
"Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment*, at which the economy could stay forever."
*Often referred to as full employment? War is Peace. Freedom is Slavery. Ignorance is Strength. NAIRU is full employment.

[Jan 03, 2014] Economist's View 'Taylor v. Summers on Secular Stagnation'

kievite said... January 03, 2014 at 05:32 PM

This is an interesting topic which sadly attracted very few comments.

I think there are two issues not covered in comments:

1. That is politics, not economics and, clearly, as for Taylor, it comes down to the usual question: "are Republicans more stupid or more evil" (see Robert Waldmann comment to the post from Brad DeLong ).

2. The level of debt and the price of energy are two important variables that should probably be taken into account in any discussion of secular stagnation.

As for Taylor personal legacy, I would suggest that the underlying assumption that there is an exogenous NIARU (non-inflation-accelerating rate of unemployment) imposing an unavoidable constraint on macroeconomic possibilities is wrong on both historical and analytical grounds. From a historical standpoint, a NIARU, if it exists at all, must be regarded as highly variable over time and place.

To me it smells with the desire to enlist the fear of inflation to justify the maintenance of a "reserve army of the unemployed" in the society (which is a Marxist term, but probably is applicable here). In a way high level of unemployment is a precondition to the fast redistribution of wealth that we observed under the current neoliberal regime.

Which is another way to say that Taylor is a stooge of financial oligarchy. A Trojan horse which plays the role of an academic economist.

Taylor v. Summers on Secular Stagnation'

That is politics not economics and, clearly, as for Taylor, it comes down to the usual question: are Republicans more stupid of more evil.

Here's the Jared Bernstein response to John Taylor that Roger Farmer is referring to:

Taylor v. Summers on Secular Stagnation: ... In a recent speech I've featured here in numerous posts, Larry Summers raised the possibility that the economy is growing below its potential, with all the ancillary problems that engenders (e.g., weak job and income growth), and not just in recession, but in recovery. Stagnation is by definition expected in recession, but not in an expansion...
Taylor argues, however, that secular stagnation is "hokem." His argument rest on two points, both of which seem obviously wrong.
First, he claims that the current recovery has been weak is not due to any underlying problems in the private sector or lousy fiscal policy, but due to "policy uncertainty, increased regulation, including through the Dodd Frank and Affordable Care Act." But the recovery began in the second half of 2009, well before either of those measures took effect. And, in fact, since they've done so, if anything, growth and jobs have accelerated. Financial markets have done particularly well...
Taylor's antipathy toward fiscal stimulus leads him to completely omit the fact of austerity in the form of fiscal drag as a factor in the weak recovery. ...
His second argument is that if secular stagnation were a real problem, we would have seen it in the 2000s expansion, yet instead we saw "boom-like conditions, especially in residential investment." ...
Yes, there was a lot-too much-residential investment, but employment growth was terribly weak...,the share of the population employed actually declined. Real GDP grew almost a point more slowly per year over the 2000s business cycle relative to the prior two cycles. Business investment grew less than half as fast in the 2000s than it did in the 1990s. In fact, after rising pretty steeply in the 1990s, CBO's estimate of potential GDP fell sharply in the 2000s..., a serious cost of the problem Summers is raising and Taylor is wrongly debunking.
It's also worth noting that middle-class incomes and poverty rates did much better in the 1990s, thanks to full employment conditions in the latter half of that cycle, than in the 2000s, when slack labor markets led to a flattening trend in real median income and increasing poverty rates.
I doubt any of this will convince Taylor and others who simply want to go after the ACA, the Fed, stimulus measures, et al. But those of us interested in blazing the path back to full employment should recognize these arguments as politically motivated distractions. ...

This post from Brad DeLong on the same topic is also worthwhile

DeDude :

The thing that holds back businesses from deploying their stash of cash, is not "policy uncertainty" or "increased regulation". It is lack of demand.

If the demand is there then the product/service will be produced. When demand is not there then the cash will sit idle or be used non-productively for things like stock buybacks or takeover of competitors. Any individual business owner who fail to meet demand (because of policy uncertainty or regulation) will simply give up market share to those of his/her competitors that chose not to be held back by those things.

DeDude -> Matt Young...

I am actually not talking about GDP. The issue is why do businesses not hire more people. The explanation that right wing fools and smart business people love to give is that it's because of regulations and policies that they don't like. However, as pointed out over on "calculated risk" they always complain about regulations and there is no correlation between their complaining (or not) and their actual hire of new employees. The only thing that determine whether a business will hire more people is whether the demand for its products/services is in excess of what can be delivered by its current workforce. And they will respond to such demand regardless of cumbersome regulations - or they will lose market share to competitors that are more than happy to fill the demand.

Fred C. Dobbs:

(Found out on the web.)

Definition of the term secular stagnation theory is presented. It refers to the protracted economic depression characterized by a falling population growth, low aggregate demand and a tendency to save rather than invest.

Dictionary of Theories;2002, p478