At Marketwatch Peter Morici has observed that the Phillips Curve has fallen and it can’t get up:
Heads must be exploding at the Federal Reserve — unemployment keeps sinking below the level that economists and policy makers think should instigate significantly much higher inflation — because econometric models that estimate that threshold are estimated, as they must be, with historical statistics. Those cannot accommodate the consequences of the technological and institutional changes that are redefining U.S. labor, commodity and product markets.
Perhaps the most striking example is the disappearance of the Phillips curve—the hypothesized inverse relationship between inflation and unemployment. In plain English, at 3.8% unemployment we should be seeing a lot more wage and price jumps than we are experiencing.
I continue to think that there’s a relationship but they’re calculating unemployment the wrong way. Unfortunately, these metrics become increasingly politicized over time. Economic behavior is unimpressed by such machinations.
You’re right unemployment measures leave a lot to be desired. Also, the Phillips Curve was an idea developed within a very different institutional framework. The monetary system of the time was fixed-rate and COLAs negotiated by unions acted as a transmission mechanism for wages, demand and inflation.
I don’t know what to say about central bankers who still think in terms of the 1970s.
If I understand correctly, we have ‘experts’ using numbers to support a theory, and when the theory fails, they blame reality. When your pet theory fails, you cannot just adjust the numbers to make it valid.
Numbers are evil. They lie.
Since most of the Fed governors and pundits like Paul Krugman and I all took our economics classes at about the same time, I strongly suspect that the Phillips Curve is Holy Writ to them. That’s how it was treated when I took my first economics courses.
There is a university in Hyde Park that had a different view. But I digress.
And for your modeling pleasure:
https://www.zerohedge.com/news/2018-06-24/martin-armstrong-30-years-global-warming-forecasts-have-all-failed
Dave, it sounds like you are positing the equivalent of the Heisenberg Uncertainty Principle to economics!
Here is an anecdote. A major American company announces its opening a new office paying good wages, gets incentives to open the office. They then attempt to fill the office using H1B visas. What’s the net effect on the unemployment rate, on wages?
http://www.orlandosentinel.com/business/os-deloitte-consulting-h1b-visas-lake-mary-20180613-story.html
An anecdote is not data, but enough anecdotes do add up.
Perhaps the Fed should ask the following question, assuming the Philips curve is valid, which market is the most appropriate one it applies to given globalization. A local one like Houston, a regional one like Ohio, the entire US, US + Canada, Nafta, the G7, the entire OECD, the entire WTO?
If its anything besides the US, what would it imply to the role of the Federal Reserve, perhaps that’s motivation enough to think too deeply…..
I still think the labor-force participation rate, which is at its lowest levels since the 1970s, should inform how we look at the conventional unemployment rates. The 1970s rate reflected a work force that was more male dominated, and today’s rate reflects continuing hangover from the Great Recession.
Curious,
It was originally assumed the Curve would apply to any advanced capitalist economy, but while there is some evidence it has applied in Western Europe, there’s little evidence it has held in the U.S. or Japan.
Drew-That guy Armstrong is lying. He a Trump relative?
Steve