Your story reminds me of something Robert Solow often pointed out - maybe he still does: that the Phillips Curve was originally observed as a relationship between unemployment and **wage** inflation (not the change in the overall price level). This creates exactly the possibility that you mention - that there could be many Phillips curves, one for each relative price, and therefore a lot of noise and information loss in generalizing these relationships (many of which might be zero correlation) into one between unemployment and a non-relative, aggregate-price-change headline number.
Contrast the humility that would result from such an awareness with the pose struck by our situation-room-dominating friend, Larry Summers, who can to all appearances sail these monetary policy seas with scarcely any reference to a model , and with no need for any kind of compass other than constantly repeating the phrase "history tells us..." It's an impressive performance - and a frightening one. It's as if Larry died and came back as his own private Phillips Curve. All he seems to care about is what unemployment rate was "required" over the last 50 or so years to reverse an episode of inflation. And he keeps insisting that inflation isn't **really** reversed until such and such an unemployment number is attained.
Larry was really weird about this. I suppose that he was assuming that at the first sign of inflation the Fed would sledgehammer the economy but that inflation expectations including wages would be so strong that it would need to continue to sledgehammer, that it really was the 1970's. And in a sense that that what the Fed HAD done during the Great Recession, only using a tack hammer. And this was imbedded in political economy model in which the Fad was (was being) way too accommodating of deficits being reluctant to raise rates and then would panic.
Ultimately, he was being a bad deficit scold. I say "bad" because I too am a defect scold but on "proper" grounds that deficits shift recourses from investment to consumption. :)
First of all real wages did not rise during the 1970's. Over the March 1975 to Jan 1980 expansion, unemployment averaged 6.9% with a minimum of 5.6%. This is a recession level of unemployment. Real wages did not rise because high unemployment meant a labor surplus. When supply is greater than demand, the price (wage) falls, which is what happened. In such a world union power evaporates. Union power,, measured by strike frequency, fell dramatically after 1978, never to recover.
The idea of wage-push inflation that circulated then was a bullshit meme, maybe even propaganda. It worked; I believed it then and was anti-union for a time as a result. It seems to me that the Phillips curve mechanism works in a simple fashion. If you throw people out of work, their spending goes down and so does that of folks worried about losing their jobs. This means less demand for stuff, and if demand falls faster than supply you would expect price inflation to fall.
Finally, federal fund rates were at 10.2% when the unemployment minimum of 5.6% was reached, and would exceed 13% five months later and 17% five months after that. How is this accommodative?
The cause of 1970's stagflation is simple. Prior to the "October Revolution" in economic policy, the Fed had partnered with the federal government in managing the economy. The government abdicated this responsibility over 1962 through 1971, and finally with the appointment of Volcker and a conservative administration determined to destroy the labor movement, by maintain high unemployment long enough to produce a new generation of workers that accepted the reality that their incomes would not keep up with rising living standards. As it turned out a new deflationary force had emerged in the 1990's that pretty much eliminated risk of major inflation unless government deficits got really out of hand. And that is where we were until 2021. And now it's a new world all over again.
The government is even more useless than it was in the 1970's and the Fed is trying, but they are only human.
I find discussions on inflation confusing and contradictory. Like when the inflation was just getting started some economists were saying it was the start of stagflation and others saying it was transitory. Then when the Fed started hiking some said there would be a recession and others a soft landing. It was so contradictory I developed an unrealistic toy model to try to make some sense of inflation in the 1970's and early 1980's, with low inflation in the 2010's and inflation in 2022.
I put it together in Dec 2022 and wrote it up as my first substack post the next month.
I use a money balance on the real economy and use a correlation between that balance and historical NAIRU values to obtain an estimate for the trend in NAIRU over time. I then compare unemployment rate with the NAIRU to identify inflationary periods, where inflation manifests or the Fed is maintaining high rates to suppress inflation, and deflationary periods when one can have low unemployment, low interest rates, fiscal deficits *and* low inflation such as the period just before the pandemic:
Today we have unemployment running 0.9% below NAIRU while it was right around NAIRU in 2019, so we had no inflationary forces in 2019, but we have them now. So, the Fed is going to have to keep the interest rates high and even then, isn't going to get inflation back down to 2% without more hikes.
It appears that rate hikes have worked by suppressing job openings rather than unemployment since these have come down a lot (see Beveridge curve link) while unemployment has stayed low.
Since deficits are likely going to go in the future, the model says so will NAIRU, implying the economy will get more inflationary. The Fed may have to hike further, and we may see job opening fall faster and maybe going into recession in 12-18 months? I don't know, I am trying to see if this model has any predictive power or whether it was just a fancy curve fitting exercise :)
Nice post.
Your story reminds me of something Robert Solow often pointed out - maybe he still does: that the Phillips Curve was originally observed as a relationship between unemployment and **wage** inflation (not the change in the overall price level). This creates exactly the possibility that you mention - that there could be many Phillips curves, one for each relative price, and therefore a lot of noise and information loss in generalizing these relationships (many of which might be zero correlation) into one between unemployment and a non-relative, aggregate-price-change headline number.
Contrast the humility that would result from such an awareness with the pose struck by our situation-room-dominating friend, Larry Summers, who can to all appearances sail these monetary policy seas with scarcely any reference to a model , and with no need for any kind of compass other than constantly repeating the phrase "history tells us..." It's an impressive performance - and a frightening one. It's as if Larry died and came back as his own private Phillips Curve. All he seems to care about is what unemployment rate was "required" over the last 50 or so years to reverse an episode of inflation. And he keeps insisting that inflation isn't **really** reversed until such and such an unemployment number is attained.
Larry was really weird about this. I suppose that he was assuming that at the first sign of inflation the Fed would sledgehammer the economy but that inflation expectations including wages would be so strong that it would need to continue to sledgehammer, that it really was the 1970's. And in a sense that that what the Fed HAD done during the Great Recession, only using a tack hammer. And this was imbedded in political economy model in which the Fad was (was being) way too accommodating of deficits being reluctant to raise rates and then would panic.
Ultimately, he was being a bad deficit scold. I say "bad" because I too am a defect scold but on "proper" grounds that deficits shift recourses from investment to consumption. :)
First of all real wages did not rise during the 1970's. Over the March 1975 to Jan 1980 expansion, unemployment averaged 6.9% with a minimum of 5.6%. This is a recession level of unemployment. Real wages did not rise because high unemployment meant a labor surplus. When supply is greater than demand, the price (wage) falls, which is what happened. In such a world union power evaporates. Union power,, measured by strike frequency, fell dramatically after 1978, never to recover.
The idea of wage-push inflation that circulated then was a bullshit meme, maybe even propaganda. It worked; I believed it then and was anti-union for a time as a result. It seems to me that the Phillips curve mechanism works in a simple fashion. If you throw people out of work, their spending goes down and so does that of folks worried about losing their jobs. This means less demand for stuff, and if demand falls faster than supply you would expect price inflation to fall.
Finally, federal fund rates were at 10.2% when the unemployment minimum of 5.6% was reached, and would exceed 13% five months later and 17% five months after that. How is this accommodative?
The cause of 1970's stagflation is simple. Prior to the "October Revolution" in economic policy, the Fed had partnered with the federal government in managing the economy. The government abdicated this responsibility over 1962 through 1971, and finally with the appointment of Volcker and a conservative administration determined to destroy the labor movement, by maintain high unemployment long enough to produce a new generation of workers that accepted the reality that their incomes would not keep up with rising living standards. As it turned out a new deflationary force had emerged in the 1990's that pretty much eliminated risk of major inflation unless government deficits got really out of hand. And that is where we were until 2021. And now it's a new world all over again.
The government is even more useless than it was in the 1970's and the Fed is trying, but they are only human.
I find discussions on inflation confusing and contradictory. Like when the inflation was just getting started some economists were saying it was the start of stagflation and others saying it was transitory. Then when the Fed started hiking some said there would be a recession and others a soft landing. It was so contradictory I developed an unrealistic toy model to try to make some sense of inflation in the 1970's and early 1980's, with low inflation in the 2010's and inflation in 2022.
I put it together in Dec 2022 and wrote it up as my first substack post the next month.
https://mikealexander.substack.com/p/a-new-way-to-look-at-inflation-revised
I use a money balance on the real economy and use a correlation between that balance and historical NAIRU values to obtain an estimate for the trend in NAIRU over time. I then compare unemployment rate with the NAIRU to identify inflationary periods, where inflation manifests or the Fed is maintaining high rates to suppress inflation, and deflationary periods when one can have low unemployment, low interest rates, fiscal deficits *and* low inflation such as the period just before the pandemic:
Today we have unemployment running 0.9% below NAIRU while it was right around NAIRU in 2019, so we had no inflationary forces in 2019, but we have them now. So, the Fed is going to have to keep the interest rates high and even then, isn't going to get inflation back down to 2% without more hikes.
It appears that rate hikes have worked by suppressing job openings rather than unemployment since these have come down a lot (see Beveridge curve link) while unemployment has stayed low.
https://mikealexander.substack.com/p/the-beveridge-curve-and-cultural
Since deficits are likely going to go in the future, the model says so will NAIRU, implying the economy will get more inflationary. The Fed may have to hike further, and we may see job opening fall faster and maybe going into recession in 12-18 months? I don't know, I am trying to see if this model has any predictive power or whether it was just a fancy curve fitting exercise :)