The Inflation/Unemployment Equation That Failed But Keeps On Winning

by Tim Cavanaugh

Reader boodood provides an important clarification to my description of the generally disproven Phillips Curve.

In my comments on the panicked palpitations prompted by the perplexing pusillanimity of our premier pump-primer, I noted that Fed chairman Janet Yellen speaks as a believer in the Phillips Curve.

Boodood writes:

I am an older non-traditional student at a good public university. We have a mainstream economics department that is on the upswing but in intermediate macroeconomics the Phillips Curve is STILL taught as if it true. It is as if the data used to propagate the curve 1860’s to 1950’s British data and casually fitted to US data in the 1960’s was not thrown into the dustbin of history by Friedman/Phelps in 1970. US economic data used the PC to inflict us with both the stagflation of the 70’s and early 80’s AND the current round of stagflation.

I am happy to have typed “abandoned by economists” rather than “abandoned by all economists,” because boodood is quite correct.

To get a sense of just how seriously the Phillips Curve is taken, bear in mind that most political-economic rhetoric implicitly endorses it and the Fed’s “dual mandate” (to manage inflation while managing unemployment) is specifically based on the theory.

My point is that the Phillips Curve has been proven not to work. It is not an operative economic theory in the same sense as, for example, the theory that if you reduce supply and increase demand with the same amount of money, prices will tend to increase.

There are rearguard actions against the evidence. One theory holds that, while the inverse relationship of inflation and unemployment can’t be mapped over time, there may be a short-term relationship. To believe this you’d have to believe modeling tools that are not precise on a large scale somehow become more precise at the small. Many people recognize that the Phillips Curve is dead. They just don’t get anywhere near government.