Thursday, 23 March 2017

Have NAIRU bashers now admitted defeat?

There was a fairly strongly worded exchange of views on the internet between roughly a week ago and six weeks ago between the folk who claim there is no relationship between inflation and unemployment (NAIRU bashers) and those who claim that there is a relationship, i.e. supporters of the basic NAIRU concept (which includes me).

I posted this article on this site. Plus there were at least two contributions on the mainly macro site, here and here. Plus there were at least two articles on Lars Syll’s site where I left comments.

Anyway, during the course of that debate I pointed out that one of the stranger claims by NAIRU bashers was made by Bill Mitchell (Australian economics prof) who claims the NAIRU concept is invalid, but who himself nevertheless finds the concept indispensable, so he gets round that by inventing his own term for the idea that there is some minimum level of unemployment which is feasible before inflation rises to unacceptable levels. His term is “inflation barrier”.

Well a few days ago he used the term again on his site in an article entitled “Amazing what politics does to people”. So I thought I’d enter the lion’s den so to speak, and suggest that it is a self-contradiction to claim the basic NAIRU concept is nonsense, and then invent your own term for the concept. My comment was as follows. I’ve put it in green italics.

“A fiscal strategy that restrains net public spending to keep the economy below the inflation barrier…”. So what exactly is this “inflation barrier”?

Presumably it’s the level of unemployment at which inflation becomes unacceptable: a concept normally referred to as NAIRU..!

The only difference between NAIRU and IB that I can see is that NAIRU specifically claims inflation “accelerates” when unemployment is below some level. But whether it accelerates or simply rises to some excessively high and FIXED level has always struck me as near irrelevant."

And what was the response from Bill and his merry band of followers? Absolutely none! Deathly silence!

So have NAIRU bashers finally admitted that there is actually a relationship between inflation and unemployment? Rather looks like it.

Having criticised Bill it must be said that he has done a brilliant job since the 2007/8 crisis in attacking the “pro austerity / cut the deficit” brigade.

And that raises a question, namely how can anyone be so disastrously wrong on one aspect of economics (and perhaps other subjects) while being brilliantly right on other aspects? It’s certainly a puzzle, and it’s a puzzle to which Paul Krugman has alluded. That is, Krugman once said that there are numerous economists he greatly admires. But in the case of almost every one of them he has found himself all of a sudden at some time or other reading something by one of those economists which he regards as complete and total incompetent nonsense.

Certainly that is a puzzle.


  1. I have been recently reading round the 1976 crisis in the UK when the gov had to go cap in hand to the IMF.Dennis Healy was forced by the IMF(Germany and USA in the main) into having to abandon one of Labour's policy targets of "full employment".The problem was the added effect this was creating on the very high inflation figures at the time.No one ever gave exact figures as far as I have read but the understanding was that you just needed lower inflation and to accept some level of higher unemployment.Well if you wanted to borrow some money from the IMF that is.
    I consider these types of trade offs as political decisions(though central banks have to an extent now take on this mantle too).It depends on the what society deems is acceptable at that time,so no single economists can pick a figure out of thin air far and apply it universally as I see it.What was deemed acceptable as an inflation target in the 70s UK was probably just "high" inflation as opposed to "mega high" inflation.There was no hard figure just a significant movement in the right direction was considered sufficient.The USA suffered barely double digits at that time as did Germany did.UK inflation was the highest amongst the richer nations at almost 26%!
    Point being you could say NAIRU at that time would have been the level of employment/inflation that enabled a country to avoid having to beg for a loan from the international community.Or the level that enables a country to maintain its sovereignty and political support of the electorate.

    1. Good points. Perhaps a good definition of NAIRU is "the level of unemployment that maximises GDP". And in normal times will be whatever gives us the standard 2% rate of inflation, assuming we are right to aim for a 2% rate. In a "Denis Healey" situation, the rate might be higher. I.e. trying to get inflation down from 26% to 2% in just one year would probably have involved unacceptable costs. Thus in a Healey situation, aiming to get inflation dropping by about 5% a year might be optimum.

    2. Well it did come down,but Healy certainly had to abanhendon "full emplyment" target,whatever that was.I mean is that ever achievable?Anyhow oil prices dropped and helped lower inflation,the unions of course resisted wages falling and redundancies.Who would wish be in Governmnet?As an aside Healy was furious with the IMF for ruining his plans and to the markets for not understanding that it was all, in his view, a "temporay blip".He said he couldn't wait for the IMF to be off his back and said he looked forward to having his "Sod off IMF day".


Post a comment.