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.