I don’t understand Felix Salmon’s hostile reaction to Amity Shlaes’s recent essay on Edmund Phelps. (Full disclosure: Amity is a friend of mine — and an economic journalist for whom I have enormous respect.)
Whether or not you agree with Amity’s opinion about the Bush administration’s preparation for the 2005 hurricane season, nothing she said about that matter is relevant to her assessment of Phelps. Her assessment strikes me as smack-on sensible.
Following Dean Baker, Salmon believes that the Friedman-Phelps idea of a non-accelerating inflation rate of unemployment — "NAIRU" — is refuted by the 1990s’ combination of low unemployment and low rates of inflation. ("But wasn’t the combination of low unemployment and low inflation a refutation of Ned Phelps and his beloved Nairu?") As Baker says
The natural rate view took a real beating in the nineties. The
overwhelming consensus within the economics profession was that the
natural rate of unemployment was in the range of 5.8-6.4 percent. This
meant that if the unemployment rate fell below this range, the
inflation rate would increase. It turned out that the unemployment rate
fell below this range in the summer of 1995 and stayed below this range
until the recession hit in 2001.
My take on this experience of the 1990s is simply that the natural rate of unemployment, if indeed it ever was as high as 5.8 to 6.4 percent, fell. Nothing about the Friedman-Phelps account says that this rate cannot change over time. The microeconomic foundations of macroeconomics are vital, and Phelps is a pioneer in crafting those foundations.
More to the point, perhaps, is the fact that the 1990s’ combination of low unemployment and low inflation sure as hell was powerful evidence — as Amity correctly pointed out — against the Phillips curve.
Amity’s take on Edmund Phelps, NAIRU, and his Center at Columbia University certainly does not warrant Felix Salmon’s dismissive treatment.
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One more explanation for the extremely favorable development from the second half of the nineties surely are the heavy supply shocks from the development of technology (IT in the combination with new means of communication). These correlated shocks contributed to the fact that the inflation-unemployment combination was below the Phelps-Phillips "curve" for zero shock.
Any estimate of a natural rate of unemployment depends on a stable growth rate of productivity. If productivity growth changes the natural rate of unemployment can also change accordingly.
Alan Greenspan believed in a natural rate of unemployment or a nairu. But because he saw accelerating productivity growth in the 1990s in changed his estimate of the natural rate of unemployment. As a consequence he did not tighten monetary policy when we approached what had been viewed as the nairu.
What is so difficult to accept about that?
Shame on you Don,
You are falling into the same (clap)trap that others are falling into. Let me explain…
By invoking supply/demand relationships to state that wages go up when employment approaches or goes below the "natural rate of unemployment", you are foolishly – yes, foolishly – ignoring the other side of supply/demand. When wages go up, and therefore the price of goods, the consumer – unknowingly obeying supp./dem. – will choose to buy fewer goods. This will create a natural barrier against inflation.
ONCE MORE, WITH FEELING: INFLATION IS CAUSED BY EXCESS GROWTH IN THE MONEY SUPPLY. All of the other, so called, contributors to inflation (wages) have to operate within the constraints that a limited amount of money supply creates.
Natural rates of unemployment will vary – I easily agree to that. But I have never been convinced of anyones thesis that the rate of empoyment has anything to do with inflation. Constraints by money supply will create compensation elsewhere by lower consumption.
Regress the total money supply from 1959 to 2006 (available presently at Wikipedia, btw.) against the unemployment rate against the unemployment rate during this same near half-century period.
The "facts" do not support your contention. Affecting unemployment is therefore an amalgam of factors, of which the money supply is only one.
Lafayett,
You missed the point of my comment: I said nothing about money supply affecting the unemployment rate. The discussion was on the unemployment rate's effects on inflation (or at least about other posts on the subject). In point of fact, the change in money supply would have a second-order effect on unemployment – not a direct one, and, I agree, would be only one of many factors that change it.
Don,
This is a hit piece and was probably not intended to counter Phelps research but Phelps and his supposed positions (hostile to environmental protection etc). I don't think Shlaes did herself a favor by writing about Phelps having to be under the Earth Institute rather than the other way around. Sachs is good at fundraising and Phelps did not yet have the prize at the time. Now that he does hopefully he receives greater funding or moves – the latter would probably yield better results. There's no substance to his claims re phelps research and I am not at all denying that.
After reading both articles it is obvious that Salmon simply dislikes Shlaes because he disagrees with her 'political' philosophy. Salmon does not have an argument against Phelps (as in a real argument) but he is trying to 'show' that Shlaes has a general disdain for 'European' capitalism. That's where the Earth Institute comes into play. Honestly I think Phelps was 'lucky' to be able to start his center on capitalism and society under the umbrella of the earth institute. The earth institute is popular (for whatever reason) with the 'public' and certain politicans so the upside is that it can support programs that perhaps would otherwise be neglected.
That was before Phelps won the prize. Now he can go where he pleases and he will have a 'true' center (strange what the prize does for one's career). Even if he stays at Columbia it is likely that he will see dramatically increased funding.
As for Katrina he is trying to persuade his readers that Phelps is against any kind of environmental action to prevent say Katrina clones and those of ever greater intensity. That argument is also meaningless. It is, however, an effective way to slander a writer you happen to dislike given that her belief was thought to be divorced from reality. I would find myself somewhere in between the two leaning to Shlaes' position but only to a degree.
Shlaes' was regarded, rightly or wrongly, as a diehard Republican apologist. I subscribe to the FT and do remember her articles some of which I agreed with and some that I didn't. Her replacement is 'better' in the sense that he sticks to a 'problem' and does not engage in tangents that 'upset' the 'delicate' European readers of the FT although I am quite sure he still manages to do so.
I posted the above because his article is not substantive. As his position is not substantive I find no reason to debate false claims he made for a purely personal attack on Shlaes and Phelps. It is quite obvious that he is hostile to them given that they 'represent' what he terms US capitalism. He adheres to 'European' capitalism (read: miserable growth with supposed environmental benefits that he would probably argue offset the lower growth rate). Again, it is not worth discussing a hit piece that lacks merit.
Mises had a newsletter contesting Phelps position – perhaps that would be a better article for discussion (as in a real discussion).
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