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.