Central Bankers Are Blind to New Phillips Curve? Or Just Sadists?

A Benjamin Cole post

No, I do not have dense pages of calculus for the reader, purporting that QE would be ruin or divine salvation, or that minor deflation is the theoretical apex of an economic model.

Just some numbers from the back of The Economist. Simple stuff.

But Jeez, eyeballing the figs, it sure seems like the price of small inflation is big unemployment.  The Phillips Curve looks more like a low-trajectory missile—to get minor deflation, you need killer unemployment.

Moreover—and most importantly—low unemployment does not provoke much inflation.

Just some simple empirical observations ahead, no theories.

Low Unemployment, But Little Inflation

Take a country I know something about: Thailand. I live here now. Anyone can get a job—my sister-in-law, in a sparsely settled rural area, found a job walking distance from her house. They asked her to put in nine hours a day, extra pay on the ninth hour. Then they asked her to work six days a week. Grape farmers.

The official stats say Thailand has an unemployment rate of 0.7%, and inflation of 2.7%. The unemployment rate has been near zero for a long time, btw. The reports of Thai public companies often say they could make money if they could find more employees. The Thai inflation rate is one that would have been politically acceptable in the U.S. until recent times, perhaps as recently as 2007.

Now the U.S. Fed applies the monetary noose if the country approaches 2% inflation. Our central bankers detest unemployment below 6%. (No, they are not Putin surrogates).

Singapore has a 2.0% unemployment rate and a 1.5% inflation rate. S. Korea is at 1.5% inflation and 3.2% unemployment. China is 2.1% inflation and 4.1% unemployment. The Far East looks like this.  Low inflation and low unemployment.

Okay, that’s the other side of the globe. So let’s look at Poland. They have the utopia of low inflation at 0.2%, but also have 11.7% unemployment. To confuse matters a bit we also see Switzerland at 0.1% inflation, but 3.2% unemployment. Sweden also has 0.1% inflation, but a higher 7.4% unemployment rate.

It is possible to get to the supreme exalted state of deflation that so enchants so many right-wing economists in the U.S. In fact, Greece has done it, a hero nation with a 1.5% deflation rate, although they also have 26.4% unemployment rate. Spain gets into the deflation zone too, at negative 0.2% and 24.4% unemployment. Italy fares similarly, with 0.3% inflation and 12.3% unemployment.

There are more countries, but you get the picture.  There are some women ugly enough to deflate men, and some economies ugly enough to deflate prices. But is that the way to live?

The Upshot: Central Bankers Are Sadistic, Nuts

Comparing macroeconomic statistics across nations is fraught with difficulties. Who knows if they measure inflation in Thailand as they do in Switzerland or Poland? And unemployment figures are squishy.

But looking at these figs, my take is you have to be sadistic or nuts to unemploy millions of people, and lose trillions of dollars of output, sacrifice untold profits just to cut reported inflation rates a percent or two.  To get inflation below 2.5% is very expensive.

And low unemployment no longer appears associated with much higher inflation rates.

The global economy has changed mightily in the last 40 years, supply chains are worldly, capital flows are gigantic. Old-fashioned demand-pull inflation may be nearly impossible to obtain. It would take an awful lot of prosperity to generate that 1970s inflation again.

I wonder how much growth in the U.S it would take to get back to 4% inflation, the rate 1980s Fed Chairman Paul Volcker obtained in his great war on inflation.

President Jimmy Carter oversaw a 20% increase in real GDP from 1976 through 1979.

Maybe that is what it would take to generate inflation. Worth a stab, no?

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