A Benjamin Cole post
A couple weeks back in this space I rambled about the national economic tables I read in the back of The Economist magazine, and how they showed that, across many nations, it seems to take a huge amount of unemployment to budge down inflation but little, and the obverse also—that low unemployment did not budge inflation much up.
Looking across many nations, it sure looked like fighting inflation with unemployment was horrifically expensive in terms of real output, not to say how it affects the jobless. But for minuscule gain—and what real “gain” is had by 1.5% inflation rather than 2.5%?
Now University of Oregon econ whiz Tim Duy, author of the excellent Fed Watch blog, has posted a chart that shows that the modern-day Phillips Curve is flatter than Twiggy. (If you are too young to remember Twiggy, let’s just say her nickname was apt.)
Okay, from Tim Duy:
Well, we could do a fancy regression, but eyeballing the above chart, it looks like since 1995 you can bring down inflation by about 1% by increasing unemployment by 5% or so. It also looks like low unemployment does not provoke inflation.
This jives with what I have been saying for years: The U.S. economy is not inflation-prone, as it was in the 1960s. More global trade means much more competition. There are less regulations on transportation. We have seen the death of Big Labor, Big Steel, Big Auto, Big Phones, Big Anybody. The Internet. Import-a-rama retailing. Dollar stores. Lower marginal tax rates.
The proof is in the Tim Duy table.
The Federal Reserve is fighting a chimera, with horrible results for millions who want jobs, or for businesses seeking profits. All to budge inflation down, maybe a percent.