Re: RE: Re: Re: FYI

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

> Bill Dickins is working on a paper that motivates,
> models, and estimates a long-run phillips curve.
> It looks roughly like this:

where does Dickens work? or do you have his e-mail address (please respond
off-list with the latter, if you know it).

also, Robert Eisner found a Phillips curve that (with inflation on the
vertical axis and unemployment on the horizontal) sloped downward at low
unemployment rates (as U rises), then sloped mildly upward, and then sloped
downward again, making a backwards-N shape. He presents several reasons why
falling U may actually reduce inflation for moderate ranges of
unemployment. (With a flat middle portion, this is a return to a vision
presented by Abba Lerner years ago.)

Anyway, I'm not writing about the Phillips curve (long or short run) as
much as its shifts. It turns out that many of the factors that shift the
perceived NAIRU (the so-called natural rate of unemployment, the threshold
unemployment rate below which inflation tends to take off) also shift the
degree of structural inflation (the kind of horizontal Phillips Curve
perceived by Michael Piore, et al.) and in the same direction, i.e., toward
lower inflation and lower unemployment, or vice-versa. So, at least as a
first approximation, one can talk about the shift factor without making a
commitment about the shape of PC.

In this view, it's amazing how shoddy the estimates of the NAIRU that
people like Robert J. Gordon are. Not only does he assume in recent
literature that the NAIRU takes a random walk (a totally atheoretic theory)
but he assumes that the slope of the short-term PC is constant despite all
of the major changes in the US economy over recent decades. (I would say
it's gotten steeper.) He also assumes that the pass-through of "expected
inflation" (what I call the inflationary hangover) to cause actual
inflation is constant despite all those major changes. Having misspecified
his basic regression equation, he naturally produces bizarre estimates of
the NAIRU. This can be seen most clearly in his raising of his estimated
NAIRU for the 1960s. (Sorry I don't have his estimates here. But they are
way out of line with experience during the 1950s and 1960s.)

My working hypothesis is that a lower full-capacity profit rate causes
capitalists to try to compensate by raising prices (and I have some data
fitting that hypothesis). Since this doesn't solve a serious profit
depression, it simply causes inflation to get worse, shifting the PC in the
stagflationary direction. (When capitalists are angry about low profits,
they punish _us_ with stagflation. They've got the power!) Similarly, the
recent combination of falling inflation combined with falling unemployment
is strongly linked to a rising full-capacity rate of profit. The
distributional shifts against labor of recent decades are thus linked to
the pleasant experience with inflation.

Imagine my surprise to find that people like Olivier Blanchard and Lawrence
Katz (not to mention Joseph Stiglitz, former chair of the President's
Council of Economic Advisors) have a similar perspective, as seen in the
JOURNAL OF ECONOMIC PERSPECTIVES (Winter 1997). Stagflationary shifts --
increases in their NAIRU -- may be caused by workers having
overly-ambitious "aspirations" compared to productivity, which squeezes
profit rates relative to what capitalists deserve (in these economists'
view). Workers then have to adjust to "reality" (in my view, capitalist
power). Then, their adjustment to "reality" lowers the economy's
stagflationary potential (lowers their estimated NAIRU) as in recent years.
A key difference between the Blanchard/Katz/Stiglitz view and mine is I see
the capitalists as having the power to _change_ reality to restore
profitability. Unlike workers, they don't have to adjust to reality.

Also, imagine my surprise that some Federal Reserve economists actually did
PC/NAIRU-type regressions that fit with my hypothesis, and found that it
was their "preferred" specification. (See Brayton,  Roberts, and Williams.
at http://www.federalreserve.gov/pubs/feds/1999/index.html)

I'll be presenting my paper at the URPE@ASSA conference in Boston, at 8 am
[!!!] on Jan. 7 or 8. I'm much more awake now than I will be then.

Jim Devine jdevine@xxxxxxxxxxxxxxx &
http://clawww.lmu.edu/Faculty/JDevine/JDevine.html