[PEN-L:29887] RE: Re: Bushies say NAIRU is 4.9

["Devine, James" <jdevine@xxxxxxx>]

Title: RE: [PEN-L:29884] Re: Bushies say NAIRU is 4.9

> Friends,
>
> Do you mind telling us what the heck this NAIRU is? Or should we
> ask Ravi to help us break this code too?
>
> Sabri
>

the NAIRU is a hypothetical rate of unemployment. If the actual rate of unemployment goes below it, the inflation rate is supposed to take off into the stratosphere. It represents a barrier to attaining full employment and to fighting poverty, "street crime," etc. If the actual rate of unemployment is above it, inflation is supposed to become better, or even become deflation (falling prices).

The NAIRU is a more-scientific way to describe what Milton Friedman calls "the natural rate of unemployment." His idea is that the economy gravitates toward the natural rate unless the government or central bank screws things up.

Getting back to "Bushies say NAIRU is 4.9," that's more optimistic, I'd say, than the consensus among macroeconomists, even though it's more pessimistic than the consensus among pen-l. It means that the Bushies are indicating a preference for a lower unemployment rate than that of the consensus macroeconomists. That's a good thing, except that it likely means bubkis in practice.

For their purposes, I'd say that more important is the fact that it also means that official budget forecasts (which use the NAIRU as a benchmark) will show smaller deficits than would estimates done by consensus macroeconomists -- and deficits are seen as a Bad Thing. This connection occurs because lower unemployment rates imply higher tax revenues and lower spending on transfer payments like unemployment insurance benefits (all else equal).

Even though the MF calls it the natural rate of unemployment, as some sort of neutral problem with the system that prevents full employment, there's a Marxist interpretation too. There needs to be a reserve army of labor in order to keep wages down, labor effort up, and profits up. If demand is so high that the reserve army goes away (and there's no substitute like forced-labor camps or other ways of punishing people for not working hard enough, etc.) then the capitalists will punish us for low profitability by pushing up prices.

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Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine