Monthly Archives: February 2017


Does employment and inflation have a relationship? Yes of course. Can a wage-price spiral happen? Yes it can. A lot of economists exploit this possibility to incorrectly argue for NAIRU.

This post is a continuation of a recent post Simon Wren-Lewis, NAIRU And TINA in which I argued that NAIRU is not a useful concept and is counterproductive.

That wage-price spirals can happen isn’t a proof for NAIRU itself. NAIRU is defined as the unemployment rate Ubelow which prices start accelerating (or inflation starts to rise indefinitely). But the NAIRU hypothesis is a hypothesis of certainty. Economies are complex dynamical systems and just because wage-price spirals may have happened in the past doesn’t imply that it will always happen.

In the last mentioned how stock-flow consistent models, full employment can be achieved with no rising inflation, just higher inflation when parameters about wage-bargaining aren’t changing or if intervals between settlements shorten.

As I said in my previous post, NAIRU advocates think that a fraction of the workforce should be kept unemployed to keep inflation under control. By claiming that there exists a NAIRU or an unemployment rate below which prices necessarily start accelerating, they do a huge disservice to not just Economics but also to the welfare state. Any politician reading about NAIRU is likely to take away the incorrect notion that if unemployment is pushed too low, hyperinflation can happen. Hence the politician responsible for taking decisions is likely to postpone or abandon the pursuit for full employment.

So one can cogently believe all three of the following:

  • there is a relationship between employment and inflation
  • wage-price spiral can occur
  • NAIRU is wrong.

In other words, NAIRU proponents exploit the possibility to claiming a certainty. Wage-price spirals happened in the 70s and Joan Robinson even saw it coming. But wage-spiral is not NAIRU. Conflating the two is vile.

What are the solutions if a wage-price happens? There is a lot of literature for an “incomes policy” from economists such as Nicholas Kaldor. For the purposes of this post, it’s not necessary to go in that direction as it’s not needed in current times at least in the advanced economies.

The All American iPhone: Bad, Or Good?

The new American President Donald J. Trump is pushing for bringing back jobs to the U.S. as everyone knows. In his inauguration speech he said:

 We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength.

I will fight for you with every breath in my body – and I will never, ever let you down.

America will start winning again, winning like never before.

We will bring back our jobs. We will bring back our borders. We will bring back our wealth. And we will bring back our dreams.

We will build new roads, and highways, and bridges, and airports, and tunnels, and railways all across our wonderful nation.

We will get our people off of welfare and back to work – rebuilding our country with American hands and American labor.

We will follow two simple rules: buy American and hire American.

Now this has led to the repetition of the story that offshoring jobs is beneficial to the U.S. The Apple iPhone is used frequently to tell the story. According to this story, as argued by many such as the MIT Technology Review, the all-American iPhone will be pricier and hence bad for the U.S. One of the arguments is that the iPhone is so complicated that it’s even impossible to make everything in the U.S! While that is certainly true, it doesn’t mean that remaking the iPhone in America, i.e., most of it is not possible or bad.

In fact such denialism has quite contributed to the rise of Trump. People interested in politics and to the left of Trump on the economic left in the “political compass” should have a look into such things.

Let’s say that Apple manufactures most parts of iPhones in the U.S. Since its costs will rise, as it has to pay more labour for example, it will be priced higher if Apple wants to keep the same margin. Now since wages are a source of domestic demand for the U.S. economy, this will lead to higher output and income for U.S. economic units. It will also lead to an improvement in the U.S. balance of payments and international investment position as the U.S. is paying foreigners lesser in the new supply chain than is the case now. Higher U.S. employment would also mean higher wage-bargaining and higher wages. Higher prices won’t hurt iPhone buyers since real incomes would rise.

Needless to say, there’s also an international aspect. That iPhones will be more expensive might mean lower volume of iPhone exports. But price is not the only thing consumers look at. So the fall in exports won’t hurt if that’s the case. Moreover, a rise in U.S. output would be beneficial to the world and iPhone exports needn’t fall. Something has to fall you’ll say. Yes, Apple’s market share will fall, although not the absolute value of its profits.

Donald Trump has to be resisted for his authoritarianism and xenophobic policies. But economic myth-making is not the right way.

Simon Wren-Lewis, NAIRU And TINA

Last month, Matthew C Klein wrote an article for Financial Times’ blog Alphaville arguing against the concept of NAIRU. Today, Simon Wren-Lewis published a reply to Klein on his blog defending NAIRU. SWL’s argument is essentially that there is no alternative (TINA):

… But here is the rub. If we really think there is no relationship between unemployment and inflation, why on earth are we not trying to get unemployment below 4%? We know that the government could, by spending more, raise demand and reduce unemployment. And why would we ever raise interest rates above their lower bound?

… There is a relationship between inflation and unemployment, but it is just very difficult to pin down. For most macroeconomists, the concept of the NAIRU really just stands for that basic macroeconomic truth.

The sad part of this argument is that NAIRU isn’t the only answer to the relationship between (un)employment and inflation. Both of the following can be true:

  • There is a relationship between employment and inflation.
  • The concept of NAIRU is false.

What is NAIRU (non-accelerating inflation rate of unemployment)? According to the originators of this incorrect idea, it is the rate of unemployment U* below which inflation starts rising indefinitely. It’s a bit of a misnomer as it’s prices which is accelerating, not inflation. Nonetheless, the extreme nature of this should be clearly stated: NAIRU advocates think that a fraction of the workforce should be kept unemployed to keep inflation under control. 

Post-Keynesians have rejected these arguments since the beginning. In their book Monetary Economics, Wynne Godley and Marc Lavoie show that in their model full employment can be achieved without a runaway inflation.

This is not the first time SWL has defended orthodoxy. A few years ago, he called rational expectations “one of economics’ major achievements” and also that:

It is not a debate about rational expectations in the abstract, but about a choice between different ways of modelling expectations, none of which will be ideal. This choice has to involve feasible alternatives, by which I mean theories of expectations that can be practically implemented in usable macroeconomic models.

However for the foreseeable future, rational expectations will remain the starting point for macro analysis, because it is better than the only practical alternative.


Dean Baker — The Trouble With International Trade: People Understand It

Dean Baker:

[these days,] major news outlets have been filled with misleading and dishonest stories claiming that the real cause of manufacturing job loss has been automation and that people are stupid to worry about trade.

From December of 1970 to December of 2000 we lost 130,000 manufacturing jobs, less than one percent of the total. There was plenty of productivity growth in manufacturing over these three decades. While manufacturing employment did fall as a share of total employment, there was little change in the absolute number of manufacturing jobs over this long period.

By contrast, manufacturing employment dropped by more than 3.4 million, or more than 20 percent, in the seven years from 2000 to 2007. This was trade. The trade deficit exploded over this period to almost 6 percent of GDP, which would be more than $1.1 trillion in today’s economy.

[the title is the link]

Dean Baker On Automation

In his farewell address, Barack Obama toed the New Consensus’ line (around 12:50 in the video in the link):

… But, for all the real progress that we’ve made, we know it’s not enough. Our economy doesn’t work as well or grow as fast when a few prosper at the expense of a growing middle class, and ladders for folks who want to get into the middle class.

That’s the economic argument. But stark inequality is also corrosive to our democratic idea. While the top 1 percent has amassed a bigger share of wealth and income, too many of our families in inner cities and in rural counties have been left behind.

The laid off factory worker, the waitress or health care worker who’s just barely getting by and struggling to pay the bills. Convinced that the game is fixed against them. That their government only serves the interest of the powerful. That’s a recipe for more cynicism and polarization in our politics.

Now there’re no quick fixes to this long-term trend. I agree, our trade should be fair and not just free. But the next wave of economic dislocations won’t come from overseas. It will come from the relentless pace of automation that makes a lot of good middle class jobs obsolete.

In other words, Obama says that international trade and globalizing production aren’t responsible for weak employment and labour markets, but it’s automation.

Dean Baker has been writing a series of good articles puncturing these arguments. In his latest, titled Badly Confused Economics: The Debate on Automation, he writes that productivity hasn’t been rising much and that if tightness of the labour market is cited as one of the reasons for hikes in interest rates by the Federal Reserve, that’s contradictory. Baker says:

… The other reason why the concern over automation seems misplaced is that it is directly at odds with how we talk about other areas of economy policy. To take an example that has recently been in the news, the Federal Reserve Board raised interest rates in the United States last month. It is widely expected to raise interest rates several more times in 2017.

The reason for raising interest rates is that the Fed is concerned that the economy is creating too many jobs. This will increase workers’ bargaining power, putting upward pressure on wages. A more rapid rate of wage increases will lead to more rapid inflation. To prevent this outcome, the Fed wants the economy to have fewer jobs.

But how can it make sense that, at a time when we are worried that automation is destroying a massive number of jobs, we also need the Federal Reserve Board to add to the job destruction by raising interest rates? If automation is leading to mass job destruction the Fed should not have to be worried about overly tight labor markets.