Twin Deceits

If you believe economists and commentators, you’d get the impression that the US economy is at full employment.

Commentators till recently have been pointing out that the Phillips curve is flat. The curve can be thought in various ways and one way is a plot of wage rate in the y-axis and the employment rate in the x-axis, as in stock-flow coherent models.

One would think it has a positive slope as higher employment would mean better wage bargaining. Or like this as in Figure 11.1, page 387 from Monetary Economics, Ed. 1 written by Wynne Godley and Marc Lavoie.

Economists using the neoclassical paradigm however think of it without any flat segments.

But till recently, many economists had been claiming that the Phillips curve is flat, as in flat not only in a segment but just flat.

This might look welcome but it is a deceit. It’s ironic that economists using the neoclassical paradigm are claiming this as typically they would accuse heterodox of assuming a flat Phillips curve.

The reason it is a deceit is that it induces the reader into thinking that full employment has been achieved and that there’s no need to do anything such as a fiscal expansion.

But recently wages have risen a bit. Now economists and commentators such as Alan Blinder, Paul KrugmanJustin Wolfers and many more have been claiming that the US economy is at full employment.

Full employment?

The headline unemployment rate of the United States is 4.1%. That is infinitely far from than 0%. How is that full employment or near full employment?

But not only that, that’s what is called the U-3 unemployment rate. The U-6 unemployment rate is 8.2%.

The differences are explained in this Federal Reserve Economic Data (FRED) blog here.

This is the real picture:

click to expand

So the twin deceits are: shifting positions on the Phillips curve to make it look like the US economy has achieved full employment and now claiming that the US economy is already at full employment. This is to promote the idea that nothing needs to be done.

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