Here's the part of Stephen Williamson's post that I thought was so interesting:
Romer says some things about economic history in her piece, but of course she is very selective, and seems to want to ignore the period in US economic history and in macroeconomic thought that runs from about 1968 to 1985. Let's review that.
(i) Samuelson/Solow and others think that the Phillips curve is a structural relationship - a stable relationship between unemployment and inflation that represents a policy choice for the Fed.
(ii) Friedman (in words) says that this is not so. There is no long-run tradeoff between unemployment and inflation. It is possible to have high inflation and high unemployment.
(iii) Macroeconomic events play out in a way consistent with what Friedman stated. We have high inflation and high unemployment.
(iv) Lucas writes down a theory that makes rigorous what Friedman said. There are parts of the theory that we don't like so much now, but Lucas's work sets off a methodological revolution that changes how we do macroeconomics. One of the things we still like about Lucas's work is his "critique" paper, which tells us why we need theory to make good policy decisions. The key example from the Lucas Critique paper is the Phillips curve: treating an observed correlation in the data as structural can be bad.
(v) Paul Volcker takes Friedman seriously. Friedman had said that "inflation is everywhere and always a monetary phenomenon." The confirmed empiricists are skeptical. They seem to think that the Phillips curve is very flat, and that there will have to be a very long period of very high unemployment to bring the inflation rate down. Not so. Volcker engineers a severe monetary contraction and the ensuing recession is fairly painful, but not so long. Success! Inflation comes down quickly and has remained low since then.
(SLIGHTLY REFORMATTED.)(i) Samuelson/Solow and others think that the Phillips curve is a structural relationship - a stable relationship between unemployment and inflation that represents a policy choice for the Fed.
(ii) Friedman (in words) says that this is not so. There is no long-run tradeoff between unemployment and inflation. It is possible to have high inflation and high unemployment.
(iii) Macroeconomic events play out in a way consistent with what Friedman stated. We have high inflation and high unemployment.
(iv) Lucas writes down a theory that makes rigorous what Friedman said. There are parts of the theory that we don't like so much now, but Lucas's work sets off a methodological revolution that changes how we do macroeconomics. One of the things we still like about Lucas's work is his "critique" paper, which tells us why we need theory to make good policy decisions. The key example from the Lucas Critique paper is the Phillips curve: treating an observed correlation in the data as structural can be bad.
(v) Paul Volcker takes Friedman seriously. Friedman had said that "inflation is everywhere and always a monetary phenomenon." The confirmed empiricists are skeptical. They seem to think that the Phillips curve is very flat, and that there will have to be a very long period of very high unemployment to bring the inflation rate down. Not so. Volcker engineers a severe monetary contraction and the ensuing recession is fairly painful, but not so long. Success! Inflation comes down quickly and has remained low since then.
I had a complaint similar to Williamson's about Romer in my Christina at '50. I expressed concern about evidence selection and the omission of data. Maybe that makes me sympathetic to Williamson's view here. Can't say. In any event, I want to review the points he makes in his little history.
(i) "Samuelson/Solow and others think that the Phillips curve is a structural relationship..." The key phrase here is "structural relationship." As Williamson points out, there IS a relationship between inflation and unemployment, but it comes and goes:
The upshot of that research is that the empirical Phillips curve relationship is in the data for some time periods and not for others, and that ... the sometimes-observed Phillips curve is not a structural relationship.
To me, determining why the Phillips relation comes and goes is much more interesting than being satisfied to point out that the relation is not structural. But that's a post for another day.
(ii) "Friedman (in words) says that this is not so." Friedman's objection is well-known. It must be. Even I am aware of it.
(iii) "Macroeconomic events play out in a way consistent with what Friedman stated." I heard this before, too. Actually, bought a house just before that bout of high inflation. Worked out good for me.
(iv) "Lucas writes down a theory that makes rigorous what Friedman said." This is the "X" on Williamson's treasure-map. I googled LUCAS ECONOMICS and found gold.
(v) "Paul Volcker takes Friedman seriously." On my fourteenth re-read of that sentence, Williamson seems to make it sound like nobody before Friedman knew there was a relation between money and prices, which is certainly not the case. Regardless, the Volcker squeeze is another well-known part of history.
Williamson's Volcker item concludes with this claim: "Inflation comes down quickly and has remained low since then." C'mon Stephen, inflation below the double digits is not the same as low inflation. Friedman bemoaned an inflation rate of 3-to-4 percent, linking it to the fall of Rome.
When I took Economics 101 in the 1970s, the goal was price stability. Not inflation stability. Calling moderate inflation "low" is a way of boasting that economic policies are right. We pretend victory over inflation and see good in the trade-off that gave us high unemployment, the great recession, endless trade deficits, unbalanced budgets, and the debt, my God, the debt.
But I really like Williamson's little history. My next blog topic is Robert Lucas.
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