Sunday, April 3, 2011

History doesn't repeat itself, but it rhymes

From the Quick View of this Google hit...

...this graph:

Step One: The Phillips Curve

Wikipedia: "In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy."

The Phillips Curve is a historical relation, manifest in the evidence.

William Phillips, a New Zealand born economist, wrote a paper in 1958 titled The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861–1957, which was published in the quarterly journal Economica. In the paper Phillips describes how he observed an inverse relationship between money wage changes and unemployment in the British economy over the period examined.

Near a hundred years of history showed the relation.

Step Two: The Phillips Curve Abused

Wikipedia continues:

Similar patterns were found in other countries and in 1960 Paul Samuelson and Robert Solow took Phillips' work and made explicit the link between inflation and unemployment: when inflation was high, unemployment was low, and vice-versa.

In the years following Phillips' 1958 paper, many economists in the advanced industrial countries believed that his results showed that there was a permanently stable relationship between inflation and unemployment.

It was the golden age and everything economists did, worked. The poor bastards thought everything they did was right. It made them giddy.

Step Three: The Phillips Curve Denied

I can't get enough of this. Here (again) is part of Stephen Williamson's post that I thought was so interesting:

(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.

Milton Friedman...

Step Four: The Phillips Curve Abandoned

Despite a hundred years of data...

Wikipedia: "Most economists no longer use the Phillips curve in its original form because it was shown to be too simplistic. This can be seen in a cursory analysis of US inflation and unemployment data 1953-92."

Step Five: The Taylor Curve

From Krugman:

March 30, 2011, 1:45 pm

What’s Behind Low Investment?

This post by John Taylor is getting a lot of attention, because it does show a striking correlation between investment and unemployment:


Gee, it looks just like the Phillips curve, only better.

A tight, inverse relationship between investment and unemployment. Who'da thunk it?

Don't get distracted by trivia and rhymes. The problem is debt. Total debt.

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