Friday, August 26, 2011

Unspeakable Practices, Unnatural Rates

The post title is a perversion of Donald Barthelme's title "Unspeakable Practices, Unnatural Acts"

Looking at my recent post on the Natural Rate of Unemployment...

Reading the first quote from Bill Mitchell...

It was argued, erroneously, that full employment did not mean the state where there were enough jobs to satisfy the preferences of the available workforce. Instead full employment occurred when the unemployment rate was at the level where inflation was stable.

The estimated NAIRU (it is not observed)...

It is not observed. But I think it is calculated by working backwards from observations of unemployment and inflation (and maybe some other stuff). I want to look into that.

But I want to look at this graph first:

The blue is the interest rate. The red is the "natural" rate of unemployment, shifted down and scaled up.

The biggest mis-match (apart from the 1980 superhigh spike of interest rates) occurs in the late 1990s, during the "macroeconomic miracle" when the economy grew while inflation and interest rates held steady, and unemployment fell. That discrepancy somehow disproves the whole concept of the "natural" rate of unemployment.

Of course, they backed into the NROU number and they show it dropping. But why it dropped? Why the economy was good?? They'd probably say the economy was good because the unnatural rate dropped.

But that overlooks everything. It overlooks the brief correction of monetary balances that I identify in The Rise and Fall of the Non-Federal Relative. And it overlooks every other possible explanation.

Yup. Aaron Koenigsberg at EHow writes

Calculating the NAIRU requires data on both the yearly inflation rate and unemployment rate over a period of time and preferably some kind of statistical software.

He lays it out in five steps. I didn't get into it. But definitely, it is calculated by working backwards from observations of unemployment and inflation.


Jazzbumpa said...

Clever title.

I'd look for common cause again.


The Arthurian said...

I look for economic causes.