In His Defense of the Phillips Curve, Greg Ip Doth Protest Too Much

For every coal and steel worker in the U.S. today, there are twenty-five retail workers. One out of every eight “American” jobs is in retail. This rates mention mainly because online shopping, along with brick & mortar advances of the Amazon Go variety promise to render redundant a high portion of retail jobs in the not-so-distant future. As is, more and more of us utilize self-checkout at our favorite grocery stores, and in superstores like Walmart. Considering the rather prosaic farm, some of the more advanced tractors of today do the work that 30 humans did not too long ago. 

Such is the genius of investment. It saves us from needless exertion. Lest readers forget, before tractors and chemical advances like fertilizer, most people were born into a life of farm work. By necessity. Most human effort was directed toward the creation of food. It was a matter of survival until automation and science made it possible for exponentially more food to be produced with exponentially fewer workers.

Thank goodness investment freed so many from work that likely suffocated their true talents. Considered through a modern lens, what a shame if Jeff Bezos, Steven Spielberg, and Patrick Soon-Shiong (creator of Abraxane, a drug developed to fight pancreatic cancer) had been born 150 years ago. Odds are they would have had no choice but to work in agriculture. What a waste of immense talent. Automation of yesterday's work has brought incalculable good to the world. 

All of this came to mind while reading Wall Street Journal commentator Greg Ip’s latest defense of the Federal Reserve. Ip was responding to critiques of the groupthink that is the norm inside a central bank staffed with individuals who near monolithically believe prosperity is the driver of inflation. Ip is defensive mainly because he too believes what is so plainly untrue.

Ip reiterated his faith in the Phillips Curve through a question in yesterday’s column: “Can the unemployment rate fall to zero and business capacity utilization rise to 100% without any effect on wages and prices?” In raising the question, Ip obliquely offered his own opinion on the matter. He believes economies have growth limits, thus creating a need for central bankers to manage the situation as a way of avoiding too much of what's a good thing. Ip believes what he believes, but as examples from the agricultural and retail sectors routinely remind us, economic growth is all about producing more with fewer human hands such that there’s never a lack of workers. To be clear, it’s the very economic growth that worries Ip and officials inside the Fed that shrinks the need for workers. Automation that is an effect of feverish investment leads to the replacement of humans on the job, thus freeing them to more productively deploy their skills. 

Taking this further, Apple iPhones, Ford F-150 trucks, and Harley-Davidson motorcycles are the certain result of endless global cooperation. Considering the iPhone, all of its manufacture takes place outside the United States.

Yet Ip asks in haughty fashion if the jobless rate can “fall to zero and capacity utilization can rise to 100% without any effect on wages and prices?” Well, yes. Thousands of times over.

Ip can’t see the folly of his question mainly because it’s not apparent to him how overwhelmingly obtuse are the economic models he thinks wise. Implicit in Ip’s view of the world is that the U.S. is an impregnable economic fortress lacking access to the world’s labor and capacity. This leads him and the Fed economists he so venerates to believe that falling U.S. unemployment and rising U.S. capacity utilization could lead to shortages. No, they couldn’t. American economic activity is very much a consequence of global labor and capacity.

Yet even if it weren’t, Ip misses the basic truth that consumption isn’t what powers growth. In truth, consumption is merely an effect of growth. We all have endless desires, but Americans consume exponentially more than do the citizens of Peru precisely because they produce exponentially more. That’s why demand can’t outstrip supply as Ip so naively believes. Production of goods and services precedes demand for same. But that’s a digression. For now, it’s worth stating the obvious: Americans are able to produce a great deal more than Peruvians thanks to the investment that is the real driver of economic growth. And investment boosts individual productivity precisely because it relentlessly reduces the need for human “hands” in all manner of work endeavors.

It’s all a reminder that even if the U.S. economy were as Ip’s economic models imagine it to be, as in an impregnable island of labor and capacity, zero unemployment and 100% capacity utilization still wouldn’t be a source of inflation. Neither would simply because investment-driven economic growth, meaning the only kind of “growth,” fosters even more in the way of investment that methodically replaces the need for “hands,” all the while expanding capacity for production.

Ip comically believes that prosperity drives up prices, and one wonders where he’s been. Away from what the Journal scribe imagines to be true, the price of most everything continues to drop. UHD flat screens that used to fetch $25,000 and more go for a few hundred, laser printers that used to retail for over $17,000 sell for even less. Considering the supercomputer sitting in Ip’s pocket, and that he doubtless utilizes in wildly productive fashion, the technology within it would have cost millions not too long ago, had it been available.

So no, economic growth doesn’t cause labor or capacity driven inflation, nor does it drive up prices. More realistically, prosperity is the greatest driver of falling prices that the world has ever known. And nothing comes else comes close.

Ip laughably asserts about economists and central bankers that, “[W]hen their predictions are wrong they ask why.” Except that they don’t. And they haven’t. The Phillips Curve has never made sense, it’s forever been all too easy to disprove, yet the Fed’s models continue to embrace what’s absurd as though it’s backed by reason. So do Ip’s columns.

So while the belief that prosperity has a downside is blindingly simple to eviscerate, the bigger problem is that Ip, along with those whom he deems unfit for the Fed, labor under a shared belief that the most dynamic economy in the world requires the steady hand of the FOMC to remain dynamic. They believe that the Fed can increase and shrink credit. That’s not serious. If it were, Haiti could solve its problems by opening a central bank. So could East St. Louis. Fed and causation have forever been reversed. Get it?  

In closing, it’s not just the Phillips Curve that begs for ridicule. So does the very notion of the Fed’s importance; something the Fed’s critics and supporters both accept as true, but that is so easy to discredit.