The Fed's Phillips Curve Isn't Dead. It Never Existed to Begin With
When the 1920s began, no one had heard of the radio yet. But by 1922 radios increasingly dominated excited conversations. $60 million worth of them were sold in 1922, but by 1929 sales jumped to $845 million. Radio Corporation of America (RCA) was the winner of the radio race, and was arguably the Apple of its day.
Interesting about the products marketed by RCA was how expensive they were. If $135 is a lot of money today, it was a gargantuan sum back in the 1920s. Yet $135 was the cost of a radio as the 1920s ended. What was a must-have gadget was still somewhat of a luxury item for the relatively few.
That radios were expensive was the surest signal that they would eventually not be. That the price of a radio would gradually plummet speaks to one of the happiest truisms about the rich and well-to-do: what they own and enjoy is always and everywhere a preview of what we’ll all eventually enjoy at low prices if economies are free. In the near term the previous truth means that in the next 10 to 15 years private flight will become cheaper and cheaper for everyday Americans.
The reason rich luxuries predict what we’ll all eventually enjoy is that what the rich buy and use amounts to a signaling device for entrepreneurs. They see the fortune that awaits them if they can mass produce at low prices what the prosperous enjoy at high prices.
The price evolution of the once obscure and expensive radio rates mention in consideration of the unfortunate analysis of inflation by the Wall Street Journal’s Nick Timiraos. In his defense, he's just reporting what Fed economists tell him. But at the same time, it's the job of reporters to be skeptical. When economists claim there's an inflationary downside to growth, reporters should start asking pointed questions. Not Timiraos.
In a front page story yesterday, Timiraos reported the Fed's standard Phillips Curve view even though the latter has long been discredited. Timiraos asked “[H]ow low can the U.S. unemployment rate safely go?” His analysis presumes there are limits to growth. Timiraos is convinced that if too many Americans are working, that the latter will result in inflation. Nothing could be further from the truth.
Back to reality, it’s not just that the able-bodied are more likely to come off the sidelines during periods of growth. Timiraos alludes to the latter. But the more important truth glossed over by the journalist is that the U.S. is not an economic island. U.S. businesses and their workers are part of an interconnected, rather global whole. Odd is that Timiraos's editors didn't require him to make the previous previous point. When considering U.S. unemployment, reporters would be wise to remember that the production of anything is a result of global cooperation. Better yet, U.S. companies are among the most globalized on earth. They’re not limited by the labor pool in the U.S. simply because they employ the world’s labor force.
Timiraos similarly forgets that in a country which houses fifty different states and thousands of different cities, people within each city and state are capable of migrating all the time. And they do. As de Tocqueville said about Americans in the 19th century, they’re restless amid abundance. To the extent that there are labor shortages today within the U.S., they’re mitigated to varying degrees by the migratory patterns of the American people.
After that, Timiraos might consider the computer on which he surely typed the article that mistakenly suggests finite labor pools will cause inflationary breakouts. It will cause him to rethink what was fed him by economists at the Federal Reserve. It might bring Timiraos to ask himself the last time he dealt with a live body while buying airline tickets, tickets to movies, or interacted with a gas station attendant. Odds are that each activity has little to do with humans for him anymore, and that it doesn’t should exist as the path to skepticism about the Fed's discredited models. Simply put, economic growth is an effect of investment, and investment is all about enhancing output in concert with reduced human input. Figure that Google alone probably saves Timiraos and his employer from extensive hiring of assistants and other fact checkers. Spell-check is of course automated.
What’s not automated is the correction of false theories about inflation still promoted in newspapers. Contrary to the reporter’s assumptions, the globalized nature of work along with relentless investment that automates old forms of work means that we’ll never have a problem of unemployment that’s too low. Goods prices are the same way. Economic growth is once again driven by investment, and because it is, we know that the price of everything falls the more that the economy grows. Getting right to the point, if an economy is growing then prices are by definition falling: think the radio, the air conditioner, the mobile phone, the computer, flat-screen TVs, etc. etc. etc. That's not what was explained to Timiraos by economists hung up on what's backwards.
Cruelest of all, the economists whispering to Timiraos convinced him to report that 1960s growth “spurred years of soaring inflation that would take a decade for policy makers to corral.” Except that’s not what happened. Timiraos might read Arthur Burns’s diary (Fed Chair in the early ‘70s) to understand what President Nixon did (much to Burns's dismay) to bring on the ‘70s inflation. Rest assured it wasn’t an effect of growth.
Timiraos owes his readers better. And his editors owe Timiraos a more thorough checking of his work. While he no doubt means well, his attempt to tie inflation to economic growth only succeeds in reminding the halfway sentient reader that he understands neither the nature of inflation nor economic growth. As for the Phillips Curve, it can’t be dead. It can’t be because it never existed in the first place.