A Keynesian Fires Back at Volcker's Inflation Warning

Nobel Prize laureate Joseph Stiglitz has fired back at former Fed Chairman Paul Volcker's NYT op-ed warning about the dangers of inflation. Stigliz writes in a Project Syndicate piece:

An independent central bank focused exclusively on price stability has become a central part of the mantra of "economic reform." Like so many other policy maxims, it has been repeated often enough that it has come to be believed. But bold assertions, even from central bankers, are no substitute for research and analysis.

Research suggests that if central banks focus on inflation, they do a better job at controlling inflation. But controlling inflation is not an end in itself: it is merely a means of achieving faster, more stable growth, with lower unemployment.

But the supposed trade off between inflation and unemployment does not exist. It's a canard that long ago should have been dead and buried.  As Murray Rothbard explained the situation  years ago:

Every time someone calls for the government to abandon its inflationary policies, establishment economists and politicians warn that the result can only be severe unemployment. We are trapped, therefore, into playing off inflation against high unemployment, and become persuaded that we must therefore accept some of both.

This doctrine is the fallback position for Keynesians. Originally, the Keynesians promised us that by manipulating and fine-tuning deficits and government spending, they could and would bring us permanent prosperity and full employment without inflation. Then, when inflation became chronic and ever-greater, they changed their tune to warn of the alleged tradeoff, so as to weaken any possible pressure upon the government to stop its inflationary creation of new money.

The tradeoff doctrine is based on the alleged "Phillips curve," a curve invented many years ago by the British economist A.W. Phillips. Phillips correlated wage rate increases with unemployment, and claimed that the two move inversely: the higher the increases in wage rates, the lower the unemployment. On its face, this is a peculiar doctrine, since it flies in the face of logical, commonsense theory. Theory tells us that the higher the wage rates, the greater the unemployment, and vice versa. If everyone went to their employer tomorrow and insisted on double or triple the wage rate, many of us would be promptly out of a job. Yet this bizarre finding was accepted as gospel by the Keynesian economic establishment.

By now, it should be clear that this statistical finding violates the facts as well as logical theory. For during the 1950s, inflation was only about one to two percent per year, and unemployment hovered around three or four percent, whereas later unemployment ranged between eight and 11%, and inflation between five and 13 %. In the last two or three decades, in short, both inflation and unemployment have increased sharply and severely. If anything, we have had a reverse Phillips curve. There has been anything but an inflation- unemployment tradeoff.

But ideologues seldom give way to the facts, even as they continually claim to "test" their theories by Facts. To save the concept, they have simply concluded that the Phillips curve still remains as an inflation-unemployment tradeoff, except that the curve has unaccountably "shifted" to a new set of alleged tradeoffs. On this sort of mind-set, of course, no one could ever refute any theory.

In fact, current inflation, even if it reduces unemployment in the short-run by inducing prices to spurt ahead of wage rates (thereby reducing real wage rates), will only create more unemployment in the long run. Eventually, wage rates catch up with inflation, and inflation brings recession and unemployment inevi tably in its wake

Stiglitz is a Keynesian inflationist, who doesn't seem to even be aware of the current accelerating price inflation at the producer level. The latest numbers show the producer price index has climbed by 7.2% over the last 12 months!

One has to ask Stigliz, with price inflation at the very base of the economy soaring, where's the improvement in employment? You would think Stiglitz would be at least humbled, if not embarrassed that he is arguing a theory that is contradicted by current facts.

In truth, there is no correlation between price inflation and employment (other than it boosts some wages above the minimum wage, but it has no impact on real wages) and current facts contradcit those who contend otherwiae. Bottom line: Stiglitz argument does nothing but prove Rothbard's observation that facts never get in the way of a Keynesian apologist for government manipulation of the money supply.