Wednesday, July 17, 2019

Alexandria Ocasio-Cortez Becomes a Rothbardian For an All Too Brief Minute

Alexandria Ocasio-Cortez
Martin Sandbu at the Financial Times sets the scene:
Incongruous does not even begin to capture the sudden outbreak of harmony between President Donald Trump’s economic policy adviser and a star of the Democratic party’s left wing.

Larry Kudlow, director of the White House’s National Economic Council, offered effusive praise last week to Alexandria Ocasio-Cortez, the Democratic congresswoman who has inspired a mass following among the younger and more leftwing ranks of her party, after her quizzing of Jay Powell, Federal Reserve chair, in Congress.

She asked Mr Powell about how the Phillips curve — the relationship between inflation and unemployment — seemed to have vanished over time. Mr Powell confirmed there was at most “a faint heartbeat” of inflationary pressures from tight labour markets, measured by unemployment rates that have long been below the “sustainable” levels estimated by the Fed...

Mr Kudlow was enraptured. ““She got it right,” he reportedly gushed, congratulating her on getting the Fed chair to confirm “that the Phillips curve is dead”.
Of course, this revelation is nothing new for students of the great Austrian school economist, Murray Rothbard.

Rothbard wrote over 30 years ago in 1984:
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 nowadays unemployment ranges between eight and 11 percent, and inflation between five and 13 percent. 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.
Unfortunately, the only thing AOC and Kudlow get is that the Phillips curve is dead. They don't get (or won't admit) that money printing distorts the economy. Their view is that the Phillips curve is dead (correct) and therefore the Fed should now print away (incorrect).

For them to understand the dangers in money printing and how it causes boom and busts, they would need to go beyond what Rothbard wrote about the Phillips curve and read what he wrote about Austrian school business cycle theory and how money printing always distorts the structure of the economy.

AOC needs to become much more than a one-minute Rothbardian. I recommend to her Making Economic Sense by Rothbard as the best way to start.


1 comment:

  1. Robert,
    On your recommendation I’m reading Making Economic Sense. It’s a great read. And I feel I’ll have a much better understanding of Economics, free markets, etc. once I’m finished.

    Thanks for recommendation.