Both Krugman and Summers can be right—just not always both at the same time. Rethinking the use of the 1970s experience to understand the 2020s inflation: macroeconomic misfires, and why humility...
I do wonder why when discussing inflation and the Phillips curve trade off, one rarely if ever sees a discussion of the change in the share of national income that goes to wages. Back in the 1970’s the share of GDP that was wages ranged from nearly 52% at the beginning of the decade down to about 47.5 at the end. Today it is about 42%. Larry’s belief that causing unemployment to rise to personally harmful levels might have had some efficacy back when wage were the majority of GDP. It seems that today that is no longer the case. Capital is far more important and far more likely to have the means to raise prices leading to increasing profits without the need to have the push of paying higher wages. The changes in technology that you often focus on have been very significant in the last fifty years and have had real effects on the structure of the economy and the likelihood of sticky inflation.
"Paul Krugman: ‘On any given macroeconomic issue… you can count on either Larry [Summers] or me having been right. The problem is you don't know which one…"
Clever but wrong.
Neither was right about 2020 policy and at least part of the reason is that both are stuck in a one good, one input one relative price model of the economy. In that model there is "a" Phillips curve if sticky nominal wages stuck at too high a level can be reduced with inflation and if real wages are sticky you need '70's inflation to stave off recession.
I agree that inflation expectations remained anchored but I have a warning about using the TIPS breakeven. Regular treasury securities are extraordinarily liquid so they have a low return. The TIPS breaker is slightly lower than expected inflation. Importantly this difference gets larger during times of trouble (when in times of trouble mother Mary came to me; speaking words of wisdom “buy tbills buy tbills buy tbill”)
The natural rate of inflation is described in (among other places) an article by Akerlof et al (no surprise about 1st author) also another paper by, I think, Bill Dickens. Importantly the model depends totally on different changes in real wages consistent with full employment in different local labor markets (as you note in your second point). The other assumption is downward nominal rigidity (nominal wages never go down). The result is a downward sloping long term Phillips curve (with actual inflation equal to expected inflation.
Akerlof, Dickens, & Perry, IIRC. There are also interesting ideas about neutral rates of unemployment and inflation in but only implicit in Blinder & Yellen "The Fabulous Decade":
> Robert Waldmann: I agree that inflation expectations remained anchored but I have a warning about using the TIPS breakeven. Regular treasury securities are extraordinarily liquid so they have a low return. The TIPS breaker is slightly lower than expected inflation. Importantly this difference gets larger during times of trouble (when in times of trouble mother Mary came to me; speaking words of wisdom “buy tbills buy tbills buy tbill”)
> The natural rate of inflation is described in (among other places) an article by Akerlof et al (no surprise about 1st author) also another paper by, I think, Bill Dickens. Importantly the model depends totally on different changes in real wages consistent with full employment in different local labor markets (as you note in your second point). The other assumption is downward nominal rigidity (nominal wages never go down). The result is a downward sloping long term Phillips curve (with actual inflation equal to expected inflation.
I think what you call the "natural rate of unemployment" is the full employment rate at the target rate of inflation when the target rate has been chosen to maximize real income growth (~ but only ~= minimizing unemployment).
I do wonder why when discussing inflation and the Phillips curve trade off, one rarely if ever sees a discussion of the change in the share of national income that goes to wages. Back in the 1970’s the share of GDP that was wages ranged from nearly 52% at the beginning of the decade down to about 47.5 at the end. Today it is about 42%. Larry’s belief that causing unemployment to rise to personally harmful levels might have had some efficacy back when wage were the majority of GDP. It seems that today that is no longer the case. Capital is far more important and far more likely to have the means to raise prices leading to increasing profits without the need to have the push of paying higher wages. The changes in technology that you often focus on have been very significant in the last fifty years and have had real effects on the structure of the economy and the likelihood of sticky inflation.
"Rare supply shocks"
a) Are not so rare
b) Are "shocks only if they affect different goods differentially
c) Require over-target inflation to facilitate changes in relative prices
d) The same is true of demand shocks
e) Positive AND and negative
"Paul Krugman: ‘On any given macroeconomic issue… you can count on either Larry [Summers] or me having been right. The problem is you don't know which one…"
Clever but wrong.
Neither was right about 2020 policy and at least part of the reason is that both are stuck in a one good, one input one relative price model of the economy. In that model there is "a" Phillips curve if sticky nominal wages stuck at too high a level can be reduced with inflation and if real wages are sticky you need '70's inflation to stave off recession.
I agree that inflation expectations remained anchored but I have a warning about using the TIPS breakeven. Regular treasury securities are extraordinarily liquid so they have a low return. The TIPS breaker is slightly lower than expected inflation. Importantly this difference gets larger during times of trouble (when in times of trouble mother Mary came to me; speaking words of wisdom “buy tbills buy tbills buy tbill”)
The natural rate of inflation is described in (among other places) an article by Akerlof et al (no surprise about 1st author) also another paper by, I think, Bill Dickens. Importantly the model depends totally on different changes in real wages consistent with full employment in different local labor markets (as you note in your second point). The other assumption is downward nominal rigidity (nominal wages never go down). The result is a downward sloping long term Phillips curve (with actual inflation equal to expected inflation.
Akerlof, Dickens, & Perry, IIRC. There are also interesting ideas about neutral rates of unemployment and inflation in but only implicit in Blinder & Yellen "The Fabulous Decade":
> Robert Waldmann: I agree that inflation expectations remained anchored but I have a warning about using the TIPS breakeven. Regular treasury securities are extraordinarily liquid so they have a low return. The TIPS breaker is slightly lower than expected inflation. Importantly this difference gets larger during times of trouble (when in times of trouble mother Mary came to me; speaking words of wisdom “buy tbills buy tbills buy tbill”)
> The natural rate of inflation is described in (among other places) an article by Akerlof et al (no surprise about 1st author) also another paper by, I think, Bill Dickens. Importantly the model depends totally on different changes in real wages consistent with full employment in different local labor markets (as you note in your second point). The other assumption is downward nominal rigidity (nominal wages never go down). The result is a downward sloping long term Phillips curve (with actual inflation equal to expected inflation.
I think what you call the "natural rate of unemployment" is the full employment rate at the target rate of inflation when the target rate has been chosen to maximize real income growth (~ but only ~= minimizing unemployment).
The above begs the question: what parts of the 70s would need to be replicated today to produce that decade long response?
I don't know, so I'm just musing.
For 20 odd years post WW2 everyone was Keynesian. Data collection was strict and accurate and inventory over-accumulations were dealt with.
Then came Nixon, Arthur Burns and the desire to stay a 2nd term.
This invited a "weighing" which was the 70s.
Whether Trump's actions lead to another weighing of US assets seems a pretty good bet.
We are not nearly as dominant a nation in the world as we were in the 70s.