The Phillips curve has flattened but not the U.S. inequality

U.S. President Joe Biden’s American Rescue Plan (ARP) – $ 1 trillion this year, then another $ 900 billion, promising $ 3 trillion for infrastructure and energy has shaken many economists. Are their fears justified? Bank and bond-market economists have previously yelled and ignored the wolf. A year ago, many of them warned that the $ 2.2 trillion case law would trigger high inflation by drastically increasing the money supply. This did not happen.

Notable among critics were neo-Keynesians such as Harvard’s Lawrence Summers and his Acolites. Summer has a different analysis. It was his uncle Paul Samuelson who started the Phillips curve in 1960 with Robert Solo. This model provided the most successful empirical predictions in financial history in the first decade and has been the economic rule ever since.

Drawing historical data, the Phillips curve suggests an inverse relationship between inflation and unemployment. This day seems to be bothering the summers. The various rescue and support packages of the US are enormous, with ARP alone accounting for 6% of GDP. The full range of federal spending is projected to reach 13% of gross domestic product (GDP). But the traditionally estimated ‘output gap’ is one-fourth or less of that.

Moreover, the official unemployment rate, at 6.2%, is not far from the level of 4% that is generally taken as ‘full employment’. Those who receive relief payments are more likely to be at the bottom of the income distribution, and therefore, in theory, should spend more and save less on it. Through the old-fashioned Phillips-curve logic, the new ‘stimulus’ can increase the unemployment rate to full employment and the inflation rate from 0.6% to at least 2-3% by 2020. But that curve has had a rough ride since 1969. For about 25 years after that, the dominant economic idea was that it was not a down-slope curve, but a vertical one, at least in the ‘long run’. This means that an attempt to reduce unemployment beyond the ‘natural rate’ or the ‘non-accelerating inflation rate’ (NAIRU) will produce higher inflation. Over the summer, I am sure there is more faith in US capitalism than this opinion suggests; And yet, he is always close to this absurd way of thinking.

Reality, however, has eradicated the Phillips curve. Inflation has not been detected since the early 1980s and mid-1990s and low unemployment has not tended to bring it about. The relation is not vertical or down-sloping, but flat; If it ever existed it would not exist. I pointed this out in a 1997 article, Time to Ditch the Nair.

What happened?

The answer is almost the same: China. Since the early 1980s, the U.S. dollar has begun to rise, suppressing America’s Midwest industrial base and trade unions. Falling global commodity prices have made China the world’s leading consumer goods manufacturer. Meanwhile, the forces that pushed up U.S. consumer prices after 1970 — the dollar devaluation, the rise in oil-prices and the cost-of-living adjustments of factory workers — have all disappeared. Since full employment was never the culprit, full employment and inflation did not return until the Kovid epidemic in the late 1990s. In addition, oil-price fluctuations are no longer a trend to feed wages and other prices, because American jobs are now primarily in services, where labor is the price you pay.

Is China now taking advantage of US high demand to raise prices? No, because Chinese companies fear losing market share to other countries, and the rewards of its economic ethics are not profit maximization, but social stability, sustainable product growth and cost reduction through learning and new technologies. Such companies do not alienate their customers by raising prices to plunder a little extra demand. There may be some late deliveries and some price increase due to high shipping costs and high wages in China. But the real inflation risk comes only from those who light the flames of war with China. War is always inflation; War with our largest supplier of goods becomes an inflation nightmare. Less than this, US households do not suffer from a shortage of products. What they lack is trust and security. Most of the biden money will not go to China, but towards rent, mortgages, utilities and debt repayment savings in the future. Yes, some services can be spent on home repairs and other neglected expenses. A good portion of the rest goes into stocks, bonds and real estate. It is mainly here that prices rise, further enriching those who already have such assets.

The already enormous wealth gap is widening. Since stocks and bonds, existing houses and land are not newly produced consumer goods, these price increases do not appear in the indicators that measure inflation. In the S&P 500 and real estate platform district, we have to look for them, where rising prices are celebrated as a good thing.

Twice the big lesson. First, mainstream neo-Keynesian macroeconomics in the 1960s was not a useful guide to understanding an American economy that is now completely covered by other parts of the world and has been fundamentally redesigned by the rise of China. Second, America’s problems of inequality and accuracy are not really problems of physical scarcity. They reflect the sustainable maldistribution of wealth and power.

Kevin James. Galbrait at the University of Texas at Austin Lyndon b. Johnson School of Public Affairs, professor of government and government / business relations chair.

© 2021 / Project Syndicate

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