PHILLIPS CURVE-OR SPITBALL
Steinfels, Peter
PHILLIPS CURVE-OR SPITBALL? PETER STEINFELS A ppearing on this channel two weeks ago, I listed four major obstacles to full employment. First on the list was an economic relationship called the...
...Some analysts found little need for data...
...But many, perhaps a majority, would still accept the generalization that there is some kind of 'trade-off' between inflation and unemployment...
...had quite low unemployment rates- at times less than 3 percent-through most of the years 1951, 1952, and 1953...
...It is true that few, if any, professional economists would state the doctrine quite so crudely...
...This is not a radical or impractical goal.' Others, like Dr...
...Various strategies have been followed to overcome such fractiousness of the data...
...If all else fails, or seems inadequate, there is the useful motion of a shifting Phillips curve-that is, a relationship that changes over time...
...When men in high office tell that we must accept high unemployment rates for years into the future in order to bring inflation under control, they are echoing the Phillips-curve doctrine...
...But, as often happens, as the acceptance of the Phillips curve among economic policy-makers has spread, skeptics have arisen among prominent economists...
...yet, coincident with the low unemployment rates, we also had very low rates of price increase...
...But almost immediately the so-called Phillips curve became a major factor in employment policy...
...Some analysts say that the Phillips curve describes a short-run relationship...
...The relationship was so logical and so consistent with economic theory that, if the data did not plainly show it, there must be something wrong with the data...
...It was included in testimony to the Joint Economic Committee of Congress by Charles Killingsworth, a professor of industrial relations and economics at Michigan State University, and was published in the Fall 1976 issue of Dissent magazine...
...I conclude that this widely held belief lacks a substantial basis in either experience or analysis...
...The most common statement of the doctrine is that if you want less unemployment, you must accept more price inflation...
...Sometimes the data are plotted on charts, and assertions are made in the text that are not clearly supported by the charts...
...The belief that there is such a trade-off has become an important barrier standing in the way of a substantial reduction in unemployment...
...There were wage and price controls during part of this period, but their abrupt removal early in 1953 made no difference...
...Some approaches to the reduction of unemployment would be quite likely to generate upward pressure on the price level...
...The data invoked to provide empirical support for this concept have turned out to be fractious...
...Many economists, with varying degrees of success, tried to determine whether the Phillips curve relationship was applicable to the American experience...
...At least for the United States, the alleged relationship cannot be convincingly demonstrated in any straightforward manner...
...Cutting wages might induce some employers to hire more workers, he said, but he pointed out that this was certainly not the only or most effective way to reduce unemployment...
...Additional variables have been thrown into the equations, often with little effort to justify their use except for the fact that more satisfactory results were thereby produced...
...Yet a lucid explanation of the Phillips curve and its undue impact on economic policy is available...
...On the simplest level, for example, the data show that the U.S...
...Like the insistence on wage-cutting, the Phillips curve concept surely has a (Continued on page 799) Steinfels (Cont...
...Killingsworth is also chairman of the National Council on Employment Policy, and to him I happily yield the remainder of my time: "In 1958, Professor A. W. Phillips published an article entitled 'The Relations Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957' His findings were not entirely free from ambiguity and, at least by contemporary standards, his methodology was not impeccable...
...Despite these difficulties, the Phillips curve has gained increasing influence in policy-making...
...kernel of truth in it...
...But there is really no convincing proof of the widely accepted belief that any reduction in unemployment, no matter how much and no matter what means are employed, will cause more inflation...
...For example, Chairman Arthur F. Burns of the Federal Reserve System in a recent speech remarked: 'Whatever may have been true in the past, there is no longer a meaningful trade-off between unemployment and inflation.' Burns proposed a program of direct attack on what he presented as the real causes of inflation, and he prefaced a program for the reduction of unemployment by saying: 'I believe that the ultimate objective of labor market policies should be to eliminate all involuntary unemployment...
...and if you want less price inflation, you must accept more unemployment...
...Leads and lags of varying duration have been tried...
...The Phillips curve is not a household word -or so I have been informed by reliable sources within several households...
...Forty-five years ago, there was general agreement among the world's leading economists that the only way to reduce unemployment was to reduce wages...
...others say, a long-run relationship...
...On the other hand, in the last three years, we have had unemployment rates that were extremely high by postwar standards-and we have had very rapid price inflation as well...
...First on the list was an economic relationship called the "Phillips curve...
...One of the great achievements of J. M. Keynes was to demonstrate the fallacy of this doctrine...
...With the passage of time, the relationship tended to become one between the level of unemployment and rate of inflation (rather than the rate of change of money wage rates), although some analysts still recognize that a change in money wage rates is far from synonymous with a change in the general level of prices...
...Burns, have pointed out that to a large degree, recent increases in the price level have obviously been caused by factors wholly unrelated to the state of the labor market-the outstanding examples being worldwide-crop failures, the unilateral decisions of the Arab oil cartel, and the tightness, in the recent past, in world markets for raw materials...
Vol. 103 • December 1976 • No. 25
