Fooled by the Phillips Curve
TYLER, GUS
Countdown '76 FOOLED BY THE PHILLIPS CURVE BY GUS TYLER D uring a debate broadcast statewide last month by public television, Robert MacNeil of New York's WNET put a tough question to the five...
...The central figure in the myth-making, A. W. Phillips of Australian National University, is totally innocent of the mischief wrought in his name...
...Senate: What did they think of Jimmy Carter's about-face, which now has him emphasizing the need to reduce inflation instead of unemployment, as he had done earlier...
...In the time-honored Republican style—inherited from Eisenhower and Nixon—he has labeled the enemy inflation...
...If there is any relationship at all between unemployment and inflation, it appears to be quite the opposite of that suggested by the vulgarized version of the Phillips Curve...
...Interest rates" are the cost of a commodity called money that penetrates the economy...
...From 1947-53, unemployment went down constantly until in the last year of the period the jobless rate was under 3 per cent, yet "inflation'' was under 1 per cent...
...The Republicans have their routine way of fighting inflation: Cut the budget...
...Consequently, before some audiences, Carter fires away at inflation...
...We are still being told not only that we can't have full employment without inflation, but that anyone who suggests otherwise is a faker...
...But the startling reversal of the classic cliches inspired little or no comment from the media...
...MacNeil, you can't get the right answer because you're asking the wrong question...
...Their program was effective...
...While some of the talk from Paul O'Dwyer and Daniel P. Moynihan made sense, nobody came out with what should have been said: "Mr...
...By January 1974, our GNP was actually shrinking at the rate of 2 per cent...
...Unemployment rose, of course...
...As Paul Samuelson of MIT bluntly put it, if you look closely at recent recessions you will find a label on them: "Made in Washington, D.C...
...The prime worry of the 10 is unemployment, making a living...
...MacNeil probably would have been shocked by such a reply...
...The New York Times headlined the report: "Unemployment and Prices Both Decline...
...This mean misinterpretation of Phillips served the White House well, providing the righteous rationale for manufacturing unemployment...
...When activity slackens, a man driving a truck delivers fewer parcels a day...
...It only demonstrated that when employment was high, wages went up...
...Vulgarizers, however, turned the laborious study into a propaganda slogan...
...1. Recessions raise unit costs...
...Inflation and unemployment go hand in hand, and it is nonsense to suggest some imaginary trade-off between them...
...it is a powerful political fiction that, in the mouths of well-intentioned but poorly informed media people, works for Ford and against Carter...
...Countdown '76 FOOLED BY THE PHILLIPS CURVE BY GUS TYLER D uring a debate broadcast statewide last month by public television, Robert MacNeil of New York's WNET put a tough question to the five candidates then vying for the Democratic nomination to the U.S...
...If you assume that 10 per cent of the labor force is jobless, then 90 per cent is on the job...
...A dramatic case in point is the recent request of the Consolidated Edison Company for a rate increase because New York City and other large public customers are dropping the utility to buy their electricity from the New York State Power Authority...
...A recent study by economist Gardiner Means reveals that in the inflationary period June '73-June '74, average price increases in "concentrated" industries were almost 22 per cent, while competitive industries showed an increase of less than 2 per cent...
...Since Con Ed has a tremendous fixed overhead, it has to charge its remaining customers more to stay in business...
...Since a wage increase need not mean a price increase—because productivity has risen, because overhead is fully utilized, because raw materials may be cheaper, etc.?there is nothing in the Phillips finding to warrant the conclusion that unemployment and inflation are at opposite ends of a seesaw...
...Had the proponents of "cooling" bothered to study the relation between employment and prices in the United States in the post-World War II years, they would have found that a low unemployment rate need not produce a high inflation rate...
...Those economic slumps were deliberately designed to "cool the economy," to lower the temperature of the overheated business machine...
...After Nixon's reinauguration in 1973, the rate of growth began to decline...
...Simultaneously, the inflation figure leaped upward into double digits...
...When addressing organized labor groups, where there is institutionalized worry over unemployment, Carter can harangue against the loss of work to great hurrahs...
...Evidently, as unemployment rises, so do prices...
...Last winter, he wiped out the basis for the entire GOP economic plan with the simple declaration that, "Whatever may have been true in the past, there is no longer a meaningful trade-off between unemployment and inflation.' Interestingly, the Economic Report of the President of the United States for 1976 also declares on page four: "Inflation and unemployment are not opposite but related symptoms of an unhealthy economy...
...In the one year from January '69 to January '70, the rate of growth for the economy fell from more than 3 per cent to below zero...
...When the cost of money goes up, all costs go up...
...In the case of the automobile industry, for example, this involves about 75 per cent of all costs in the manufacture of a car...
...Hence, Ford and Carter have to choose between the two evils...
...There is a logic to such a correlation—reasons embedded in the nature of the American economy and the way it is "cooled...
...Carter, as a traditional Democrat, has no such easy formula...
...the prime concern of the 90 is inflation, making ends meet...
...To charge the Republicans with having manufactured unemployment is not to engage in propagandistic hyperbole...
...For his query merely echoed what the media has all along assumed: It is impossible to reduce unemployment and inflation at the same time...
...Then the economy began to expand again—some say, to help reelect Nixon—from 1970 on so that by January 1972 the rate of growth had risen to 6 per cent...
...Proponents of the Phillips doctrine claim this is impossible...
...So they said a variety of things, like unemployment was the bigger danger, or what Jimmy says before Election Day is less important than what he would do after Inauguration Day...
...Instead, the rate rose from 4.8 to 6 per cent...
...This mischievous myth is more than an economic fallacy...
...airplanes fly far below capacity, etc...
...As if to confirm the "deflationary" impact of higher employment, in February of this year the Wholesale Price Index declined by five-tenths of a per cent, while the unemployment rate fell by about 2 per cent...
...The political appeal of this position is bound to be widespread...
...to fight unemployment, you must be ready to live with inflation...
...But even after oil and grain prices stabilized, the inflation rate remained high while unemployment hovered around 8 per cent...
...In our economy, marked by heavily capital intensive operations, the major expenses of production are "fixed" (land, buildings, machinery, debt service, local taxes, administrative salaries...
...No doubt, opec pressure and Russian purchases of American grain helped push inflation beyond normal levels...
...In the third quarter of 1975, productivity in the private sector of the economy rose by an incredible 11 per cent...
...a salesclerk makes fewer sales...
...Similarly, factory people cut down their pace when there is little work at hand...
...The mythology was too powerful...
...2. During the recessions productivity falls...
...A warm?not a cool—economy lowers costs by stimulating productivity...
...According to Republican mythology, prices should have skyrocketed...
...When an auto plant is running at full capacity—say, turning out 1,000 cars a week—the unit cost is determined by dividing total expenditures by 1,000...
...Even the admission of Federal Reserve Board Chairman Arthur Burns that the Phillips Curve had fallen flat received minimal attention...
...4. High interest rates ?an instrument used to slow the economy —are inherently inflationary...
...This, too, has an instant attraction for the middle American, who quite properly resents his present tax burden...
...Between 1961-65, unemployment kept falling while the inflation rate ran between 1-2 per cent a year...
...If a candidate does not make his selection clear, he is doubletalking the American people...
...If, as a result of a recession, the plant runs at half capacity, then all costs are divided by 500 and unit costs are almost doubled...
...By the measure of the media, this makes Carter a double-dealer and Ford a man of principle...
...Productivity rose because there was a lift in the economy...
...In 1968, the last year a Democrat held the Presidency and the height of our Vietnam involvement, the unemployment rate was 3.6 per cent and inflation reached 4.8 per cent...
...Instead, the inflation rate fell from 6 per cent to 4 per cent...
...So we know through facts, through logic, and through the admissions of Burns and President Ford that the Phillips philosophy is clearly phoney...
...The panel seemed embarrassed...
...Surely workers did not suddenly become that much more efficient, nor did the system of production change so miraculously...
...The journalists' unfounded preoccupation with the connection between unemployment and inflation is due less to malevolence than ignorance...
...His famous paper published in 1959, "The Relations Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957," never established a correlation between unemployment and prices...
...By the prevailing logic of the White House, this should have checked inflation...
...the other 25 per cent of the costs is variable labor and raw (materials...
...Ford has had little trouble making a choice...
...In addition, if Uncle Sam lowers his demand for capital, there will be more money available for private industry to invest in business expansion...
...The media came to accept the hocus pocus as divine writ...
...Nevertheless, just weeks before a supposedly enlightened electorate is to choose a party to lead the country, it continues to be treated as divine writ...
...The real villains here are those in the Nixon White House and elsewhere who took a scientific finding—the Phillips Curve—and turned it into a highly unscientific guide for economic policy...
...But as a shrewd and highly professional politico who keeps a sharp eye on the polls, he knows that if the electorate has to choose between unemployment and inflation, they will name rising prices as their first foe...
...If prices are held in check, people will buy more and thereby generate more jobs...
...They were reluctant to repudiate their party's Presidential standard bearer, yet they did not want to be identified with his waffling...
...It was this rate of inflation that inspired the Nixonomicists to "cool" the economy...
...Concentrated ownership, in turn, spurs artificially high pricing...
...The more sophisticated Republican argument further suggests the antiinflationary drive will promote employment...
...To fight inflation, you must tolerate unemployment...
...Yet it happened, and continued to happen regularly during the following months...
...3. Recessions encourage oligopoly and monopoly by wiping out the small competitor...
...fiction overcame fact...
Vol. 59 • October 1971 • No. 20
