“The Phillips Curve is alive,” said Fed Chair Janet Yellen at Wednesday’s post FOMC meeting press conference. We’ll offer some remarks on this in just a moment, including why Yellen is toast. But first we must put her utterances into proper context.
This week, at a business meeting, we experienced the full veracity of Brandolini’s Law. If you happen to be ignorant of Brandolini’s Law, we must apologize. For we must forever end your bliss.
Alberto Brandolini introduces his magnificent, if sobering, law to the world.
Brandolini’s Law, or the BS Asymmetry Principle, as formulated by Italian programmer Alberto Brandolini, says: “The amount of energy needed to refute BS is an order of magnitude bigger than to produce it.”
In other words, it takes 10-times the energy to debunk a falsehood than it takes to spew it. Certainly, Brandolini is on to something. In fact, as far as we can tell, there are countless applications of this law.
Money, policy, economics. You name it. There’s an abundance of nonsense out there for each of these subjects. Moreover, it’s exhausting to negate. But nowhere else does money, policy, and economics mix with such special vigor than in the dishonorable world of central banking.
Fiat money. Legal tender. ZIRP. NIRP. Operation twist. Quantitative easing. Can you think of another profession out there that so dangerously operates upon a foundation of pure BS? Janet Yellen, no doubt, is in the business of spewing nonsense. It’s a cornerstone job function of central bankers. But, alas, she isn’t very good at it.
In fact, Ms. Yellen picks whatever data seem convenient…which is actually not a criticism. Even if a central planner were completely aware of all the data that exist at a given point in time and could firmly rely on their correctness, central planning of the economy would still be impossible.
For drivel to be effective it must be carried forward with unequivocal confidence. It can be incoherent. It can be contradictory. It can be complete gibberish. It can be all of these things, and more. But it can’t be hesitant.
Yet everything that comes out of Yellen’s mouth is tentative and unsure. She hedges. She prevaricates. She dithers. She evades. What’s more, she does so with the confidence of silly putty. Nonetheless, we won’t give her a pass.
This cartoon will probably never get old…
As noted above, at Wednesday’s press conference Yellen remarked that “The Philips Curve is alive.” This, indeed, is utter BS…driveled out in just five words. Now, as established by Brandolini’s Law, we must expend 10-times the energy – or more – to refute it.
Why Janet Yellen is Toast
The Phillips curve, if you didn’t know, says there’s an inverse relationship between inflation and unemployment. When unemployment goes down, inflation goes up. Conversely, when unemployment goes up, inflation goes down.
The curve was produced by economist William Phillips using data for wage rates and unemployment in the United Kingdom in the years 1913 to 1948. Like any economic theory derived from empirical data, the practitioners always miss one very important insight. Namely, that the economy isn’t stagnant; it’s dynamic. Its inputs change over time.
The modern-day adaption of the Phillips curve is known as “NAIRU” (or “non-accelerating inflation rate of employment”), the theoretical way for which was paved by Keynesian economist Abba Lerner in 1951 in “The Economics of Employment” (Lerner inter alia strongly believed in socialist central planning, natch). The study of wage rates and employment published by William Phillips actually came later, in 1958. In the 1960s, Samuelson and Solow published papers on the topic, while the term NAIRU was coined by Friedman in the 70s – he began to differentiate between “short-run” and “long-run” Phillips curve effects in a vain attempt to explain the stagflation of the 70s. In a word, it is all complete balderdash – which should be glaringly obvious to anyone looking at the chart above. Supposedly, the two data series should be negatively correlated at all times. As Henry Hazlitt showed, if one looks at the post war data from 1946 to the late 1970s, it is in reality no better than a coin toss – the Phillips curve seemingly “worked” about half of the time. It hasn’t gotten any better since. So Ms. Yellen might as well have said “coin tosses are alive and well”. If anything, the Phillips curve shows why one cannot possibly construct a valid economic theory on the basis of historical data. Not surprisingly, at least 7 Nobel Prizes were won in the late 70s/ early 80s for papers debunking it! Not that it is difficult to debunk – it is already nonsense from a theoretical perspective. But Keynesians have no capital theory, and look at the economy in terms of aggregates and equilibrium equations. This has nothing to do with the real world, it is ultimately just a poor attempt to make economics more like physics. Of course, admitting to the fact that this is approach makes no sense would imply that central planners are surplus to requirements. A great many people would have to look for a real job – click to enlarge.
Perhaps, the Phillips curve provides a snapshot of what reality was like during a certain time and place. But that certain time and place was prior to globalization, involved an on again off again pseudo gold exchange standard, and encompassed the Great Depression and two World Wars.
Extrapolating that reality into the present and attempting to fabricate new data to support it is an application of absurdity. Since Phillips first derived the Phillips Curve there have been lengthy episodes that are inconsistent with his original findings. Particularly, the late 1970s – when inflation and unemployment went vertical in tandem.
How could it be that both went up at once? Weren’t they mutually exclusive? According to the Phillips Curve this was impossible. Yet it happened all the same. In short, the Phillips Curve is a BS theory.
The fact that Yellen still spews this nonsense is intolerable and insulting. This, among other reasons, is why she is toast. Her four-year appointment is set to end in February 2018. We suspect she won’t make it much past the next Presidential inauguration.
Chart by: St. Louis Federal Reserve Research
Chart and image captions by PT
M N. Gordon is the editor and publisher of the Economic Prism.
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