Ep. 132 The Phillips Curve and Keynesian La-La Land: The Alleged Relationship Between Unemployment and Inflation

31 March 2018     |     Tom Woods     |     10

Krugman insists on the validity of the Phillips Curve, which purports to show an inverse relationship between unemployment and inflation, but the causal mechanism Krugman sees between them is straight out of Keynesian la-la land.

Krugman Blog Post

Immaculate Inflation Strikes Again (Wonkish)” (March 27, 2018)

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Empire of the Institute,” by Paul Krugman

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  • http://2vnews.com 2VNews

    Is it not an effect of inflation if prices should have decreased but instead steadily increase?

  • martinbrock

    I was with Bob until he said that the Fed should raise rates. The Fed should permit markets to set rates (or it should cease to exist), but it should not raise rates.

    The Fed only controls nominally riskless rates, like the rates on Treasury securities. It creates a floor on risky rates by conspiring with the Treasury to offer these riskless rates.

    Lending in a free economy is inherently risky. A state offering an alternative to this risk is selling riskless income, taken from taxpayers (including inflation tax payers), to its crony capitalist constituents. These constituents are not only fat cats on Wall Street. Anyone with an FDIC insured savings account is a rent seeking, crony capitalist.

    As libertarians, we don’t want any riskless interest rates. We don’t want the Treasury selling bonds yielding a nominally riskless interest rate at all, and if the Treasury sells these bonds, we don’t want the Fed raising the rate further by selling bonds bought previously (by creating money) for this purpose.

    • Gunther Ruck

      I’m not often one to put words in others’ mouths, but I believe that Bob would agree 100% that the Fed should cease to exist. His point regarding the Fed raising rates is that the current interest rate is far, far below what the market rate would be. Therefore, by raising rates, the Fed would at least get closer to the market rate and thus reduce mal-investment to some extent. Of course it is impossible to know what exactly the market interest rate should be (hence why we should end the Fed), but it is reasonable to assume that the market interest rate would be much higher than the Fed’s current interest rate, given Americans’ lack of savings.

      • martinbrock

        There is no single interest rate, and the rates regulated by the Fed are not free market rates. Treasury rates and similar rates are never free market rates, because the state is not a private actor. Rates in FDIC insured bank accounts are not market rates either. Rates in Fed reserve accounts are not market rates. States sell security, while free market rates are always risky.

        Since I don’t want the state’s bonds (including state guaranteed bonds) to exist at all, why would I care that they yield 0%? I prefer that they yield -1,000,000%, because I don’t want anyone owning them ever.

        If you aren’t saving, because the riskless interest rate in your FDIC insured bank account is too low, then you wouldn’t be saving in a free credit market either. I don’t want the state to increase saving by entitling savers to tax revenue and similar monopoly rents. Riskier saving opportunities (market opportunities) still exist. Save with those.

  • oneroguecow

    The problem with using the Spanish inflation example is that the inflation in Spain stays mainly in the plain.

  • Mark D. Isaacs

    The alleged A.W. Phillips Curve converted me from the Keynesian Weltanschauung [“the darkside”] to Austrian Economics back in 1980. And, it is still a standard dogma in college Macro and Micro texts. It is the cornerstone of the Keyensian religion! <KEEP HAMMERING AWAY!

  • Peter H Andersen

    Cheap Mexican labor, cheap East European labor, trade liberalization rounds, technology. A bit early to skip that relationship as it will come back when we run out of cheap labor pools to tap etc..
    And monetary policy, will CBS really manage to get out of the swamp without paper money loosing of control credibility ? Next recession will show.

  • Bob_Robert

    Total utter bunk, virulently disproven by the entire 1970s. And yet it will not DIE.

    • Kristian

      Exactly had economics been true a hard empirical science (like our Keynesian friends purport) as soon as something arose that contradicted the theory (ie the 1970s inflation which was like the equivalent of astronomers finder out that we the sun centers the solar system)…the theory would have been thrown out!

  • Tyler Folger

    A great Herbener talk for a further take-down of the Phillips Curve

    https://www.youtube.com/watch?v=uyql_Kvq85Q