More Nonsense with the Phillips Curve

At the New York Times, Neil Irwin wrote an article that discusses the Federal Reserve's dependence on the long discredited Phillips Curve.

Caroline Baum also posted a related article at Economics21.

The Phillips Curve is a key tenet of Keynesian thought. It purports to show an inverse relationship between the the rate of inflation and the rate of unemployment. 

One would think the stagflation era of the late 1970s and early 1980s, when the U.S. economy experienced high levels of both inflation and unemployment, would relegate the Phillips Curve to the dustbin of history. Unfortunately Keynesians never give up that easily. According to Irwin, Fed chairwoman Janet Yellen said the Phillips Curve "is a core component of every realistic macroeconomic model."

Little wonder the U.S. economy is mired in such a pathetic "recovery" with geniuses like Yellen and her ilk burdening the economy with policy nonsense that goes by the acronyms ZIRP (zero interest-rate policy) and QE (quantitative easing).

Yellen is convinced that if the unemployment rate falls below the "natural" rate of unemployment (whatever that is), inflation is likely to accelerate. The thinking here is that low rates of unemployment will drive up wages and eventually result in higher prices for goods and services. Such a theory assumes that labor markets are inflexible and that companies can't access abundant sources of labor overseas.

The really perverse aspect of the Phillips Curve is that it assumes that too many people working and prospering is inflationary. Actually, the truth is just the opposite. With such thinking, is it any wonder that economic output is significantly below its potential?

As Ralph Benko notes at The Pulse 2016, The House of Representatives passed legislation (H.R. 3189, Fed Oversight Reform and Modernization Act of 2015) on November 19 that promises to reform the way the Fed sets monetary policy. Naturally, Janet Yellen is vehemently opposed and President Obama promises a veto if the bill makes it through the Senate and reaches his desk.

Of course, any reform that minimizes the impact of the Fed's flawed economic models, such as the Phillips Curve, is most welcome. If it prevents further Fed market manipulation in the form of ZIRP and QE, the economy can only benefit.