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The Tyranny of the “Phillips Curve”

Since back in the days when some of us were in high school several decades ago, we’ve been served up the dumbest economic concept of all time: the Phillips Curve. This was the lame-brained “theory” by neo-Keynesian economists of the 1960s and 1970s that to slow inflation the Fed needs to raise unemployment and slow down economic growth.

The whole concept of an inverse relationship between unemployment and inflation blew up when it was put into practice in the mid-1970s and the result was rising inflation AND rising unemployment. Then in the 1980s and ‘90s with free market supply side policies in place, we had low inflation and low unemployment.

That should have been the end of buying the Phillips Curve snake oil. Except that we’ve learned in recent years that when the left’s theories are contradicted by the real world, they stick with the theory. If the laboratory mice aren’t behaving as predicted, the problem isn’t the theory, it’s the mice.

The Theory Blows Up

Which brings us to the high priests in the temple of the Federal Reserve Board – who gave us 9.2% inflation last year. Now what are they doing? Still singing out of the Phillips Curve hymnal. Just listen to Jerome Powell explaining the Fed strategy back in August: “Getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions” – i.e., fewer people working.

Then there was this from Fed governor Christopher Waller explaining the latest Fed decision: “While I am ENCOURAGED BY the early signs of moderating economic activity in the fourth quarter, inflation is still too high.” Then he added: “I am increasingly confident that policy is currently well positioned to SLOW THE ECONOMY and get inflation back to 2 percent.” (emphasis added)” Christopher Waller, November 28, 2023.

This is dangerous nonsense. We still have 5 to 6 million working age men out of the workforce. The economy’s average growth post-Covid over the last two years has averaged less than 2% and this quarter GDP is now reading at a measly 1.2%. Congratulations, Dr. Powell. There’s that below-trend GDP you were hoping for.

The Fed should have long ago tossed out the Phillips Curve sophistry. As Arthur Laffer has put it: “If the economy produces more apples, the price of apples goes down, it doesn’t go up.”

We are for prosperity. This Fed is for private sector austerity and fine with government growth (does anyone recall Fed chairman Jerome Powell advising the government to stop spending so much money as Paul Volcker and Alan Greenspan routinely did?) And that’s what they’ve delivered since Biden came into office.

Then they wonder why 70% of voters are unhappy.

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