December 23, 2023
Source: Bigstock
Repeat after me, class: Growth does NOT cause inflation. Write it on the blackboard 100 times.
For decades, the economics profession has been trying to tell us all just the opposite. They keep shoveling out 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 Federal Reserve 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.
“Growth does NOT cause inflation.”
Over the past 40 years or so, if there is a relationship between unemployment and inflation, they tend to run together more often than in an inverse relationship. As my colleague at the Committee to Unleash Prosperity, David Simon, puts it: “The historical evidence shows the opposite of the Phillips Curve theory: increasing inflation in a particular year increases the unemployment rate in the following year — and that reducing inflation in a particular year reduces the unemployment rate in the following year.”
This concrete evidence should be the end of the myth of the Phillips Curve. 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.
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 discredited Phillips Curve hymnal. Just listen to Jerome Powell explaining the Fed strategy back in August: “Getting inflation sustainably back down to 2% 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%.” — Christopher Waller, Nov. 28, 2023 (emphasis added).