Semi-Daily Journal Archive

The Blogspot archive of the weblog of J. Bradford DeLong, Professor of Economics and Chair of the PEIS major at U.C. Berkeley, a Research Associate of the National Bureau of Economic Research, and former Deputy Assistant Secretary of the U.S. Treasury.

Thursday, August 24, 2006

Knzn Reads Arthur Laffer So We Don't Have to

The mysterious, vowelless knzn treats Arthur Laffer in an appropriate manner:

Economics and...: Dangerous Curve: Arthur Laffer, on the opinion page of today’s Wall Street Journal (hat tip to Dave Altig), writes:

You'd have to dig pretty far down in the duffle bag of economists to find one who actually believes in the Philips Curve--the idea that rapid growth causes inflation.

It appears that, all these years that I’ve been studying the Phillips curve, I’ve been under a wrong impression about what the Phillips curve was. You see, naïve as I was, I thought that demand was the causal factor. I thought that excess demand caused both faster growth and rising inflation rates. I had this crazy idea that maybe, faced with excess demand, firms would both raise prices and increase production, thus increasing the inflation rate and increasing the growth of output at the same time. And I also thought that this excess demand would give firms a reason to hire more workers, even if they had to pay higher wages to do so, so the unemployment rate would fall and wages would rise. Seems like a pretty reasonable theory to me; I doubt you would have to dig very far down in the duffle bag to find an economist who believes it. But apparently, this is not what the Phillips curve is about.

No, according to Laffer, the Phillips curve is the idea that growth itself causes inflation. That is a really dumb theory. No wonder so few of us actually believe it. All this time I thought I believed in the Phillips curve, when actually what I believed was something quite different.

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