The Non-Accelerating Inflation Rate of Unemployment should have been buried decades ago - Politics Forum.org | PoFo

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#15201584
The NAIRU should have been buried decades ago
NAIRU means the Non-Accelerating Inflation Rate of Unemployment, also called natural rate of UE.

By 1983 Mainstream economists had introduced NAIRU. Several progressive economists published peer reviewed papers to show this shift in thinking – away from a commitment to full employment – was based on a lie. The whole NAIRU story was a fraud. They were largely ignored. Other progressive economists were also producing credible research that refuted the main propositions. Some 38 years later, the European Central Bank has produced a research paper which now supports the position progressive economists took back then.

The ECB Working Paper uses OECD data for 29 countries to look at “the dynamics of unemployment (= u) and its natural rate (= u*)”. Here u* is also called the NAIRU. This u* (NAIRU) is, of course, unobservable, being a theoretical construct in mainstream macroeconomics. So it has to be proxied – estimated – from real world data using a range of estimation techniques, however all of them are *deeply* flawed.
The result is that the NAIRU or natural rate of unemployment just rises and falls along with unemployment with some time lag and *slight* rate changes. Both the links below include 1 or many graphs to illustrate how the 2 track along with each other. The blog is much shorter.

Link to paper put out this week by the European Central Bank => https://www.ecb.europa.eu/pub/pdf/scpwp ... 96b.en.pdf

Link to Bill's blog => http://bilbo.economicoutlook.net/blog/?p=48837

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#15201602
wat0n wrote:That's in line with what mainstream models predict. There is no reason to believe the NAIRU is stable.


Well, this one line reply is not clear. "Stable" is not a word I would have expected to see in this context.

Anyone who clicks on Bill's blog will get to read for themselves that Dr. Prof. Bill Mitchell thinks about NAIRU. Short answer, he thinks it was a lie from the start, a fraud. It is nonsense.

Much of what I posted above was a rewording of what he wrote.

He says that the purpose of NAIRU is to provide a hook for politicians to hang their hat on while they stop the Fed. from doing its job under the law to see the US has "full employment" and low inflation. Since 1983 or before the Fed. has targeted low inflation and let unemployment rise because that is what the corp's owners want and NAIRU is the excuse they use to CTA(ss).
. . . About a year ago, the Fed. announced that it would stop using NAIRU to act before there is real inflation, and instead wait to see if there is real inflation before they act.

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#15202065
Steve_American wrote:The NAIRU should have been buried decades ago
NAIRU means the Non-Accelerating Inflation Rate of Unemployment, also called natural rate of UE.

NAIRU is just another neoclassical fraud contrived to obscure the real causes of inflation (excessive funding of asset bubbles by private commercial banks) and unemployment (landowner privilege).
#15203924
Steve_American wrote:Link to paper put out this week by the European Central Bank => https://www.ecb.europa.eu/pub/pdf/scpwp ... 96b.en.pdf


I take issue with the introduction of this paper:

According to mainstream macroeconomics, the long-run level of unemployment, or natural
rate, is determined by imperfections in the labor market. Monetary policy and other determinants of
aggregate demand can influence the fluctuations of unemployment around the natural rate but not
the natural rate itself. This theory underlies the policies of many central banks, which focus on the
inflation rate because it is a variable that monetary policy controls in the long run.
Some economists, however, dissent from this mainstream view. They argue that
unemployment exhibits hysteresis, a concept introduced in 1986 by Blanchard and Summers.


Hysteresis is not a part of mainstream econ? Since when? And I suppose Blanchard and Summers are non-mainstream economists?

P.S.: That 1986 paper has 2924 citations.
#15203937
Rugoz wrote:I take issue with the introduction of this paper:



Hysteresis is not a part of mainstream econ? Since when? And I suppose Blanchard and Summers are non-mainstream economists?

P.S.: That 1986 paper has 2924 citations.

Rugoz,
I'm not a trained economist, as I have always said, my reading of Bill's blog IIRC said that MS Econ. is now using ideas from MMT and saying they knew it all along. This might explain why 'hysteresis' is now being used by MS economists.

In any case, the introduction is not the heart of the paper.
. . . The NAIRU is a totally made up thing. It has no basis in reality. In a recession, corps lay off workers, and so unemployment goes up. MS Econ's NAIRU theory claims that in a recession, the reason unemployment goes up is because the workers choose to quit because they want more leisure time.
. . . Which explanation seems more likely, based on what you have been told all your life? I've been told that you can't get unemployment insurance payments if you quit. You can only get them it you are laid off or something like that. If I'm right, then that alone disproves the NAIRU theory.

Yet, NAIRU is the hook that the Fed. has used for 40 years to target inflation over unemployment in its actions. And worse, raising interest rates adds a cost onto *all* corps which makes them *all*raise prices together, which adds to the inflation.
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#15203938
Steve_American wrote:Well, this one line reply is not clear. "Stable" is not a word I would have expected to see in this context.

Anyone who clicks on Bill's blog will get to read for themselves that Dr. Prof. Bill Mitchell thinks about NAIRU. Short answer, he thinks it was a lie from the start, a fraud. It is nonsense.

Much of what I posted above was a rewording of what he wrote.

He says that the purpose of NAIRU is to provide a hook for politicians to hang their hat on while they stop the Fed. from doing its job under the law to see the US has "full employment" and low inflation. Since 1983 or before the Fed. has targeted low inflation and let unemployment rise because that is what the corp's owners want and NAIRU is the excuse they use to CTA(ss).
. . . About a year ago, the Fed. announced that it would stop using NAIRU to act before there is real inflation, and instead wait to see if there is real inflation before they act.

.


I'm not sure about what your question is here.

He's also wrong about believing the NAIRU is all that important to set policy. The Fed cares about anchoring inflation expectations, and that need not have much to do with the NAIRU.

The NAIRU is more useful at a conceptual level, but the Fed likely doesn't bother to estimate it and most definitely does not use it for setting interest rates in FOMC meetings, since as I said there is no reason to believe it's stable over time.
#15204118
wat0n wrote:I'm not sure about what your question is here.

He's also wrong about believing the NAIRU is all that important to set policy. The Fed cares about anchoring inflation expectations, and that need not have much to do with the NAIRU.

The NAIRU is more useful at a conceptual level, but the Fed likely doesn't bother to estimate it and most definitely does not use it for setting interest rates in FOMC meetings, since as I said there is no reason to believe it's stable over time.


I said that Mainstream economists, which includes all economists that work for the Fed., believe that NAIRU lets the Fed. target inflation over unemployment, because people choose to be unemployed.
. . . This obviously false. But is it any more *obviously false* than other things they believe? These things include the economy is like a "perfect economy" where every player knows everything about everything AND no player has monopoly power, or that banks lend their depositors' money, or that the US national debt must be paid-off someday. or that adding money to the money supply by the Gov. is much more inflationary that when banks make loans which also adds money to the money supply (in fact somewhat more than the deficit spending by the Gov., except in recessions).
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#15204164
Steve_American wrote:I said that Mainstream economists, which includes all economists that work for the Fed., believe that NAIRU lets the Fed. target inflation over unemployment, because people choose to be unemployed.
.


No one believes that :roll:

In fact, the unemployment rate does not include people who choose to leave the labor force.
#15204237
wat0n wrote:The NAIRU is more useful at a conceptual level, but the Fed likely doesn't bother to estimate it

The Fed certainly does bother to estimate it: NAIRU Estimates from the Board of Governors

and most definitely does not use it for setting interest rates in FOMC meetings,

Well it did until very recently: On August 27, 2020 the Federal Reserve announced that it will no longer raise interest rates due to unemployment falling below a certain level if inflation remains low.

since as I said there is no reason to believe it's stable over time.

Who says it need be stable?
#15204238
SueDeNîmes wrote:The Fed certainly does bother to estimate it: NAIRU Estimates from the Board of Governors


And yet they don't seem to care all that much about it since they added the following note:

Prefatory Note for the Real-Time NAIRU

The Federal Reserve staff’s real-time estimates of the NAIRU should be interpreted with caution. First, there is no unique conceptual definition of the NAIRU, and the definition used in Federal Reserve staff estimates of the NAIRU has evolved over time. Indeed, a number of specific definitional changes should be noted:

In early 1994, the staff modified its estimate of the NAIRU to account for the estimated impact of the redesign of the Current Population Survey on measured unemployment.
From November 1997 through June 2002, the staff interpreted the relatively rapid productivity growth seen in the late 1990s as a factor temporarily holding down inflation, thereby allowing a lower unemployment rate to be consistent with a stable inflation rate, and the staff’s NAIRU estimates incorporated this productivity effect. As of August 2002, however, the staff’s definition of the NAIRU was modified to exclude such temporary productivity effects.
At several points in time, the Congress extended the length of time that unemployed individuals are eligible to receive unemployment insurance compensation. In the staff’s view, these extensions tended to raise the unemployment rate to some degree without affecting labor market slack and hence were viewed as raising the effective NAIRU. However, while these considerations were incorporated into the staff’s economic outlook, the measure of the NAIRU reported in this data excludes such effects.
It should also be noted that at any given point in time, the staff was most concerned about estimating the contemporaneous NAIRU and hence may have devoted somewhat less attention to revising the historical NAIRU estimates, especially for dates in the relatively distant past. Consequently, definitional changes or modifications in the estimation procedures may not have been incorporated into the retrospective NAIRU estimates until somewhat later than the point in time at which these adjustments were made to the contemporaneous NAIRU estimate. Finally, it should be noted that each vintage of NAIRU estimates was archived in an electronic database but not reported in the Greenbook, and hence these data are not necessarily free from typographical errors.

If you have any questions about the data, please contact Tom Stark at [email protected].


They care so little about the NAIRU that they don't even bother to revise their past estimates to keep definitions consistent.

SueDeNîmes wrote:Well it did until very recently: On August 27, 2020 the Federal Reserve announced that it will no longer raise interest rates due to unemployment falling below a certain level if inflation remains low.


...Meaning they don't really care about the NAIRU all that much. What the Fed does care about and has cared about for decades now is inflation expectations, and whatever references it makes to unemployment must be read in that sense.

The NAIRU is more useful conceptually, since in this context it's effectively the unemployment rate at which the Fed believes labor markets are not going to put pressure on the inflation rate and hence can provide information to the public about how will future the monetary policy rates look like. But even in this case, since there can be different ways to operationally define the NAIRU for the purposes of providing estimates, it quite obviously isn't the big factor driving monetary policy, even if it's not controversial that developments in labor markets often drive inflation.

That announcement, then, should be understood as telling agents labor markets had stopped being a factor on inflation at the time (namely, during the worst part of the lockdowns - which makes sense, given the mixture of all the pandemic aid on one hand and the reluctance to consume on the other as a result of the uncertainty at the time). I guess the Fed will at some point care about labor markets for the purposes of fighting inflation again, once supply chains and labor markets themselves normalize. In the meantime, just enjoy these unusual times in which the Fed believes there is no correlation between inflation and unemployment and hence is telling the public labor markets won't be a factor in fighting inflation for now.

SueDeNîmes wrote:Who says it need be stable?


Then it's even less understandable to harp on the NAIRU.
#15204270
SueDeNîmes wrote::eek:

What utterly bizarre interpretations of plain English. The Fed patently does estimate NAIRU and did, until August last year, raise interest rates when unemployment fell below a certain level.


Do you have an actual argument to provide? It's clear they don't use it for setting policy, which is what the OP is claiming.

And no, the Fed did not mechanically raise rates when unemployment hit a particular level.
#15204324
wat0n wrote:1] Do you have an actual argument to provide? It's clear they don't use it for setting policy, which is what the OP is claiming.

2] And no, the Fed did not mechanically raise rates when unemployment hit a particular level.

@ waton, what SueDeNîmes told you is enough to prove my point that the Fed. does, now did, use NAIRU to justify its targeting rising inflation over its other lawful job of targeting full employment.

Reply to 1].
Prof. Bill Mitchell in his blog post on 9/12/21 wrote:The decision in 2020 by the Federal Reserve Bank to abandon the NAIRU approach, which other central banks have followed really marks a decision by policy makers to move on after they have seen the adherence to the NAIRU nonsense has left millions of people without work – quite unnecessarily.


Bill, is a PhD in Economics with peer reviewed paper for over 28 years. Why should we take your unsupported word for something over Bill's?

Reply to 2].
No, the Fed raised interest rates when inflation hit a certain point, not when unemployment hit some number. The Fed targeted high inflation and ignored the effect on unemployment.

BTW --- MMTers point out that raising interest rate actually causes more inflation because interest payments are just as much a cost for corps as was rising oil prices in the 70s. And, all increases in basic cost that effect all corps (more or less equally) can and will be passed on to the consumers as price increases. MMTers say they can see it in the historic data.
. . . Mike Norman said this in the thread I posted yesterday about a stock trader you should follow.
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Last edited by Steve_American on 24 Dec 2021 03:45, edited 2 times in total.
#15204329
I don't need either.

Again, what the Fed and other central banks care about is keeping inflation expectations anchored. That means they won't mechanically raise rates if expected inflation remains low.

Case in point: The Fed's Greenbook projections @SueDeNîmes posted were discontinued in 2015 (I wonder why if they care so much about the NAIRU?). According to the CBO, the NAIRU stood at ~4.5% in 2019:

https://fred.stlouisfed.org/series/NROUST

The actual unemployment rate was at or below 4% that year:

https://fred.stlouisfed.org/series/UNRATENSA
https://www.bls.gov/charts/employment-s ... t-rate.htm

Yet the Fed funds rate remained flat throughout the period:

https://fred.stlouisfed.org/series/DFF

How is this so if the Fed only stopped caring about the NAIRU in 2020?
#15204340
wat0n wrote:Do you have an actual argument to provide? It's clear they don't use it for setting policy, which is what the OP is claiming.

It's clear that they did.

And no, the Fed did not mechanically raise rates when unemployment hit a particular level.

Indeed it was a judgement call by committee, offset against other indicators. Its use in policy setting has been increasingly controversial for some time and the 2020 announcement was a tipping point, not a reversal. Mitchell's point appears to be that this comes much later than it should have, with damage already having been done by needless tightening. Not that central bankers remain slaves to the NAIRU.

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