(I'm sending this to pen-l, also, since it seems of interest.) Brad deLong writes: >Arthur Okun and company thought that the NAIRU had successfully been breached in the 1960s--that they could run the U.S. economy without structural changes at 4% unemployment and 2% inflation forever. The result was the 1970s--and the fall of social democracy as a governing ideology.< >Be very, very careful before you try to repeat their mistakes: better to have 4.5-5.0% unemployment than to have a few years of 3.0-4.0% unemployment followed by OPEC Shock III, productivity slowdown II, and the second coming of Ronald Reagan.< In what way was the productivity slowdown of the 1970s due to the inflation? please explain the causation. I thought that mainstream economists really didn't have a convincing explanation of that slowdown (not that anyone else does). Methinks that you hang too much blame on the late-1960s inflation (as Max also points out). As he seems to be hinting, it's _Clinton_ who is "the second coming of Ronald Reagan" (with satyriasis replacing Alzheimer's). Since Doug imposes Draconian limits on the number of lbo-posts, here's an additional point or five (making up with quality for what quantity can't achieve): 1) I remember reading that Okun _et al_ asked LBJ to raise taxes (to restrain the economy, raise unemployment, and fight inflation, exactly what Brad says they should have done). LBJ's response was half-hearted at best (and always shows up in macro texts as an example of how "temporary" tax changes have little effect on aggregate demand). It wasn't LBJ's personality that drove that result. It was the fact that (a) he and his cronies wanted to fight and win (or at least not lose) the war against Viet Nam and (b) if they raised taxes and/or cut domestic spending, they would undermine popular support for their regime even further. Remember that 1968 was the year of several urban riots and that a lot of tension was already building. In other words, it wasn't Art Okun as much as _political stalemate_ that encouraged the inflationary impulse. (Economists tend to overestimate our guild's impact on history.) 2) The labor history I've read indicates that by the _early_ 1960s, employers were already working toward breaking the post-WW2 truce with labor that helped create the relatively egalitarian 1960s prosperity (moving operations to non-union climes, etc.) That is, a lot of the conservative results you point to were already in the making. The inflation in many ways was just an excuse for reactionary politics. (BTW, this criticism seems to be fatal to Jamie Galbraith's book, at least from what I've read so far, which isn't far.) 3) Another shift was that of the shift away from fixed exchange rates to floating rates, which I interpret as an inevitable result of the relative decline of US hegemony as a result of (a) the spending on, and loss in, Vietnam and (b) the recovery of W. Germany and Japan from WW2. The shift to floating rates, as textbooks tell us, make fiscal policy much less powerful and monetary policy much more effective. With fiscal policy -- the center of Keynesian power -- down, the Fed jumped into the power vacuum. This meant that US macropolicy became dominated by the center of rentier power. 4) I do think that the basic theory behind the NAIRU makes a lot of sense on the level of theory. That is, unemployment (a reserve army) is needed to protect profits and if capitalists aren't happy with the profit rates they receive, they punish us with inflation; further, as Abba Lerner (not Milton Friedman) pointed out, sustained inflation tends to get built into expectations, allowing the acceleration of inflation. (Lerner had the misfortune of talking about these things long before they happened. No, I don't know if MF plagiarized. I think not, since ML's work was more sophisticated, bringing in the distinction between "high" and "low" full employment which MF ignored.) a) A crucial problem is that the NAIRU is unknown. I've noticed that more conservative economists produce higher estimates than do liberal ones. Of course, the Fed doesn't really care, since all that's important to them (and their friends at the banks and Wall Street) is inflation. b) In addition, as Shawn Hargreaves-Heap pointed out years ago in the ECONOMIC JOURNAL, low unemployment rates (like high ones) tend to be self-reinforcing. This is currently called the "hysteresis hypothesis" (and is somewhat popular among academics), though I've never noticed Shawn getting the credit. (Plagiarism? again, I don't know. I think the problem is that economists tend not to read anything that's more than a couple years old. As Krugman's work indicates, even those at the top of the pecking order don't care much for scholarly canons about doing literature searches and being strict about citations. Also, as with Lerner, I think most economists nowadays would consider Shawn to be politically incorrect.) In short, persistent low unemployment rates imply that employers hire people who normally termed "structurally unemployed" (in the wrong place or having the wrong skills or credentials for the jobs). On-the-job training allows these folks to do the job in a way that profits their employers. Once they get in the door, they stop being structurally unemployed. This lowers the NAIRU (or the Profit-Preserving Unemployment Rate, PPUR). BTW, low unemployment rates can substitute for affirmative action in bringing pariah groups into the formal paid labor force (as with Blacks during WW2 and Vietnam) which helps break down racist and sexist barriers. Low unemployment rates help make affirmative action programs (and other efforts to deal with structural problems in labor-power markets) more effective, too. c) It is likely that some inflation would result. If used in moderation, price controls can help here, so that the benefits of the hysteresis effect can kick in. d) Further, as Barry Bluestone & Steve Rose point out (in their working paper at the Jerome Levy Institute and the on-line summary), the effective supply of labor is not just the number of people in the labor force. They argue that economic insecurity drives many employed workers to moonlight and to work overtime (independent of employers' insistence that they do so). So it isn't just low oil prices and the high dollar which helps the US avoid inflationary acceleration at sub-5 percent unemployment. Relatedly, what really counts is not the unemployment rate but the cost of job loss that disciplines labor, preserves profits, and prevents accelerating inflation. What with Reagan's firing of the air traffic controllers, the steady decline in the quality of the National Labor Relations Board, Clinton's "welfare reform," and a host of other events that make up capital's "one-sided class war" (to use Doug Frasier's phrase), the cost of job loss seems to have risen relative to the unemployment. As even Alan Greenspan has realized, US workers are much more economically insecure than they used to be. The steeper wage gradient also creates greater incentives for the employed to sweat. In their book THE WINNER-TAKE-ALL SOCIETY, Frank and Cook talk about how those who are excluded from the (shrinking) elite of high-paid workers invest much more time trying to break into that elite. This extra sweat helps raise labor produc- tivity, depress wage rates, and preserve profits, subsituting for unemployment. Not that I think that the powers that be will allow unemployment to stay as low as it is right now, but hope springs eternal. Jim Devine [EMAIL PROTECTED] & http://clawww.lmu.edu/Departments/ECON/jdevine.html
