Click to enlarge.
As seen in the chart, there is no correlation between the inflation rate and the unemployment rate.
Here is an alternative way to look at this same data. I'm plotting the inflation rate compared to the average inflation rate and the unemployment rate compared to the average unemployment rate.
Click to enlarge.
Do you see correlation in that chart? Maybe you do. How sure are you? Here's that same data plotted on a scatter chart.
Click to enlarge.
There is no correlation (neither positive nor negative). That's what the math says. Whatever pattern you think you see is undone by the patterns you don't see.
See Also:
The Failed Keynesian Phillips Curve
Source Data:
St. Louis Fed: Unemployment Rate
St. Louis Fed: CPI
I'm pretty sure this is not the best way to consider the data. Most of the time (though not always,) inflation and unemployment do display contrary motion from year to year.
ReplyDeleteYou saw this when I posted it last Summer.
http://jazzbumpa.blogspot.com/2011/08/this-is-not-70s.html
The specific relationship between CPI and EU changes over time - hence the various discrete curve sections on your graph.
I took a look at some of it here, which we discussed at the time.
http://jazzbumpa.blogspot.com/2011/08/is-phillips-curve-valid.html
I think there are different economic realms, and the relationships among variables are mutable in the different realms, so considering it all as a single data set misses the detail.
Inflation doesn't create jobs, but a moderately inflationary economy enables economic growth, and that does create jobs.
Cheers!
JzB
Jazzbumpa,
ReplyDeleteMost of the time (though not always,) inflation and unemployment do display contrary motion from year to year.
You saw this when I posted it last Summer.
I do not see it in your chart. Your chart sets the scales for both series to be the same and therefore confuses the picture. For example, it is impossible to have a negative employment rate. Therefore, whenever the CPI is negative the unemployment rate will always be higher on your chart (and make it appear to be a contrary motion whether it truly is or not). I will post a chart of my own (in the spirit of your chart) to correct for this.
My chart is just another way to present the data in your chart. I certainly don't see the correlation in mine. 0.01 is about as far from being correlated as one can get.
Inflation doesn't create jobs, but a moderately inflationary economy enables economic growth, and that does create jobs.
Inflation is a tax. Taxes don't create jobs. There wasn't real economic growth over the past century because of inflation. There was real economic growth in spite of it.
I should add that this is my opinion of course. I didn't mean to imply that my opinion was fact.
ReplyDeleteyeah, I just made a chart earlier, too:
ReplyDeletehttp://research.stlouisfed.org/fred2/graph/?g=6NC
what's the story from that? We were in the "great moderation" 1990-2005, but as we hit "full employment" in the late 1990s we started to get some sustained "inflation".
Same thing in the 2004-2006 period, inflation was starting to pick up.
Adding in the fed funds rate (green):
http://research.stlouisfed.org/fred2/graph/?g=6NE
shows how when inflation started ticking up in the late 1990s and mid-2000s the Fed started tapping the brakes, throwing the economy into recession each time.
Fed putting the rates back to 5%+ would certainly get that gray bar back, eh.
But with fiscal policy at the zero bound we might spend the entire decade far from "full employment".
I think inflation is a dumb idea but if I were unemployed I prefer having a job even if prices were going up 5% pa thanks to whatever the Fed was doing to get more money into the paycheck economy again.
Of course, the main mechanism we got sub-5% unemployment with in 2005-2007 was the $5T housing bubble, and another $5T of helicopter money isn't going to actually make any permanent improvement to our economic situation.
But we are in a competitive devaluation situation. Maybe we'd be better off with the yuan at 3, and to get that we have to double the supply of USD in the global economy.
Now, if oil goes to $200 thanks to that, that would suck. But so does our $700B/yr trade deficit, most of which isn't due to oil imports.
The danger is that we continue to look for the path of least political resistance, without actually addressing any serious structural reform. That is in fact a quick trip to a sovereign debt crisis.
But inflation is the only way we're going to get our systemic leverage down from 3.0 to 2.0 . . .
http://research.stlouisfed.org/fred2/graph/?g=6NG
Complicating matters more is that we can't inflate our way out of the 80 million beneficiary packages we're going to be handing out to the baby boom in the next decade.
"I don't have any solution but I certainly admire the problem"
Inflation is a tax. Taxes don't create jobs. There wasn't real economic growth over the past century because of inflation. There was real economic growth in spite of it.
ReplyDeleteHere the leftist in me would argue that without extra-market intervention (space aliens, government, etc) capital attracts capital, and poverty begets poverty in a very centrifugal (and wealth-destroying) dynamic.
This gets back to the "cross of gold" speech of 1896, where WJB was arguing the lock on capital the "NY" financial interests had held for 50+ years was throttling the nation's actual wealth producers.
It took ~120 years and two major wars for the dollar of 1800 to be inflated away 15%:
Cumulative change of what cost $100.00 in 1800:
1810 $92.10
1820 $82.21
1830 $62.66
1840 $58.65
1850 $48.89
1860 $52.78
1870 $74.30
1880 $56.72
1890 $52.82
1900 $48.93
1910 $54.76
1920 $117.28
Savers are not wealth-creators, and the needs and preferences of any economy's actual wealth-creators should be honored for the most part.
But these days, as I've stated earlier here, I don't think inflation is any silver bullet given our massive pensioneer burden and our need to keep energy prices from squeezing us any harder than they already are (thank god for tracking, LOL).
Engineered inflation is more like a rubber bullet -- you can hit yourself with it if you're not careful.
Troy,
ReplyDeleteInflation, credit, and recreational drugs!
1. They can all make you feel good in the short-term.
2. They can all be addicting.
3. They can all make you feel bad in the long-term.
Take credit for instance. Many argue that its real expansion creates more real jobs. I think that's definitely true in the short-term. It can't go on forever though, and when it fails it fails spectacularly.
Similarly, I believe that an increase in the inflation rate can create jobs in the short-term. I do not believe it can create more in the long-term. That said, short-term fixes can fix short-term cyclical problems. We'll need long-term fixes to fix structural problems though. Can we go back in time and elect Ross Perot?
But we are in a competitive devaluation situation. Maybe we'd be better off with the yuan at 3, and to get that we have to double the supply of USD in the global economy.
I hear you, but what would China do? Can we really win the competitive devaluation game with them? Especially if they aren't as economically strong as most seem to think? It seems a bit like Nordstrom deciding to go head to head with Wal-Mart on price. Sigh.
"I don't have any solution but I certainly admire the problem"
I think that pretty much sums up my blog and all of my opinions.
Troy,
ReplyDeleteSavers are not wealth-creators, and the needs and preferences of any economy's actual wealth-creators should be honored for the most part.
I wouldn't disagree. It's tough to truly stick it to the savers though. The same gene that gets us to hoard cash also apparently gets us to hoard commodities. Of the two, I'd suggest that the latter is no picnic for the poorest among us.
Engineered inflation is more like a rubber bullet -- you can hit yourself with it if you're not careful.
Ideally, the Fed would create wage inflation and commodity deflation. Too bad they have a rubber mallet and not a scalpel. It's like a twisted game of Whack-A-Mole. Everytime something "pops" up, out comes the mallet, lol. Sigh.
Troy,
ReplyDeleteFed putting the rates back to 5%+ would certainly get that gray bar back, eh.
As a worrier by nature, you know what really scares me?
Getting that gray bar back at 0%!
I think most believe it is impossible. In sharp contrast, I think the odds are definitely above 1%. Perhaps even well above it.
So how would people react if the impossible happened?