Economists Are Clueless On How Low Unemployment Can Fall Without Causing Spiraling Inflation

Neil Irwin wrote the piece I have been waiting for pretty much forever. He points out that economists estimates of the “non-accelerating inflation rate of unemployment (NAIRU)” have been repeatedly shown to be hugely wrong. In the 1990s the accepted wisdom was that this number was close to 6.0 percent, with estimates falling on both sides of this number. Yet, the unemployment rate fell to 4.0 percent as a year-round average in 2000 without any noticeable uptick in the inflation rate.

More recently, most economists had put the NAIRU between 5.0 and 5.5 percent. With the unemployment rate now at 4.1 percent we still see little evidence of any inflationary pressures in the economy and the inflation rate remains below the Fed’s 2.0 percent target. The unemployment rates in Japan and Germany are also both well below estimates of their NAIRUs from just a few years ago.

In short, economists have this hugely important number wrong. It is hugely important because the Fed and other central banks use it as a metric to tell them when they should start raising interest rates to slow the economy.

As the piece points out, in the 1990s, prominent economists (including Janet Yellen) pushed for the Fed to raise interest rates to keep the unemployment rate from falling much below 6.0 percent. It was only because Fed Chair Alan Greenspan was not an orthodox economist that the Fed didn’t raise rates and we saw the low unemployment of the late 1990s. This was the only period of sustained broad-based real wage growth since the early 1970s.

The failure of the economics profession to get this one right would be like sports analysts picking the Cleveland Browns as Superbowl winners at the start of 2017 season or music critics in the mid-70s pronouncing Bruce Springsteen as a no-talent bum who will never go anywhere.

Great to see the piece by Irwin. He was much more polite than I would have been.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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