Arthur Laffer, on the opinion page of today’s Wall Street Journal, 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.
KNZN nails Laffer on not knowing the difference between SHIFTS OF a curve versus SHIFTS ALONG a curve. No surprise there, but there is a surprise in the fact that Donald Luskin also spotted Laffer’s stupidity. Brad used to refer to Luskin as the stupidest man alive. I think we have a new candidate.