Criticizing Bernanke and the Phillips Curve
Let’s go back a bit to when we and Mark Thoma ridiculed a WSJ oped for arguing there was no short-term Phillips curve trade-off. Now let’s review the latest nonsense from John Tamny:
While U.S. businesses access worldwide capacity and labor pools, the Fed (at least publicly) persists in viewing the U.S. economy as a closed one – one with static amounts of labor and capacity that do not change in response to shifts in the economic landscape. Rather than letting market prices such as gold guide management of the dollar, today’s Fed seemingly follows an “economy rule,” whereby it will raise its target interest rate when backward-looking government indicators of growth suggest economic strength, and cut rates when those same indicators suggest weakness… In defense of Ben Bernanke, it was his predecessor, Alan Greenspan, who resurrected the Phillips curve in the late 1990s with frequent commentary suggesting the “economy could overheat” if “demand growth persists or strengthens.” Stocks have been flat since then in nominal terms, and in real terms they are even weaker.
While both the WSJ oped pages and Tamny ridicule the concept of the short-term Phillips curve, they have contradictory complaints about monetary policy. The WSJ crowd wants even tighter monetary policy – whereas Tamny is arguing that monetary policy is too tight. While I’m a bit concerned with the tightness of our current monetary policy, I’m sure glad it is being run by folks like Ben Bernanke than the inconsistent idiots of the rightwing.