The Natural Rate of Unemployment: We Criticize the Criticism
Max Sawicky takes exception to a post from Mark Thoma on the Barney Frank v. Ben Bernanke debate. Max has afforded us with a couple of opportunities starting with how Mark was criticizing Congressman Franks for criticizing Chairman Ben. Criticize the criticism? Wasn’t that the Taliban’s reaction to 9/11?
But back to the economics, which we also discussed here:
The current Employment to Population Ratio is 63.3% and my guess has been that the natural rate is closer to 64%. Some of our conservative blogging economist friends have suggested it might be a little lower than my guess. If Chairman Ben thinks the natural rate is closer to 63.5%, then fine. But there is not a “large body of research” proving me right and him wrong nor visa versa.
Max’s beef with Mark is stated succinctly:
his argument is mostly from authority. This is what economists think, Barney means well but is on the wrong page.
Max backs up his claim that some economists on the same “wrong” page as the Congressmen in two ways. First up is Dean Baker on the Death of the NAIRU theory:
Contrary to Friedman’s view, the economics profession ignored the fact that the Greenspan experiment had contradicted its longstanding views on the NAIRU. Instead, the theory was modified to allow for possibility that the NAIRU could shift unexpectedly in unpredictable ways. Hence, we see that economic theories are not discarded because they are falsified.
Next up is Jared Bernstein with charts showing the gap between productivity and real compensation as well as a chart suggesting a time-varying NAIRU with the following caveat:
Like many economists today, I consider the NAIRU to be a poor guidepost for policy makers. Events have overtaken the original model, and while some useful advances have been made (Ball and Moffitt, 2001), the evidence I present below suggests that subscribing to the model risks persistent and unnecessary slack in the economy, wasting billions of dollars and consigning millions of potential workers to fewer job opportunities and lower wages than should be the case.
This debate as to what the labor market would look like if we were at full employment dates back to when Arthur Okun suggested his measure of the GNP gap over 40 years ago. Okun suggested his infamous “law” as a proxy – not as some well accepted measure that all economists had to agree with. To suggest there is some authority as to whether we are at full employment would be to ignore the great debate among blogging economists as to why real compensation has been so flat for so long. I’m in the camp that we are still short of full employment, which must mean I’m on the wrong page too.