The Myth of the NAIRU and Its Purpose

Matt YglesiasMatt Yglesias wrote a great article at Vox today, The NAIRU, Explained: Why Economists Don’t Want Unemployment to Drop Too Low. I know it sounds very technical and boring, but it isn’t. It is about the Federal Reserve and how economists have spent the last 40 years doing everything they can to enrich the rich and impoverish the poor.

NAIRU is an acronym for “Non-Accelerating Inflation Rate of Unemployment.” It is supposedly the unemployment rate at which inflation will be flat. If unemployment gets below that level: inflation will take off. The problem with it is that, like much in economics, it doesn’t have much in the way of empirical evidence to support it. So why does everyone believe it? Simple: it provides a justification for keeping unemployment at a high enough level where workers have little leverage. It is a big part of the reason why workers have seen almost no share of productivity gains over the last 35 years.

What we’ve seen since the early 1980s onward is that inflation has remained low — most of the time, too low. And this is because the Federal Reserve has always prioritizes attacking even the threat of inflation above stopping actual job losses. You see, there is no doubt that there is a relationship between inflation and employment. In the late 1950s, William Phillips showed that inflation and employment were inversely related. High levels of employment tended to cause inflation, and vice versa.

Phillips Curve

This graph is for the 1960s, but the graph for the century before that looks pretty much the same. What I find most interesting about this is that to me, the sweet spot on the graph would be an unemployment rate of less than 4% with an inflation rate of 3%. But the Fed — and most other central banks — are obsessed with a 2% inflation target, which they generally think is compatible with a 5-6% unemployment rate. That’s an extra 2-3 million unemployed people, just so the rich don’t have to worry about even a hint of inflation. And it just so happens to keep wages low. It’s good to be rich.

With just the Phillips Curve alone, there might be some pressure on policymakers. But instead, there is this whole “rational expectations” theory behind it that basically says that even allowing inflation won’t help employment. So the Fed may have a dual mandate to minimize inflation and unemployment, but in practice it has a single mandate to minimize inflation and let the American worker starve as he may.

Yglesias pointed out that even if you accept the NAIRU, the Fed has consistently kept unemployment above it. Other than at the end of the 1990s, periods of time where the unemployment rate was below the NAIRU were brief and shallow. And even during that 1990s period, there was no increase in inflation. I would have thought this would mean that economists would throw away the NAIRU or at least recalibrate it to allow for a lower target unemployment. But no. Instead, they seem to have just convinced themselves that the late 1990s was a special case. And this is why the Fed currently is on the verge of raising interest rates. Because employment is doing so great. (Note: sarcasm!)

What’s so frustrating about this is that it would never work the other way. If there was sketchy evidence for allowing inflation of 5%, it would not be economic dogma. It is only economic dogma when it just so happens to benefit the power elite. I have begun to see economics as a kind of theology. What economists primarily do is apologetics: justifying established dogma. It’s not that they aren’t smart guys. Theologian are smart too. But that doesn’t make them right.

In the past, there have been whole classes of people whose job it was to justify the power of church. We have the same situation now — just with a different power center. The economists use math to show that the power elite really do deserve what they have — and more. And so we’ve had anti-union and anti-inflation policies for the last several decades. We are told this is necessary so we can all have nice things. But it is all about justifying taking what should be the nice things from the poor and giving them to the rich. And it is done in the name of “Science!” Economics isn’t a science. It is a conspiracy of the rich.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

3 thoughts on “The Myth of the NAIRU and Its Purpose

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