Late last year, I wrote to Dean Baker — the Pollyanna of economists — asking him about why Alan Greenspan didn’t change inflation thinking. I wrote, “Greenspan allowed inflation to get below 4%, yet there was no accelerating inflation. So why do I continue to hear that 5.5% unemployment is the NAIRU? Am I missing something?” Baker wrote back, “That history is conveniently ignored.” Indeed it is.

For those of you reasonable people who don’t follow this stuff, NAIRU stands for “Non-Accelerating Inflation Rate of Unemployment.” It is supposedly the rate of unemployment below which inflation will start to rise. It’s actually a nasty little concept. Beneath it is the idea that low inflation creates a workers’ market. And because of this, workers can demand higher wages and this in turn causes prices to rise — hence inflation.

I doubt this is even true. After four decades during which all economic growth has gone to the people at the very top of the economy, higher wages will not necessarily lead to higher prices. In fact, the pure economics of it indicates that it should simply cause a more equitable distribution of incomes. Basically: owners should make less and workers should make more. If you are skeptical of this, read my article, What Sets Prices? The idea that increased costs lead to higher prices is just wrong.

Right now, everywhere I turn, I hear that the NAIRU is between 5.0% and 5.5%. This is a problem, because the standard unemployment rate is 5.6%, and it may well be lower by the time this article gets published. So this has lots of people screaming for the Federal Reserve to increase interest rates to head off inflation. But the yearly inflation rate for last year was 1.66% — well below the Fed’s already too low 2% inflation target. And there is absolutely no trend. (Actually, there is a downward trend — but it isn’t significant.)

In the late 1990s, Alan Greenspan let unemployment get low. People warned him when it got to 5% but he let it go. And the inflation rate got down to 4.2% without any hint of inflation. He went further, but as it continued down to a low point of 3.8%, the inflation rate did go up a tad. The inflation rate maxed out at 3.7%. Bear in mind that this is not a bad rate. In general, I think the Fed’s inflation target ought to be in the 3.0% to 3.5% range. But it is now the consensus of really, really rich people that the Fed’s target should be 2%. Regardless, Greenspan managed to have inflation below 2% with unemployment around 4.3%.

Note the madness of this. The power elite claim that we must maintain a high unemployment rate with low worker bargaining power so that the rich don’t have to face even the risk of inflation. This is the kind of “conventional wisdom” that you get when you live in an oligarchy and not a democracy.

Recently, Paul Krugman wrote a good article on this subject, but from an entirely different perspective, Tough Fedding. In it, he suggested that the whole NAIRU may not be valid in the current environment of a Fed absolutely determined to keep inflation at 2% or less. And his calculations indicate that we shouldn’t even begin to worry about inflation until unemployment gets below 5%. He concluded the article by noting the options:

I see it from the workers’ standpoint, of course. It may be a little hard for Krugman to see what’s going on because he no longer lives in this world. But it is very simple: the people at the Fed are far more concerned about even the smallest threat to their rich friends than they are about the wholesale destruction of workers’ lives. And that’s why they do things that make Krugman scratch his head.

In the Dean Baker quote above, he was being being sarcastic. The people who want to puts the brakes on our small economic recovery haven’t forgotten the lessons of the late 1990s. And they don’t disagree with Krugman’s simple model. They just don’t care.