Power Elite Lie About NAIRU to Protect Themselves

Federal ReserveOn Saturday, I published, Jobs Report Always Brings Calls for Fed Tightening. It was about this whole class of people who always want the Federal Reserve to raise interest rates because (they claim) inflation is going to rise. There is generally a trade-off in Fed policy: to lower inflation, you must slow the economy. Thus, calls for raising rates are also calls for ending jobs. But to the power elite, it is axiomatic that a slight reduction in the wealth of the rich is worse than thousands of poor people losing their jobs.

This is all based on the concept of the non-accelerating inflation rate of unemployment or NAIRU. The basic idea behind the NAIRU is fine. The truth is that there is a natural rate of unemployment because people do choose to be unemployed for periods of time. If unemployment gets below this rate and businesses are so desperate for workers that they raise their pay faster than the rate of productivity, it causes inflation. It’s interesting that so many powerful people are obsessed with this happening, given that its been many decades since anything like it happened. The point is that economic policy probably should not shoot for a zero unemployment rate.

But when it comes to specifics, the NAIRU is pretty much a myth. I’ve been amazed the last year to hear people claim authoritatively that that the NAIRU is between 5.0% and 5.5%. Were they not around in the late 1990s when Greenspan allowed unemployment to get below 4% without causing any inflation? And try as I may, I could not find that there was any change in the economy that might make the NAIRU larger today than it was then. It just seems that this class of people want the NAIRU to be high so the Fed is forced to raise interest rates and protect their piles of cash.

Saturday Morning, Paul Krugman posted an amazing collection of data, Remembrance of NAIRUs Past. It contains the following list of NAIRU estimates from the 1990s leading up to the Greenspan boom when (Again!) unemployment went below 4% and inflation did not take off:

NAIRU Estimates 1990s

What is fascinating here is that the estimates of the NAIRU were roughly the same then as they are now. Yes, they are slightly higher. But there is no recognition that maybe the way that the NAIRU is calculated is all wrong. Instead, it is always this very conservative number designed as though the greatest good is low inflation — clearly trumping low unemployment. And I think this is just unconscionable.

No amount of data matter. What matters is what the rich want. Actual lost jobs can’t compete against theoretical future inflation. This is yet another indication that we do not live in a democracy. Democracies are much more than elections. As you can see in almost every dictatorship in the world: people vote. It doesn’t even matter that the elections are nominally free when the institutions of democracy are controlled by and for the benefit of the power elite.

Most libertarians complain about the Federal Reserve as an unaccountable institution. I am inclined to agree with them. But the problem is the opposite of what they think. Libertarians generally think that the Federal Reserve is “devaluing” our money. But it is the other way: they are doing everything they can to protect the wealth of the rich. The only constraint is that they can’t do that job so well that the economy crumbles. If all the serfs die, what will happen to the rich? But clearly, the Federal Reserve and many other institutions of our democracy are only indirectly interested in the people.

See Also

The Myth of the NAIRU and Its Purpose
How the Fed Enforces the Status Quo
Economic Scale and Income Inequality

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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.

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