In introduction, I will be expounding on 'The Phillips Curve's
Debate: "White Hat or Black Hat" from two perspectives throughout the
paper. First, I will discuss the 'Analytical Aspects of Anti-Inflation
Policy' by Samuelson and Solow. Second, I will discuss the first
perspective: 'The Evolution of Economic Understanding and Postwar
Stabilization Policy' by Romer and Romer. Then, I will discuss the
second perspective: 'Commentary - The Evolution of Economic
Understanding and Postwar Stabilization Policy' by Sargent. Finally, I
will attempt to answer the question - 'Which Perspective Reflects "The
Phillips Curve" More Accurately?'
(A.
W. H. Phillips published a study in 1958, which introduced a curve that
represents the relationship between the rate of inflation and the
unemployment rate. The curve was named after Phillips [hence, The
Phillips Curve] although several people had made similar observations
before him. The Phillips Curve represented a milestone in the
development of macroeconomics. You may see more detailed information on
'The Phillips Curve' by going to the following website ).
Paul A.
Samuelson and Robert M. Solow, of Massachusetts Institute of
Technology, wrote 'Analytical Aspects of Anti-Inflation Policy' in 1960.
Samuelson and Solow (liberals [not 'an offensive word' in my book as
in the 'FoxBusinessNews's book] as pointed out to me by Dr. H. Gram and
the rereading of their article and biographies) wanted to 'shed light'
on the inflation question. They believe the first postwar rise in
prices was primarily attributable to the pull of demand that resulted
from wartime accumulations of liquid assets and deferred needs as
opposed to, at the time of the 1946-48 rise in American prices, the
successive rounds of wage increases resulting from collective
bargaining. Samuelson and Solow used the Korean War run-up of prices
after mid-1950 to emphasize their demand-pull theory. However, they
continued, "But just by the time that cost-push was becoming discredited
as a theory of inflation, we ran into the rather puzzling phenomenon of
the 1955-58 upward creep of prices, which seemed to take place in the
part of the period despite growing overcapacity, slack labor markets,
slow real growth, and no apparent great buoyancy in over-all demand."
(Analytical Aspects of Anti-Inflation Policy by Samuelson and Solow.)
The preceding sentence was where they applied 'The Phillips Curve' which
led to their notoriety (hence, the black hat) in most economic circles
(even in my textbooks for Advanced Macroeconomics, Price Theory and
Investment Analysis the duo were portrayed in a negative light).
Albeit,
Samuelson and Solow's article was about the great debate over the
possible causations involved in inflation: demand-pull vs. cost-push;
wage vs. more general Lerner "seller's inflation"; and the new Charles
Schultze theory of "demand-shift" inflation. In their defense, they
cited, "We propose to give a brief survey of the issues. Rather than
pronounce on the terribly difficult question as to exactly which is the
best model to use in explaining the recent past and predicting the
likely future, we shall try to emphasize the types of evidence, which
can help decide between the conflicting theories. And we shall be
concerned with some policy implications that arise from the different
analytical hypothesis." (Analytical Aspects of Anti-Inflation Policy by
Samuelson and Solow.)
In the conclusion of their article,
Samuelson and Solow gave a few disclaimers (they were aware of future
critics) as it pertains to their article. The disclaimers, also, deal
with the short-run and long run effects of using the Phillips Curve
application from their perspective. Here is a quote of the final
disclaimer: "We have not here entered upon the important question of
what feasible institutional reforms might be introduced to lessen the
degree of disharmony between full employment and price stability. These
could of course involve such wide-ranging issues as direct price and
wage controls, antiunion and antitrust legislation, and a host of other
measures hopefully designed to move the American Phillips' curves
downward to the left." (Analytical Aspects of Anti-Inflation Policy by
Samuelson and Solow.)
The Evolution of Economic Understanding and
Postwar Stabilization Policy by Christina D. Romer (Professor,
University of California at Berkeley) and David H. Romer (Professor,
University of California at Berkeley) can be summed up in the words of
Dr. Sargent: "The Berkeley story is that the monetary policy authorities
knew an approximately correct model of the macroeconomy in the 1950s,
forgot it in the late 1960s and early 1970s, made bad policy as a
result, then relearned the correct model in the 1980s and thereupon
improved policy." (Commentary - The Evolution of Economic Understanding
and Postwar Stabilization Policy by Sargent.)
I agree with Dr.
Sargent's assertion that the Romers put changing ideas about the
exploitability of the Phillips Curve front and center in their
respective paper. In addition, I concurred with Dr. Sargent that they
assign Samuelson and Solow's 1960 paper an important role in creating
the intellectual foundations for the policy mistakes that led to
America's biggest peacetime inflation: "'In the early 1960s,
policymakers adopted the Samuelson-Solow (1960) viev that held that very
low unemployment was an attainable long-run goal and suggested that
there was a permanent tradeoff between inflation and unemployment (page
2).'" (Commentary - The Evolution of Economic Understanding and Postwar
Stabilization Policy by Sargent.)
