Thursday, April 4, 2013

How to solve the crisis without doing a thing

Are you concerned with unemployment and the effects of austerity on the very slow recovery? The Congressional Budget Office (CBO), with the help of mainstream theory, has a solution. Just hike the natural rate of unemployment. Now there are less people involuntarily unemployed, and we are only about 2.2% above 'full employment.' If they hike it a bit more we are done, and John Taylor and Martin Feldstein will be correct in pressing the Fed to hike the rate of interest.
It is a convenient solution no doubt. Mind you the most typical way of deriving the natural rate is from some kind of average of the actual unemployment. In other words, they [mainstream] tell you that the average of a series is the attractor of the actual series. Talk about having things upside down!

This reminds me of the time Bob Solow gave a talk at the New School (in 2001) and suggested at the beginning that the idea of the natural rate was incorrect and should be avoided. By the end of the talk he argued that most analysts think that the natural rate was, back then, at around 5.2%. There it is, the natural rate doesn't exist, but it is 5.2%.

1 comment:

  1. Reminds of a great paper by Jamie Galbraith: "Time to Ditch the NAIRU".


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