Goodbye to NAIRU? Hello Once Again to Keynes

Paul Krugman has a very interesting piece in the New York Times today. It builds on the very good recent  work of Olivier Blanchard on the natural rate and the possibility of hysteresis brought about by prolonged unemployment in the winter 2018 Journal of Economic Perspectives and a very recent excellent article by Mike Konczal in Vox “How Low  Can Unemployment Go?‘‘ It also reflects some of same arguments I have been presenting over the years about the problems with orthodox Neo-classical theory and the failure to accept that the conventional wisdom  on inflation and unemployment based on Milton Friedman‘s argument about the natural rate of unemployment were not correct and needed to be updated.I have argued this position in many conference papers on deficits and debt, the crash, rediscovering Keynes and the origins of quantitative easing that I have presented over the past twenty years many of which I posted on this web site. In one paper in particular I posited the proposition that the natural rate of unemployment ought to be replaced by the natural rate of inflation below which one might get accelerating unemployment. (See Harold Chorney,Restoring Full Employment:The Natural Rate of Inflation  versus the Natural Rate of Unemployment Sept.19,2011 this web site)

To me the evidence is overwhelming. We have had a major increase in high powered money as part of QE which succeeded along with fiscal stimulus in blocking and partially reversing a severe slump and yet a full ten years later we have no significant inflationary impulses, exactly the opposite of what the conventional wisdom suggested would happen. In fact in Canada core inflation is well below 2 % the most. recent figure was 1.5 %. So as Krugman, Konczal and Blanchard convincingly argue something is not right with the conventional theory. Blanchard also explores the lasting damage that elevated unemployment caused by a crash and financial crisis can do and makes a convincing case for hysteresis. Krugman usefully points out that we must not rule out inflation for ever regardless of how low the unemployment rate drops. But taken together the argument makes clear there is a growing awareness of the need for a major revision of theory in a Keynesian direction. Keynes who died 72 years ago in late April 1946 would be pleased.

In a panic money becomes very scarce and there is an enormous increase in hoarding like behaviour. Liquidity preference grows. Here in Canada we have recently learned that the big five commercial banks received massive injections of capital during the height of the crisis.(See the report of the CCPA and The Globe and Mail  on this ) I have no problem with that as long as the money was used properly, the banks were kept solvent, the acquired assets eventually turned a modest profit and executive salaries were frozen and in future there are no complaints when legitimate sectors of the public are helped where it is needed without Neo-con criticism of government  wasted expenditure.

The modern market capitalist system as Robert Reich puts it needs saving for the many not just for the few.


About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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