Can we maintain low unemployment, inflation, and interest rates?

By Scott Benjamin

Has the Phillips Curve gone the way of the pay phone?

After studying British wages and unemployment from 1861 to 1913 noted economist A.W. Phillips reported in a landmark 1958 study that there was an inverse relationship between low unemployment and low inflation.

“Higher inflation is associated with lower unemployment and vice versa,” according to a definition from Investopedia.

Former Washington Post economics columnist Robert Samuelson has stated that, “The logic seemed impeccable. Tight labor markets would raise wages, which would be passed along to consumers in higher prices.”

When the COVID-19 pandemic began in March 2020 unemployment nationally was at 3.5 percent – the lowest it had been since 1969 – and the inflation rate was 1.5 percent, about where it has stayed since the Federal Reserve Board set a 2 percent target in 2012, according to The Wall Street Journal.

Samuelson wrote last year that an opportunity to test the hypothesis that truly “full employment” and meager inflation were compatible” had been lost as a result of the pandemic.

“Who knows when, if ever, it will return?” he concluded.

Some federal economic officials apparently think that President Joe Biden’s proposed $1.9 trillion stimulus package could help again establish low unemployment and low inflation simultaneously.

The Wall Street Journal recently reported that, “Seeing diminished risks to inflation, Fed Chairman Jerome Powell has made it clear he wants to get back to such low levels of unemployment quickly.”

“In comments to a Princeton University forum in January, Mr. Powell said the lesson he drew from the pre-pandemic economy was that the U.S. can run at very low unemployment levels and create “substantial social benefits” along the way, without inflation,” The Wall Street Journal reported. “He ended a series of interest-rate increases in 2019 and started cutting them. Since the pandemic began, he has pushed short-term rates to near zero.”

However, Donald Klepper-Smith of DataCore Partners, who served as the chairman of former Gov. M. Jodi Rell (R-Brookfield) economic team, says the government’s consumer price index and unemployment figures are “skewed.”

“It used to be cut and dry,” he said in a phone interview with Patch.com.

Klepper-Smith said the current U-3 measure of unemployment is less comprehensive than the previous U-6 formula.

He remarked that unlike U-6, the U-3 calculation doesn’t include discouraged workers or part-time employees that are seeking full-time jobs.

“For every unemployed person in the statistics there also may one that is not seeking employment,” Klepper-Smith added.

Klepper-Smith, the former economist for Liberty Bank, said that between 2000 and 2012 there was an average of a four percent differential in how inflation was being calculated in comparison to the previous standards.

“If you consider 1.5 percent and 5 percent – it is a huge difference,” he related. “It no longer represents the cost of living but the cost of surviving.”

“The statistics look better and it saves a lot of money because there are retirement plans and other social benefits that are based on the rate of inflation,” Klepper-Smith explained.

Samuelson has stated that the Federal Reserve Board’s recent relaxing of the two percent inflation goal could lead to the high inflation that plagued the economy through four recessions between 1969 and 1982.

Klepper-Smith exclaimed, “The fact that the Fed is potentially relaxing its commitment to 2 percent inflation is because the economy is still in need of monetary and or fiscal stimulus. As I said, any stimulus we get will prove to be inflationary, but less so relative to other cycles because of the substitution effect of capital for labor, as well as globalization.”

Through the recent years, he has pointed to a study that has projected that 38 percent of the jobs in 2017 would be eliminated by 2032, largely through robotics and digitization.

Larry Summers, who served as treasury secretary for former Democratic President Bill Clinton and director of the National Economic Council for former Democratic President Barack Obama, expressed concerns recently that although there are benefits to Biden’s proposed $1.9 trillion American Rescue Act stimulus the unprecedented size of it also could “set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”

The stimulus approved in February 2009 – one month into the Obama Administration - was $787 billion. About $3.5 trillion in stimulus was approved by Congress and former Republican President Donald Trump between March and December of 2020.

Klepper-Smith said that “servicing debt [from Trump’s policies and from the pandemic] is still a problem.”

The Wall Street Journal reported that the Congressional Budget Office projects an accumulated federal deficit of $12.6 trillion over the next decade.

Klepper-Smith declared, “People will be paying more in taxes and buying fewer goods and services.”

A 2019 report from the Peterson Institute stated that that the recent alterations in the economic blueprint are “not permanent or irreversible.”

Klepper-Smith agreed, saying that, “Over the long run [the Phillips Curve] is still valid.”