There is supposed to be a stable negatively sloped curve here by which higher inflation comes with lower unemployment. Beyond that correlation, most policy economists read it as cause and effect, higher unemployment begets lower inflation and vice versa. The point of the article is how little reality conforms to that bedrock belief.
He refers to a WSJ article with an amusing chart in accompaniment.
The Phillips Curve famously began as an empirical finding in search of a theory. For several decades, it has been a theoretical relationship in search of empirical support.
In the Book of Arnold, I write,
In normal times, most prices remain stable, with some prices rising and some prices falling. Changes in relative prices (prices of computers falling, college tuition rising) are much more dramatic than changes in the overall rate of inflation.
Over the past 70 years, inflation in the United States has typically stayed in a range of 1 to 5 percent. However, inflation broke out of that range significantly in the 1970s, reaching highs of close to 15 percent. In the early 1980s, inflation began to ebb, receding to its normal range by the end of the decade.
The orthodox view of the 1970s inflation is that the acceleration was caused by excessive monetary growth and it was ended by a change in Federal Reserve policy that reduced the rate of money creation. My unorthodox view is not as well positioned to explain these movements. One possible alternative explanation is that the habitual behavior of people changed. They began to expect high inflation, and they factored such expectations into labor contracts and other long-term arrangements.
In my view, the 1970s through the mid 1980s are the only important inflation event in post-war American macro history. Whatever explains the behavior of inflation in that period, the Phillips Curve is not the story. An “expectations-augmented Phillips Curve” will fit, but primarily because of the expectations term. The idea that inflation develops momentum because of expectations strikes me as sound. The empirical support for other factors is mostly of the form of confirmation bias.
The great stagnation allegedly began in 1972. There have been ideas bandied about how credit sometimes expands when people are trying to bridge a gap between expectations and reality. Could this play into an expectations feedback loop in the 70s?