In recent decades, most economists have mistakenly re-defined "full employment" to mean something other than what the term used to mean and what most people understand it to mean -- namely, that anyone who wants to work can quickly find a job. Instead, they've tied full employment to a specific rate of unemployment that is supposedly necessary to prevent excessive inflation.
This new definition carries weight, because the economists behind it are highly respected by pundits and politicians who help shape public opinion. These economists define full employment as the "non-accelerating inflation rate of unemployment," or NAIRU. Wikipedia says NAIRU "refers to a level of unemployment below which inflation rises." Investopedia defines it as "the specific level of unemployment that exists in an economy that does not cause inflation to increase."
Thus, by definition, the NAIRU consists of an automatic cause-and-effect relationship between some particular rate of unemployment and inflation. That's why economists give it so much weight. On the face of it, however, this concept is nonsense. There is no such simple cause-and-effect relationship. Reality is far more complicated than that.
The economists themselves can't agree on what that rate of unemployment is. And the most recent official predictions were wrong. Decreasing unemployment rates in the 1990s, for example, did not lead to any insignificant increase in "core inflation," which excludes oil prices. Yet economists still talk about the NAIRU as if it were Gospel truth.
Once you accept that no NAIRU has magical powers and you recognize that other factors are extremely relevant, the only logical conclusion is to accept that, given the political will, we can use measures other than creating unemployment to deal with any inflationary pressures that result from achieving true full employment. The NAIRU therefore is a myth. It does not hold the power it is supposed to have.
This conclusion is reinforced by an analysis of the historical record. For example:
* Wage setting practices in Sweden and Japan maintained a sustainable balance between wage growth and productivity growth into the 1980s.
* Rapid worker productivity growth in various countries have restrained wage and price increases.
* Price controls have been used to restrain prices.
* Increased global competition is limiting price increases.
We should also bear in mind that we can fund public-service jobs without increasing the deficit (which can be inflationary). Workers in a federally funded jobs program can remain available to take jobs in the private sector, just as they do when they collect unemployment insurance. Also, the amount of money the federal government sends to each region can be based on that region's unemployment rate: regions with more unemployment can receive more funding. Finally, we can reduce funding for direct job creation as unemployment declines. All of these methods will minimize inflationary pressures.
If wages and Social Security keep pace, a modest increase in prices is not problematic (except for Wall Street traders who did not anticipate the increase). The gains from increased employment would be far greater than any potential costs from higher inflation. Even if prices did increase, the rise would be gradual, allowing time for corrective measures, if needed.
Once again, we need not get hung up on trying to reach agreement on exact methods. Rather, we can stay focused on our goal and insist that if and when policy makers at some point in the future consider creating unemployment to restrain inflation, they should do so openly with full public debate.
In the meantime, we can keep in mind four facts: 1) The NAIRU with its alleged automatic cause-and-effect relationship is blatantly false. 2) There's a good possibility we can achieve full employment without adding to inflationary pressures. 3) There are other ways to deal with any inflationary problems that result and we should try those options first. 4) Creating unemployment to control inflation should be the absolute last resort.
We should not blindly trust economists (or any other technocrat). They've often been terribly wrong on many important matters in the past. They tend to ignore morality and are too willing to sacrifice the unemployed and working poor on the altar of "economic growth" that fails to lift all boats. Instead, we should rely primarily on our own common sense and clear logic, and stay grounded in the key moral issue: every adult who is able and willing to work deserves a living-wage job opportunity.
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