The Economic Advisor

The Phillips Curve’s Debate White Hat or Black Hat from Two Perspectives

In introduction, I will be expounding on ‘The Phillips Curve’s Debate: “White Hat or Black Hat” from two perspectives throughout the paper. First, I will discuss the ‘Analytical Aspects of Anti-Inflation Policy’ by Samuelson and Solow. Second, I will discuss the first perspective: ‘The Evolution of Economic Understanding and Postwar Stabilization Policy’ by Romer and Romer. Then, I will discuss the second perspective: ‘Commentary – The Evolution of Economic Understanding and Postwar Stabilization Policy’ by Sargent. Finally, I will attempt to answer the question – ‘Which Perspective Reflects “The Phillips Curve” More Accurately?’

(A. W. H. Phillips published a study in 1958, which introduced a curve that represents the relationship between the rate of inflation and the unemployment rate. The curve was named after Phillips [hence, The Phillips Curve] although several people had made similar observations before him. The Phillips Curve represented a milestone in the development of macroeconomics. You may see more detailed information on ‘The Phillips Curve’ by going to the following website ).

Paul A. Samuelson and Robert M. Solow, of Massachusetts Institute of Technology, wrote ‘Analytical Aspects of Anti-Inflation Policy’ in 1960. Samuelson and Solow (liberals [not 'an offensive word' in my book as in the 'FoxBusinessNews's book] as pointed out to me by Dr. H. Gram and the rereading of their article and biographies) wanted to ‘shed light’ on the inflation question. They believe the first postwar rise in prices was primarily attributable to the pull of demand that resulted from wartime accumulations of liquid assets and deferred needs as opposed to, at the time of the 1946-48 rise in American prices, the successive rounds of wage increases resulting from collective bargaining. Samuelson and Solow used the Korean War run-up of prices after mid-1950 to emphasize their demand-pull theory. However, they continued, “But just by the time that cost-push was becoming discredited as a theory of inflation, we ran into the rather puzzling phenomenon of the 1955-58 upward creep of prices, which seemed to take place in the part of the period despite growing overcapacity, slack labor markets, slow real growth, and no apparent great buoyancy in over-all demand.” (Analytical Aspects of Anti-Inflation Policy by Samuelson and Solow.) The preceding sentence was where they applied ‘The Phillips Curve’ which led to their notoriety (hence, the black hat) in most economic circles (even in my textbooks for Advanced Macroeconomics, Price Theory and Investment Analysis the duo were portrayed in a negative light).

Albeit, Samuelson and Solow’s article was about the great debate over the possible causations involved in inflation: demand-pull vs. cost-push; wage vs. more general Lerner “seller’s inflation”; and the new Charles Schultze theory of “demand-shift” inflation. In their defense, they cited, “We propose to give a brief survey of the issues. Rather than pronounce on the terribly difficult question as to exactly which is the best model to use in explaining the recent past and predicting the likely future, we shall try to emphasize the types of evidence, which can help decide between the conflicting theories. And we shall be concerned with some policy implications that arise from the different analytical hypothesis.” (Analytical Aspects of Anti-Inflation Policy by Samuelson and Solow.)

In the conclusion of their article, Samuelson and Solow gave a few disclaimers (they were aware of future critics) as it pertains to their article. The disclaimers, also, deal with the short-run and long run effects of using the Phillips Curve application from their perspective. Here is a quote of the final disclaimer: “We have not here entered upon the important question of what feasible institutional reforms might be introduced to lessen the degree of disharmony between full employment and price stability. These could of course involve such wide-ranging issues as direct price and wage controls, antiunion and antitrust legislation, and a host of other measures hopefully designed to move the American Phillips’ curves downward to the left.” (Analytical Aspects of Anti-Inflation Policy by Samuelson and Solow.)

The Evolution of Economic Understanding and Postwar Stabilization Policy by Christina D. Romer (Professor, University of California at Berkeley) and David H. Romer (Professor, University of California at Berkeley) can be summed up in the words of Dr. Sargent: “The Berkeley story is that the monetary policy authorities knew an approximately correct model of the macroeconomy in the 1950s, forgot it in the late 1960s and early 1970s, made bad policy as a result, then relearned the correct model in the 1980s and thereupon improved policy.” (Commentary – The Evolution of Economic Understanding and Postwar Stabilization Policy by Sargent.)

I agree with Dr. Sargent’s assertion that the Romers put changing ideas about the exploitability of the Phillips Curve front and center in their respective paper. In addition, I concurred with Dr. Sargent that they assign Samuelson and Solow’s 1960 paper an important role in creating the intellectual foundations for the policy mistakes that led to America’s biggest peacetime inflation: “‘In the early 1960s, policymakers adopted the Samuelson-Solow (1960) view that held that very low unemployment was an attainable long-run goal and suggested that there was a permanent tradeoff between inflation and unemployment (page 2).’” (Commentary – The Evolution of Economic Understanding and Postwar Stabilization Policy by Sargent.)

The Romers used the following excerpt in their defense:

“Mr. Fischer: I leave David and Christina Romer to answer what Samuelson really meant. David, however, you are going to divide it? Why don’t you come back fairly quickly on what Tom Sargent said and then we’ll turn to the audience?

Mr. Romer: Let me just provide three responses. First of all, thank you very much for the kind words and insights. Second, on Samuelson and Solow, Tom said we give them a dramatic role. If you read our paper, we don’t give them a dramatic role. We mention them in the introduction. We don’t claim to have studied that part of the intellectual history and the link between what Samuelson and Solow did and subsequent policy carefully enough to have a view on whether their role was dramatic or not. Third, and more importantly, Tom gave a long list of ideas that don’t get a big role in our paper. It is an interesting list. It has a lot of things that surely played some role, and so I want to say thanks for the suggestions, and that there is surely something there. But I don’t want to go too far. We left those things out of our story because we thought, in looking at the big picture of policy and, indeed, at lots of the medium-sized twists and turns, that those things are not central. To give one example: We don’t think, and we are in company with a lot of people, that what happened in the 1960s and 1970s was that people fell into a Kydland and Prescott equilibrium where you know exactly what is going on, but because you can’t precommit, the optimal policy for you to follow is one that involves high inflation. So, that is one idea that we would say to a first approximation just was not important. Some of the others clearly did have some role, but we feel that they are not the essence of the matter.

Ms. Romer: As the historian on the team, I wanted to take a second and talk a little bit about research methodology and about the narrative approach. Here I’ll actually invoke Stan Fischer, who had a much more important role than he will ever know in shaping our views. In our introductory graduate macro class, he said, .How do we know money matters? It wasn’t a VAR or some other complicated regression. It was Friedman and Schwartz. I think that this view has definitely affected our research strategy. Often narrative evidence is, in some ways, the most powerful. If you think about the question that we are asking what were the beliefs of policymakers there are not a lot of data one can use. We tried to get somewhere with the Fed forecasts. But this is inherently a question of what people were thinking. To answer that, you need to read the narrative sources. I also want to take exception to the idea that the narrative approach is literary. I prefer to think of it as science in a different form. It is not getting a few fun anecdotes that make for better reading. It is, in fact, taking serious sources, reading them systematically, carefully, confronting them with a hypothesis. If it is done well, it is certainly a legitimate technique. In terms of how subjective it is, all of us who have done empirical work know that there are a multitude of decisions and judgment calls that one makes any time one does research. That is true of both narrative research and empirical work. The last thing I’d say concerns verifiability. How is any work ever tested or verified? It’s by someone else trying to replicate it. It is true of empirical work: another researcher gets the data and tries it again. It is true of narrative work: someone else looks at the same sources, or at new sources, and sees whether they reach a similar conclusion.” (General Discussion: The Evolution of Economic Understanding and Postwar Stabilization Policy chaired by Dr. Stanley Fischer [Professor, University of California at Berkeley])

The Commentary – The Evolution of Economic Understanding and Postwar Stabilization Policy by Dr. by Thomas J. Sargent, Professor, Stanford University and Senior Fellow, Hoover Institution, is basically a critique of the Romers’ article (as pointed out above). Interestingly, Dr. Sargent’s scathing critique was made more credible and fair since as a Senior Fellow of the conservative Hoover Institution and as depicted by his various published papers and biography, came to the defense of renowned liberals Samuelson and Solow. (Dr. H. Gram first pointed out the irony to me.)

Dr. Sargent, methodically and gingerly refuted ‘The Berkley Story’ by using different angles with Germanic organizational skills and Teutonic thoroughness. (I have given a few examples in the above paragraph).

Therefore, which perspective (The Romers’ perspective or Sargent’s perspective reflects ‘The Phillips Curve’ [as applied by Samuelson and Solow] more accurately? The answer can be found in Sargent’s quote: “The Romers’ reading of the story of post-WWII Fed behavior in terms of knowing, forgetting, and relearning is appealing and even comforting because, in the end, the Fed has gotten things straight, raising the prospects for a future characterized by excellent U.S. monetary policy. I would add some words of caution to this rosy outlook. As in any good story, the Romers have simplified things to make their point. They are optimistic that the Fed has converged on a correct specification of the dynamics of the system they control. They ignore the role that fixed exchange rates probably played in disciplining Fed policy in the 1950s and 1960s. They downplay the possibility that the late 1960s and 1970s were times of especially large shocks, and that in the last two decades shocks have been drawn from distributions that make the Fed’s job easier. But let’s hope that the Romers are correct and that the Fed has learned the most important lessons to be learned.” (Commentary – The Evolution of Economic Understanding and Postwar Stabilization Policy by Sargent.)

In my opinion, Samuelson and Solow reflected in their article the Romers’ view. However, they (as Chairman Alan Greenspan and any other savvy politician does in their speeches, today) peppered their article with nuances, subtleties and disclaimers (see the introduction and conclusion of their article) to defend themselves against the eventual critics who would test their applications in future situations. Dr. Sargent used the nuances, subtleties and disclaimers to make his scathing point against the Romers. For example, “While the Romers’ summary judgment about the ill effects of Samuelson and Solow’s paper might be just, a subtler reading of Samuelson and Solow’s paper, and its subsequent influence and ramifications, are also possible.” (Commentary – The Evolution of Economic Understanding and Postwar Stabilization Policy by Sargent.)

In conclusion, I expounded on ‘The Phillips Curve’s Debate: “White Hat or Black Hat” from two perspectives throughout the paper. First, I discussed the ‘Analytical Aspects of Anti-Inflation Policy’ by Samuelson and Solow. Second, I discussed the first perspective: ‘The Evolution of Economic Understanding and Postwar Stabilization Policy’ by Romer and Romer. Then, I discussed the second perspective: ‘Commentary – The Evolution of Economic Understanding and Postwar Stabilization Policy’ by Sargent. Finally, I attempted to answer the question – ‘Which Perspective Reflects “The Phillips Curve” More Accurately?’

Karl A. Mitchell