"China's 8 percent economic growth rate last year was among the fastest in the world. That wasn't good enough for the country's local governments: They all said their own growth was even faster.

"Flouting the law of averages, China's 31 provinces and municipalities each reported 2002 growth rates higher than the central government's figure for the whole country, according to data from local government Web sites and state media reports.
"The conflicting numbers highlight doubts about the accuracy of information supplied by China's government, including world-beating economic growth. Some analysts say China's real growth could be less than half the official rate as provincial officials inflate their own economic success to win promotions.

"'China has made progress in improving its statistics, but there's still some way to go,' said Xie Xin, a regional economist at Bank of America in Singapore"
 

We haven't heard much of the Phillips Curve in the last couple years, because the economy had been in recession and unemployment has been on the rise. But think back to just a few short years ago -- or to any time when the economy has been growing robustly -- haven't you heard things like "the economy is overheating" or "the pool of available workers is shrinking" and "the Fed will have to put the brakes on by raising interest rates." Whenever it's said -- whether its on the evening news or in the minutes of a meeting of the Open Market Committee of the Federal Reserve -- it's treated as utterly axiomatic, beyond questioning, obviously true... like saying that rain coming down makes the streets wet.

But why should it be true? Suppose literally everyone who wanted a job had a job. Would inflation spin out of control for some reason just because everyone is working -- earning more and producing more? Why? What kind of bizarre notion of the nature of money and markets would ever lead anyone to expect that?

And is it true? No -- it is simply not. Did the persistent unemployment of the 1970s keep inflation in check? No -- that was a decade of horrendous inflation. Did the rapid rise of employment in the 1980s and 1990s cause runaway inflation? No -- inflation subsided to near non-existence in those decades. Just take a look at this chart from a paper just published by economist William Niskanen of the Cato Institute showing the relationship -- or absence of a relationship -- between inflation and unemployment. Niskanen calls it "white noise." Do you see a Phillips Curve hiding in there? I don't.

But never bother academic economists or power-mad economic policy wonks with mere facts. These are the same guys who insist that deficits cause interest rates to go up -- despite glaring counterexamples right this very minute in both the United States and Japan. Just browse the speeches of Federal Reserve officials on the Fed's Web site and you'll see how deeply the most powerful -- and presumably knowledgeable -- economic policy experts in the world believe that prosperity causes inflation -- and how sincerely they take it as their duty to limit prosperity for the sake of controlling inflation. Read this paragraph from a June, 2000 speech by then Fed Governor Lawrence Meyer, as he ponders just how much and for how long the Fed will have to slow the economy.

"...monetary policy does face a challenge--rebalancing aggregate supply and demand to contain the risk of higher inflation. ...If the task is only slowing the economy to trend--because the [optimal unemployment rate] turns out to be close to 4 percent--the task is not as challenging, and inflation will remain stable near current levels. If the [rate] turns out to be closer to 5 percent, then the task is more demanding, and growth will have to slow to below trend for a while...

Meyer and the boys over-shot a bit. They've done such a good job of "rebalancing aggregate supply and demand to contain the risk of higher inflation" that unemployment has shot past the 5% he was talking about in 2000, and now is closer to 6%. Oh well -- what's a couple million people thrown out of work if that's what it takes to “contain the risk of higher inflation”?

Which takes us to the heart of darkness in the Philips Curve -- and why I call it the economics of mass destruction. Even though it's demonstrably not true that employment causes inflation, we should not act on it even if it were true. It is an outrage against decency to cold-bloodedly pursue policies designed consciously to throw, say, 5% of Americans out of work so that the other 95% can enjoy lower inflation. It sounds absurd -- but that's precisely what's going on every time the Fed meets -- it's just as though Alan Greenspan picked names out of the phone book and said, "you... you... you... and you... you're out of a job -- and thanks for being a good American." See what I mean about a conspiracy to keep you poor and stupid – and to tell you it’s for your own good?

Posted by Donald L. Luskin at 1:09 AM | link    

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