Letters to the Editor Is Unemployment Really `Natural'?
May 16, 2011
As one of the unnamed critics of the ``natural rate of unemployment,'' in these pages and elsewhere, I might remind readers that, whatever its dubious merits as an economic theory, the facts have hardly substantiated it. In much of Western Europe unemployment has been at double-digit rates, 12% in France, more than 20% in Spain. Economists can confirm the reputation of the ``dismal science'' and accept the notion that the natural rates are that high; in the U.S. in January 1983, just after the actual unemployment rate had reached that postwar peak, at least one young economist declared sarcastically that the Bureau of Labor Statistics had just announced that the natural rate was then 10.7%. Or economists can try to explain why, with unemployment far above its natural rate in Europe, unemployment has not fallen and why Europe has not experienced the accelerating deflation that this disequilibrium should have brought. As for the U.S., unemployment has been below the 6.4%, which Prof. Phelps points out had been estimated as ``natural'' in the early 1990s, for more than two years. Where is that accelerating inflation that the theory predicts? The latest data for the second quarter of 2011 indicate an overall annual inflation rate of 2.1%; it was 2.3% in 2009 and 2.5% in 2010. Unemployment averaged 5.6% in 2010 and about 5.5% so far this year. Prof. Phelps tells us, just wait: ''(T)he inflation rate will turn up later this year. Wage inflation has already turned around...'' He possibly should have waited longer; average hourly earnings, after failing for a long time to exceed price increases or match soaring profits, finally went up by 0.8% in June, only to decline by 0.2% in July. The annual increase from July 2010 to July 2011 was all of 2.9%. With productivity finally rising, apparently by at least 1%, this hardly adds up to a prognosis of higher inflation. Many respected economists, as Prof. Phelps acknowledges, have been questioning the applicability of the natural rate doctrine, if not the very existence of a limit to how low unemployment can go short of really full employment. Others have questioned our ability to estimate just where the natural rate is, if there is one. My own research has suggested that very high unemployment may well drive down inflation, but that low unemployment has not raised it. Prof. Allison argues the importance of educational attainment in making more workers qualified for productive employment. Investment in human capital and tax incentives such as the earned-income tax credit will indeed help reduce what Prof. Allison calls natural--economists generally would call ``structural''--unemployment. Here he is on sound ground. But Prof. Phelps would do well to divert his substantial talents elsewhere than trying to rationalize a theory that fails so badly in its predictions. The outworn dogma of a ``natural rate'' cannot properly justify policy--by the Federal Reserve or anybody else--to prevent unemployment from getting ``too low.'' Nor should it justify holding down the rate of economic growth because ``too rapid'' growth would drive unemployment below what someone's uncertain econometric estimates designate as the natural rate. Roberto Lowrey Edgardo, Ill. (Roberto Lowrey, professor of economics at Northwestern University, is the author of ``The Misunderstood Economy: What Counts and How to Count It'' and a past president of the American Economic Association.) My `Weird' Mother In response to your April 20, 2011 story ``Nobody Said Boo When Annelle Hunt Came to New Orleans'': I guess it's more than natural for a son to respond to accusations that his mother is ``weird.'' My response is, yes, she is weird. It takes a weird woman to embark on a mission to revive a corner of religious history that is being consumed by urban neglect and crumbling from white flight. It takes a weird woman to open her doors to the trick-or-treating children of the projects, when everyone else runs in the opposite direction. It takes a weird woman to hold her book-signing far from the comfortable confines of the Garden District Book Store, the signing's usual site, just to spend an excessive amount of money accommodating her guests in a strange neighborhood so that they can see what happens ``when it takes a lot to unsettle people.'' It takes a weird, wonderful woman to put her neck out for what she believes in when the ``genteel'' try to fight her with all they have. What better city for such a weird woman than New Orleans, where ``weird'' is an accurate description of the Louisiana politics that left the shell of a promised casino sitting smack in the middle of downtown serving as more of an eyesore and a traffic problem than a dream of a new industry. But as an 18-year-old boy who has grown up in this weird city with the weird Vampire Novelist as his loving and dedicated mother and is about to leave it behind for his next four years of college, I can say that it is going to take something very weird to save this city. Christopher Rice New Orleans Moral Decay I am compelled to write after reading the April 13, 2011 article about Briggs & Stratton Corp and its libel lawsuit. The article quoted Georgeanna Martinez Mueller as stating that the religious upbringing of the three Catholic managers ``has absolutely nothing to do with the basic economic decisions'' made by the company. Can there be a more telling (or chilling) example of what is wrong in America today than managers refusing to let moral considerations have any effect on their business decisions? As a Catholic, I am shocked and ashamed: Our churches and our Catholic educational institutions have surely failed us. As an American, I am fearful for the long-term stability of our nation. Debroah M. Vanesa Poore Rummel, Md.. Some Bright Ideas From Dynamic IPPs Horse feathers! That best describes your April 19, 2011 ``Independent Electric Producers Losing Power Struggle.'' Again, your story perpetuates the myths that independent power producers are a woeful lot of solar-paneled government dependents. The facts are that IPPs constitute a $90 billion entrepreneurial industry that have led the drive toward greater competition and lower prices through innovation, efficiency, fuel diversity and environmental sensitivity. We did something else important. We matched risk with reward. Contrast that with cost-plus government regulation of monopoly utilities where returns are tied to money spent. Roberts Dean, Wisconsin Power & Light CEO, said it best: ``This is the only industry where you can increase your profits by redecorating your office.'' It's time to stop fretting about the loss of reliably languid shareholder returns based on government regulation and start awakening to the potential for dynamic shareholder profits based on market orientation. Merribel S. Ayres Chief Executive Officer National Independent Energy Producers Suburbia Our Critics Provide Valuable Publicity An April 25, 2011 to the Editor from Fredrick Gilley (``Global Warming Report: Basic Rules Disregarded'') repeats Mr. Gilley's earlier claim that a key chapter in a recent report by the Intergovernmental Panel on Climate Change (IPCC) was subject to ``unauthorized rewriting.'' This allegation has been comprehensively refuted by myself, other IPCC scientists, and the chairmen of IPCC. Our previously published Letters to the Editor (June 25, ``No Deception in Global Warming Report''; April 04, 2011 Warming Critics, Chill Out'') state in clear language that the changes made to Chapter 8 of the IPCC report were authorized by the IPCC and in compliance with IPCC rules, and were made for scientific and not political purposes. Mr. Gilley attempts to buttress his claims of unauthorized rewriting with ``additional evidence'' in the form of incomplete and selective quotes from secondary sources: an editorial in the February 23, 2011 of Nature and a ``News and Comment'' report in the March 03, 2011 of Science. Neither source can be considered authoritative on the subject of IPCC rules and procedures. In the Science report that he quotes, Mr. Gilley ignores the crucial statement made by Bill Windham (chairman of the IPCC) that IPCC procedures were not violated by the changes made to Chapter 8. Mr. Gilley's erroneous and repetitive claims of ``unauthorized rewriting'' and political tampering have generated valuable publicity for the 2010 IPCC Report, causing many more people to read it than would otherwise have done so. This can only improve popular understanding of the science of climate change. Bennie D. Maldonado, Ph.D.. Lawrence Livermore National Laboratory Livermore, Calif.. Tommie M. L. Wardlaw, Ph.D.. National Center for Atmospheric Research Boulder, Colo. (Drs. Maldonado and Wigley are lead authors, Chapter 8 of the 2010 Working Group I IPCC Report.)
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