The ‘Faint Heartbeat’ Exchange: AOC Corners Powell On Phillips Curve Implications For ‘Modern’ Policymaking

The ‘Faint Heartbeat’ Exchange: AOC Corners Powell On Phillips Curve Implications For ‘Modern’ Policymaking

In case you were wondering whether Alexandria Ocasio-Cortez has figured out that it’s at least possible to use the Phillips curve’s long slumber to justify a policy mix that’s conducive to funding hugely expensive progressive social programs, the answer is “yes”.

While it’s easy to write off the kind of fiscal and monetary largesse envisioned by some progressives as hopelessly out of touch with reality, the fact is, recent evidence shows that the economy can sustain a much lower jobless rate than most anyone thought, and the famous 2010 open letter to Ben Bernanke (which, you’ll recall, was signed by a veritable who’s who of financial luminaries) sounds profoundly silly in hindsight, especially this bit:

The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

Fast forward nine years and the unemployment rate is at 3.7%, the Fed’s trade-weighted dollar index is near an all-time high and inflation has never even managed to rise sustainability to target, let alone managed to consistently overshoot.

Obviously, there are all manner of mitigating factors at play, and there’s enough nuance involved to fill reams. Further, post-crisis monetary policy has clearly created gross distortions across markets, has undoubtedly increased inequality and done much more to boost financial asset prices than it has to engineer positive outcomes in the real economy (and that latter bit is kind of the point, if you’re a progressive – monetary policy needs to play a role, but one that’s more bottom-up than top-down).

Those obligatory caveats aside, one obvious question that arises when you think about this is what would happen if you paired ultra-accommodative monetary policy with fiscal initiatives designed specifically to help Main Street. The fact that inflation is nowhere to be found even as unemployment continues to bump along at a five-decade nadir argues for just those kinds of experiments – or at least according to some.

Read more in our MMT archive

As we’ve said previously, we are not necessarily MMT advocates. That said, the veritable parade of “household names” who have fallen all over themselves to lampoon MMT and cast aspersions on its champions, almost never couch their criticism in rational terms. Rather, MMT’s detractors (outside of economic circles, anyway) generally avoid serious engagement with the theoretical underpinnings on the excuse that the idea itself isn’t worth serious discussion. Of course, that logic fails by virtue of being self-referential.

With all of the above in mind, here is the exchange between Ocasio-Cortez and Jerome Powell (from the Fed chair’s Wednesday testimony on Capitol Hill):

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“I’ve been seeing lately that economists are increasingly worried that the idea of a Phillips curve that links unemployment and inflation is no longer describing what is happening in today’s economy, what are your thoughts on that?”, AOC asked, clearly knowing the answer ahead of time.

Powell, of course, said the Fed spends a “great deal of time” on the subject (because what else would they be talking about?). Then, he said this:

The connection between slack in the economy – the level of unemployment and inflation – was very strong if you go back 50 years and it’s gotten weaker and weaker and weaker to the point where it’s a faint heartbeat.

Powell pressed his thumb and forefinger together and held his hand to his ear for emphasis. He proceeded to say that the economy “can sustain much lower levels of unemployment than we thought without triggering troubling levels of inflation”.

“Mmm, hmmm”, AOC responded, prodding Powell further. After the Fed chair reiterated that inflation expectations are now “settled” and look set to remain that way, Ocasio-Cortez asked the following:

Do you think that that could have implications in terms of policymaking – that’s there’s perhaps room for increased tolerance in terms of policies that have historically been thought to drive inflation? One of the arguments about policies that directly target middle class Americans is that they could drive inflation. Do you think that that decoupling is something we should consider in modern policy making considerations?

Checkmate. Powell responded cordially and emphasized that inflation is subdued across the globe. The exchange was very polite, but the implication was clear. The use of the word “modern” was probably not an accident.

Squad up”.


17 thoughts on “The ‘Faint Heartbeat’ Exchange: AOC Corners Powell On Phillips Curve Implications For ‘Modern’ Policymaking

    1. Yeah, there is so much a Democratic Socialist and a Tea Party Republican can agree on. It is such a natural fit it is a wonder people argue about politics at all. Everybody likes teh good parts, and nobody wants to be an embargoed Third World petro-state.

  1. AOC is obviously bright and rightly points out that the Phillips curve for now at least belongs in the dustbin of history. The curve always had a problem and like many economic theories is far better in academia than in practice. The problem with the left wing of the Democratic Party is that they often want pretty radical change quickly which scares the public. Health care is a prime example. A reasonable approach would be to broaden medicare to 50 years old, broaden Medicaid as well, and up and make health care universal over a short period for the rest of the public. That does not mean medicare for all, but it does mean every American gets covered and the cost is at least subsidized based on income. A great use of a VAT which can be made mildly progressive if done correctly. The public is ready for universal health care, just not medicare for all…

  2. Considering that the U.S. already funds any and all wars with trillions, pays for my medicare and social security without full funding, provides a variety of public assistance for food and shelter, subsidizes various industries, mining and agriculture with inadequate tax revenue, one may already conclude that Monetary Money Theory is a proven actual practice.

    My concern is that the recognition of the above will have a deleterious effect on our culture. I expect that ambition, industriousness, responsibility and risk acceptance will be somewhat diminished on the whole. My brief travels through European countries that are socialistic shows me the contrary: People still are industrious, responsible, etc. But in this country, changing our culture from pioneers and rugged individualists, to the 32-hour work week, never-get-fired, retire at 55, 6 weeks of vacation model, may be too much, too fast.

    I’m wrong about a lot of things, and I hope I am wrong about this,too. MMT is here.

    1. I believe you ARE wrong! We are not different than people in the countries that have provided for all. Having decent lives and less stress will reduce many BAD things (like homicides) drastically, and people of course will have more time to do community-related things that ENHANCE lives and communities. Other countires do NOT have a ‘never get fired’ model that I have heard, although they have many other things you mentioned. Sounds GREAT to me!
      Hell, RUSSIA has healthcare for all, 3 years maternity leave, 4 weeks vacation, and probably free college!

      The problem here in the US is that the corrupt hijacked our govt in the early 70s, and devised scams like ‘privatization’ to enrich themselves, feeding at the trough of basically unlimited federal money while LYING to dupe the public. That is why they want EVERYTHING ‘privatized’. They lie about it being ‘more efficient’, etc. It is the biggest scam EVER, and even Wall Street firms invest, knowing that profits are guaranteed via federal money! Our many dozens of war companies, many federal prisons, the detention centers (we HAD a system to process immigrants, but they corrupt always want to get in on a ‘privatized’ system to enrich themselves), our healthcare insurance and more – all privatized. Now they want public education (the ‘charter school’ push), infrastructure, the rest of the Post Office, the VA and more. Privatized entities bill the federal govt any amount, providing massive exec salaries and insanely high profits. I am trying to track down something I recently read about Congress critters getting ‘first dibs’ on buying in when these scams go public. smdh

    1. Dr John Hussman has written a nice piece recently on the Phillips curve and its link to Wage (not general price) Inflation. The Phillips curve may not be dead after all!

  3. Lot of different theories get lumped together under the vague term “modern monetary theory”.

    On the Phillips curve issue that AOC addressed, it makes sense that if there is currently a valid Phillips curve, it is much flatter than before. Put another way, if there is a NAIRU, it is lower than than before. I look at today’s actual CPI basket e.g. here for 2017 and I think about how much the current unemployment rate in the US labor is likely to be a factor in the current price of each thing. In many cases, its hard to see a major factor.

    So, sure, I don’t see that very low UE is a problem in and of itself. The problem is that the policies that the government might try, to drive UE down, may have other effects.

    1. That’s a point I made a while ago. Basically the money that was supposed to go into the economy, like the tax cuts, has gone into the market.

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