Heisenberg Report

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”.