Sat. Oct 16th, 2021

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 Attorney Solon Phillips  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.)

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