3. Chapter 18 contains a ‘concise postwar economic history’.
Comment:
The reader is invited to compare that history with my amendment to the Bruno & Sachs story.
4. Phelps catalogues monetary aspects as temporary (‘high frequency’) and nonmonetary aspects as structural (see p4 and 335).
Comment:
I agree that it is valuable to look at nonmonetary effects. But the major issue is the Phillipscurve, a relation between unemployment and inflation, and thus it is difficult to neglect monetary policy. When Central Banks have a wrong theory, and cause the rate of interest to rise, then this should be in the model.
On page 314, the acceleration of prices (change of inflation) is introduced in a Phillipscurve in an ad hoc manner.
Similarly, on page 329 the possible influence of Bretton Woods is discussed, and Phelps remarks that this system allowed for adjustable pegs - but then misses the point that the pegs were pretty fixed in practice.
No doubt, Phelps will agree that the whole story contains both elements.
5. Phelps uses the calculus of variations, and his marginal tax rate is
T(y)/
y.
Comment:
This is proper in this theoretical development, but it should be replaced by a dynamic marginal rate when the theory is translated to the real world. In chapter 29 it is explained what I mean by this, and it is shown that this dynamic marginal rate may be close to the average rate.
Curiously, Phelps’s econometric exercise uses average rates (p 314 & 318), and finds a contractionary relationship. In a sense, this supports my analysis, which allows lower average taxes and thus lower unemployment. However, I think that the estimated equation is too simple for the true model.
6. Turnover costs appear to be very effective in one of the major models.
Comment:
That would mean that a simple subsidy would have huge effects. This does not seem realistic. The huge effect comes - I surmise - from the homogeneous labour assumption, and it is more appropriate to assume heterogeneous labour.
7. “The shifts and long swings in unemployment are an equilibrium phenomenon, not a matter of misperceptions or misforecasts and consequent wage-price misalignments” (p vii). Phelps then uses “(...) the equilibrium case in the expectational sense of the term: the case of correct expectations about the course of the economy.” (p1)
Comment:
The Moon falling on and past the Earth - and expecting to fall so - is a story of disequilibrium and of equilibrating forces but also of equilibrium. What you use is just a matter of perception and of words. More important is the inoptimality of present unemployment.
Phelps writes on optimality: “(...) much of what we measure as unemployment reflects job rationing, hence is involutary and imposes private and social net burdens (...)” (p viii, see also Phelps p9).
Thus note that there is another concept of the “natural rate” (NAIRU), namely the market clearing rate.
Even when expectations are correct - even when happens what you predict - then you can still be unhappy about that and look for change; and thus there can still be forces towards the clearing rate. Fulfillment of expectations is not the only utility that you are after. Phelps’s emphasis on the expectations definition suggests that his analysis is incomplete.
Inoptimality may also have causes in the political structure, a point that gets less attention by Phelps regardless of his comment on p374-375.
8. Phelps: “A worldwide increase of public expenditure (...) was not found to be expansionary (...) The same is true of a worldwide increase of public debt. (...) Prudence requires putting aside the Keynesian approach for the time being in favor of taking up the structuralist approach.” (p330)
However, the page before: “(...) the economy is so complex an organism, so to speak, that it would be naive in the extreme to imagine that, at long last, the true macroeconomic model of equilibrium unemployment determination had been discovered. A question that permanently looms over any such research as this is whether the results interpreted as favorable to the theory are in reality the expression of some mix of other theories, some likely to be old and some not yet known.” (p329)
Comment:
I fully agree with the statement on page 329 but think the statement on page 330 overdone. The body of neoclassical thought is too big and strong to be replaced by a mostly ad hoc econometric exercise. This is hubris !
For starters: government expenditures rose as a result of unemployment benefit payments. So there is a positive relation between unemployment and expenditure. Secondly, “Keynes” is much more complex than the simple idea that deficits would reduce unemployment. Macro-economics aspires at wise management of economic development, only occasionally using deficits to reduce unemployment. (What politicians do, is another story.) One needs a more complex structural model to disentangle the various relationships, instead of a two-equation reduced form estimate as Phelps does. [124]