Galbraith does not have that background. Instead, he has a field day in making fun of our fellow economists who - indeed - make fool of themselves. Galbraith nicely remarks: “The NAIRU, like the wage rate, is downward sticky.” (p180) Perhaps in reality, but certainly in the estimates that the colleagues have been providing in these last years. Economists lag behind the observations. Robert J. Gordon, who I greatly respect, appears to provide a NAIRU estimate with a confidence interval that seems to make it rather useless for policy. Galbraith rightly comments that the NAIRU in this manner becomes a ritual blessing for the powerful and the status quo - and is far away from real science. Galbraith gets upset, and quite justified so, since so many innocent people are victims of this intellectual incapacity.
Nevertheless, Galbraith himself mentions an unemployment target of “4 percent or lower” (p171). This causes the question with me whether this is not a NAIRU again, and why it cannot be 2%. In his suggestions for anti-inflation measures, Galbraith also advocates wage restraint, and I cannot but think that the threat of unemployment has a role here.
Galbraith recalls the Friedman quote where the ‘natural rate’ of unemployment is ‘ground out’ from the ‘Walrasian system’. Galbraith makes fun of this, essentially arguing that ‘Walras’ was before ‘Keynes’:
“From a proper Keynesian perspective, the correct response to Friedman’s second formulation of the natural rate hypothesis would have simply been, “Sorry, but at the aggregative level the ‘labour market’ is a misconception; it does not exit.”” (p177)
Part of this is going too fast. First of all, we should ditch the word ‘natural’. Secondly, if we drop ‘Walras’ from the Friedman quote and substitute ‘the proper model’, then we have a proper argumentation. (And we should remember that Walras was a very subtle economist, with more attention for dynamics than perhaps commonly thought.) Thirdly, I don’t see why we cannot model the labour market as a ‘market’ with aggregate impact and spillover - even though I value the ILO dictum “Labour is not a commodity”. The ‘market’ model is useful economics, and the models can be used for policy advice.
So I think that Galbraith might well adopt the NAIRU and use it to his advantage. It is a useful modeling tool. If you put the hammer in the toolbox, instead of on the shaky shelf above your head, it won’t hit you on the head so often. Note also that Graafland (1990a) and Gelauff (1992) following Hersoug (1984) have provided more theoretical foundations to the concept, so that the complaint ‘an empirical regularity in search of a theory’ no longer seems valid.
Whereas I use a whole earnings distribution, Galbraith uses a Theil measure (and calls this a measure for inequality) - and, again quite parallel, we both link these to fiscal and monetary policy.
It may well be that an inequality measure is more efficient to use than a whole distribution. Such measures have been around for a long time, but it seems to me that Galbraith’s book is the first time that it is both developed in the present detail and linked up with policy.
Interestingly, Galbraith uses his measure to find that US unemployment should be below 5.5 % in order to keep equality constant or improving. Referring to the ‘natural rate’, he calls this the ‘ethical rate’. I wish he hadn’t done that, and had dumped the word ‘natural’ too. But as such his analysis nicely sharpens our insights in the dilemma’s of policy making.