Friday, April 19, 2013

Kevin Hoover Libels Samuelson and Solow

In this article Kevin Hoover claims he can summarize Samuelson and Solow (1960) by quoting the legend to their figure 2 removing necessary context.  His assertion is false.  It is easy to prove his claim is false, by reading the two paragraphs which follow his out of context quote.

Hoover wrote "he close fit between the estimated curve and the data encouraged many economists, following the lead of Paul Samuelson and Robert Solow, to treat the Phillips curve as a sort of menu of policy options. "

To the extent there is any basis at all for this claim, it is the legend to figure 2 "This shows the menu of choice between different levels of unemployment and price stability, as roughly estimated from the last 25 years of American data".  Yep there it is the word "menu".

The first full paragraph after figure 2 reads, and I quote (with possible typos and emphasis mine)

Aside from the usual warning that these are simply our best guesses, we must give another caution.  All of our discussion has been phrased in short-run terms, dealing with what might happen in the next few years. It would be wrong, though, to think that our Figure 2 menu that related obtainable price and unemployment behavior will maintain its same shape over in the longer run.  What we do in a policy way during the next few years might cause it to shift in a definite way.

This is the famous critique of Samuelson and Solow (1960) for which roughly 7 economists were awarded the Nobel memorial prize.  It is right there in Samuelson and Solow (1960).  

The following paragraph anticipates everything the slightest bit useful that Friedman or Lucas wrote about the Phillips curve.  Again I quote.


Thus it is possible that after they had produced a low-pressure economy, the believers in demand-pull might be disappointed in the short run; i.e., prices might continue to rise even though unemployment was considerable.  Nevertheless, it might e that the low-pressure demand would so act upon wage and other expectations as to shift the curve downward in the longer run - so that over a decade, the economy might enjoy higher employment with price stability than our present-day estimate would indicate.
Some macroeconomists claim that the field has progressed in my life time (I was born in 1960).  Indeed some claim that there has been a revolution on the order of the Copernican revolution.  I agree with Paul Krugman that the sole basis for this claim is the discovery which I just quoted and which was published 6 months before I was born.

In the following paragraph Samuelson and Solow anticipate the work of OJ Blanchard and Samuelson's nephew published in 1985 while also admirably refraining from polluting the economics literature with the word "hysteresis,"   They anticipate Friedman's critique of them and Blanchard and Summers's critique of Friedman.

But also the opposite is conceivable.  A low pressure economy might build up within itself over the years larger and larger amounts of structural unemployment (the reverse of what happened from 1941 to 1953 as a result of strong war and post war demands).  The result would be an upward shift of our menu of choice, with more and more unemployment being needed just to keep prices stable

That is they anticipated that what happened in the 1970s was possible then went on to note that what happened in Europe in the 1980s and 1990s was also possible.

Mainstream macroeconomics has only gotten as far as the second full paragraph after Figure 2 in Samuelson and Solow (1960).  It is, from time to time, noted that cyclical unemployment can become structural (the overwhelming micro evidence can't be ignored completely).  But the standard view is that the long run Phillips curve must be vertical, as Friedman said, and that two decades are a very short time.  I note that the not ultra orthodox Krugman describes this as part of the canon.

Milton Friedman’s assertion that there is no long-run tradeoff between inflation and unemployment turned out to be correct, and is now part of the standard canon.

Krugman is also confident that cyclican unemployment causes life long losses for the unemployed.  He knows that this is inconsistent with the standard canon.  The natural rate of unemployment is one and many constant and variable it resolves all contradictions by embodying them.

Friedman's critique of the Phillips curve was not an interesting combination of validity and originality.  It is demonstrably invalid and completely unoriginal.

1 comment:

Kevin D. Hoover said...

I stumbled on this while looking for something else (I am not usually a reader of blogs.) But I was shocked to discover that I had "libeled" two economists whom I greatly admire. Whether a reader ought to take account of the limited space available in an encyclopedia article or whether it is just a case of my own views developing, many of the points that are made in this post to refute me are points that I have long made myself in other contexts. My mature and more complete views on Samuelson and Solow's Phillips curve appear in a recent paper, which Solow himself has told me he mainly agrees with: "The Genesis of Samuelson and Solow’s Price-Inflation Phillips Curve." (http://public.econ.duke.edu/~kdh9/Source%20Materials/Research/Samuelson-Solow%20Genesis%2014%20%20May%202014.pdf)

Kevin D. Hoover