Sunday 23 November 2014

Austrian groundgog decade

Via Paul Krugman, I see that Peter Schiff had this to say:
"The truth is that high levels of unemployment are historically correlated with higher inflation and low levels of unemployment with lower inflation. That is because an economy that more fully utilizes labor resources is more productive. More production brings down prices."

What??? Leave aside that pretty much everything in the Austrian worldview has been thoroughly refuted by evidence over the past 7 years -actually they will force you to leave it aside as they claim that Austrian economics is pure logic that is not refutable by evidence (handy, isn't it). Just look at the statement and... what???

For every task, you will find people willing to perform it for a lower compensation than others. In an economy that fully uses labour resources, you cannot target the cheaper population. How is that going to bring prices down I'm not too sure.
Further, with high unemployment the alreday frugal chap is well aware that, should he lose his job he would struggle mightily to find another one, whereas people are already queuing up to try and get HIS job, so you can bet that he will not be in a great position to demand a strong pay rise, while doing his best to appear very productive so as not to be replaced by someone by now willing to do it for even less. Contrast with a full employment economy where companies are bidding up to snatch anyone appearing on the job market.

And a high unemployment economy will find it very hard to sell the products that are already there (hey, if there was too much demand for the existing supply it would not STAY a high-unemployment economy), so companies will be in no position to bring up their prices, an effect that would go ever stronger as unemployment takes hold (people losing benefits would have even less purchasing power, further reducing demand), and of course a miserable outlook is going to reduce investments as well, just as we have seen over the past few years.

And yet Austrian true believers like Schaff will have you believe that the Philips curve points upwards: high unemployment triggers high inflation.
OK, we have exactly one case of a strong correlation in that direction, and what causality (it was mostly simultaneity) there was plainly went the other way: the oil shocks of the 70s triggered a strong inflation at a time of high unemployment. But clearly, when the price of your main input quadruples, you are going to struggle to stay competitive (thus unemployment), while it also has a direct effect on inflation, which was entrenched by the fact that, back then, most salaries were indexed to inflation -ie they HAD to rise by at least the inflation. So since inflation was boosted by an external event, wages could not adjust, making the problem worse. That is a clearly unique case that could not be replicated today as wages are no longer indexed.

Do Austrians really loved ABBA so much that they want to pretend we are always in the 70s?

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