Known Unknowns


Welcome to Known Unknowns, a newsletter that remains devoted to “discredited” and “defunct” economists.

Is the Phillips Curve dead?

I think that’s the wrong question, because it’s actually been dead since the 1970s, with the onset of stagflation. Since then, economists and policymakers have used the Philips Curve 2.0. All the gleeful “economists are slaves to a dead theory” stories seem to ignore the last 40 years of economic research. But I digress.

I think the better question is “is the Philips curve 2.0 dead?” or “do the natural rate and inflation expectations play the same role in the economy that they used to?” The natural rate is misunderstood. Many people think it is permanent, but it can actually change just like any other economic variable, because it is a function of skills, reservation wages, and any structural element in the economy. The distinction is important, because monetary policy does not have much influence over the natural rate. It’s not that the natural rate can’t change, or does not respond to policy—it just doesn’t respond to monetary policy.

Now, it’s true that inflation and inflation expectations have been low, even as unemployment, natural and otherwise, has fallen (or so we think). Does that mean Philips Curve 2.0 is dead? Maybe. It’s hard to know, because no one knows what the natural rate is. But I think that inflation targeting works pretty well, and people believe that the target and expectations have been very stable, which means that the relationship between inflation, expectations, and unemployment may have changed. Perhaps it’s time for the Philips curve 3.0. After all, economies evolve, and so should economic models. I think that suggests a need for caution and humility, not a 50 basis point rate cut.

Here’s what confuses me. I keep hearing people say “the Philips Curve is dead,” and also that we should keep cutting rates until there’s higher inflation. This seems inconsistent to me. You can’t say that the Philips Curve is dead and then use it to justify a rate cut.

We’ll all soon have reputation insurance

I recently had a delightful conversation with Bruce Carnegie-Brown, the chairman of Lloyds of London. I’ve always been fascinated by Lloyds, because they insure crazy things that no one else will—people’s hair, damage from California wildfires, and cyber insurance, to name a few. These are risks that are nearly impossible to measure. How do they do it? Some measurement, some experience, some trial and error, and lots of reinsurance. Lloyds also relies on diversification because it is a network of syndicates that underwrite each policy. I wonder if that model will still work now that more risks, climate and cyber, are systematic.

Carnegie-Brown says that in the age of big data, those who thrive will be the people who know what data not to use. He says that contrary to public perception, those with the most data don’t necessarily have the greatest advantage. Too much data can be a bad thing. The winners will be the people who know what data is actually useful.

I asked him what the new risks are that he’d like to insure, and he suggested reputation insurance. Imagine if you could insure against a bad tweet ruining your career. Think of the moral hazard!

Fight for $15

The House passed a $15 federal minimum wage by 2025. Never mind that the median wage in many southern states is $14. I guess we live a time in which there are no trade-offs. I don’t want to think what will happen if there’s a recession in the next few years.

And I can’t blame populists this time. The economics profession is sharply divided on this issue. Only a few years ago, most everyone agreed that a minimum wage that exceeds the median wage is a bad idea. I’m not sure what changed. I’m also disturbed by the tenor of the conversation, as economists are smearing colleagues’ work in major newspapers and claiming that peer-reviewed, still well-regarded papers have been “discredited.” This serves no one, especially the low-wage workers caught in the crosshairs.

Economics has a long history of political balance, even if they did not necessarily get along. But I’m starting to think that we are no better than sociologists.

Can a Cosmo quiz tell us the future of health care?

I don't know how scientific it is, but Cosmopolitan recently released a poll on how young women feel about health care. It is important to them not only that there’s universal coverage, but that coverage is of uniform quality—i.e., that richer people don't get better care. If this poll is representative, it does not bode well for serious health insurance reform.

Even the Democratic candidates who are pushing Medicare for All appear to be hinting (I think so, anyway—it’s hard to know for sure) that people can still pay for higher quality care or elective procedures if they want to. But if everyone gets the same quality care and it’s disconnected from price, it seems that providing health care will either be incredibly expensive or that the quality of the care will be worse than what many Americans are used to. A more efficient solution is basic universal insurance and letting people opt for better care if they can afford it.

This often gets left out of the debate, because it seems unseemly. But Americans will need to reconcile the fact that if they want universal insurance, innovation, and the quality of care that they’re used to, not everyone will get the same quality of care. Considering that the Cadillac tax never went anywhere, it seems we’ll never have reform that asks people to pay more for better care.

The federal government quietly just took on a huge liability

It has always bothered me that entitlements don’t count as debt. After all, they tend to be senior to other forms of debt. And it sets up some bad incentives as well.

I know that you saw this one coming, but it looks like multi-employer plans might get a federal bail-out. No talk of reform, righting past mistakes, or sharing the pain—just a bail out. The PBGC was supposed to insure the plan, but they can’t afford to. So, the Ways and Means committee just approved a bill for a federal bailout.

This sets a bad precedent. What will happen to state and municipal plans which aren't insured and are also in bad shape? Is the PBGC just like Frannie and Freddie, in that they have an implicit guarantee that no one acknowledges, but everyone assumes, and no one really realizes until taxpayers need to pay up?

In other news

Putin can do just about anything to Russians and still get away with it—except mess with their pensions (it always comes down to pensions)

At least part of the soccer wage gap is due to male players taking riskier pay

Me on Master’s in Business

Why junk bonds are offering negative yields

Until next time, Pension Geeks!