Apart from Nash, economists who have had a fascinating and adventurous life practically do not exist and in fact William Phillips, the man who will keep us from hyperinflation or, if things go badly, plunge us back into recession, he was not an economist.
Being a New Zealander, he was rightly born on a farm isolated from the world where you had to make do with everything. The first few years he went to school by commuting on a freight train and then, when a dirt road was inaugurated, on a bicycle on which he spent two hours one way and as many on the way back. In order to be able to study during these four hours, he mounted a lectern on the handlebar. Then he fitted the house radio, the washing machine and all those electrical marvels that were changing life in the XNUMXs. He also built a cinema in the nearest town and became its director. To make some extra money he also went to Australia to hunt crocodiles and work in the mine and in the meantime he enrolled in university, of course electrical engineering.
He found a good job in a power plant but it was a bit boring and in 1937 he went to seek his fortune in China. When China was invaded by the Japanese fled to Russia, took the Trans-Siberian and arrived at London in time to be sent back to Singapore as RAF pilot. There was war and the Japanese did it prisoner in Indonesia for three and a half years. Unable to sit on his hands, he learned Chinese, built a small radio to communicate with the outside world and rudimentary electric kettles that allowed all the prisoners to prepare tea according to the sacred British customs.
After the war, completed his engineering studies in London, but still having the memory of the prison camp and of the self-regulation capacity of that human microcosm still alive, he decided to deepen it and took a second degree in sociology. However, these were the years of functionalism à la Parsons, formal and abstract, e Phillips found Keynes enthusiastically taught on the London School's business faculty much more fascinating. Those were the years in which people thought they held the keys to controlling the economy, freeing it from crises and directing it towards bright horizons of growth and social progress. She devoured books and economics courses and graduated again, to then become a teacher for many years. Being an engineer and being a Keynesian, he found it natural to build himself a hydraulic calculator with pumps and valves on which to run the Keynesian econometric model and earn his doctorate.
In the model he also put his own famous curve. She had noticed that wages went up when unemployment went down and vice versa. Irving Fisher had already noticed it, but no one had paid attention to it. The Phillips curve was instead appreciated by Samuelson and Solow, who introduced it in the United States and included it in those textbooks on which generations of central bankers trained.
The curve worked. Phillips, after years of teaching, had in the meantime retired to New Zealand to spend the last few years perfecting his Chinese, but its curve, together with the IS-LM of Hicks and Keynes, was became the backbone of the econometric models that would guide monetary policy for half a century. Even the Taylor rule, which should guide the level of interest rates, derives directly from the Phillips curve and incorporates it.
In the course of its life the Phillips curve has however met two moments of difficulty. The first was in the seventies, when Milton Friedman he pointed out that rising inflation, at a certain point, ceases to be accompanied by an increase in employment. The second was in the years after 2008, when it was seen that rising employment was no longer accompanied by an increase in inflation.
Unemployment in the United States today has fallen to a level that has always triggered wage inflation in the past. Europe will reach this point, according to the ECB, at the beginning of 2019. Since monetary policy produces its effects in one to two years and must therefore be preventive, the Fed should already have been in the tightening phase for some time (when we are not yet at neutral) and the ECB should be neutral (when instead it is still expansive). This delay demonstrates that the central banks are not blind in their belief in the Phillips curve. On the other hand, rightly so, the banks themselves still don't feel like declaring it dead and don't want to be caught completely unprepared if it were to suddenly wake up.
And besides, there is not even certain empirical evidence that the curve is completely dormant. The Atlanta Fed has a next generation wage inflation meter, which the market looks little because it is fond of traditional indicators. It has a broad statistical basis and measures the year-on-year change in earnings of those who have not changed jobs. Since those who change jobs in times of low unemployment usually get a good raise, the inflation calculated by the Atlanta Fed is therefore underreported. Although underestimated, however, it has already reached 3.4 per cent in the latest survey (it was 1.5 five years ago).
Even conceptually, it is difficult to declare the Phillips curve dead, unless you want to declare the law of supply and demand of which it is a subset dead (the scarcity of available labor increases its price, the abundance depresses it). It is rather true that the underlying world, yes, has profoundly changed.
When the Phillips curve worked well, the world of work was homogeneous, unionized, and marketed on a national basis. Today's Germany, which still has a relatively homogeneous and regulated world of work, a still powerful and organized trade union and a labor market that immigration has globalized only in the least qualified functions, it is no coincidence that the country where the Phillips curve still works very well. There is full employment and wage inflation, as per the textbook. In the last two years of a weak euro, delocalization has also stopped, so that the job market has returned to being national.
In the rest of the world, however, much has changed. Trade unions, given increasing power by the New Deal and post-war European legislation, were progressively weakened by legislation from the XNUMXs onwards. The large Fordist factories have been relocated, the huge open space offices overlooked by the little man with the umbrella in Tati's Playtime have been replaced at least in part by teleworking and automation.
The workforce is not necessarily objectively weak (full employment now extends to many countries) but it is subjectively very weak. It is atomised, it deals more and more in solitude with its compensation, knows that in the Balkans, Bangladesh or Lesotho there are those who can do the same job for a third or a tenth of their wages. It sees multitudes of immigrants who are or could compete (it is no coincidence that the German trade unions and the SPD opposed immigration with some success throughout the XNUMXs and XNUMXs). Law of artificial intelligences that will one day be able to run states, let alone not be able to do its job.
The subjective weakness leads not to ask for increases and for some time keeps wage inflation low, but the market forces somehow continue to work and sooner or later someone will come looking for even the shyest worker and to take him away he will offer him a raise. In America this already happens, but not in a generalized way.
So here we are at a crossroads. If the William Phillips curve is only asleep and central banks are on the verge of waking up, coldly raising rates, they will spare us what Alan Greenspan recently called the imminent stagflation. However, if the curve remains asleep for a few more quarters, the central banks, with their useless increases, risk producing a recession that we could otherwise avoid.
Luckily we still have a few months in which inflation will remain calm, while growth will remain at good levels. We remain constructive on equity markets (particularly Europe, hedged Japan and emerging markets). The increase in real rates wanted by the central banks has already taken place and for some time there won't be much else (except possibly inflation) to worry the bonds. Bank stocks still have some way to go.
All without exaggerating, because in a mature phase of the cycle one should never use a heavy hand.
