During a press conference following the recent FOMC meeting, Federal Reserve Chair Janet Yellen stated, “The Phillips Curve is alive.”*
Before we dive into the reasons behind this claim and why Yellen’s position is precarious, it’s essential to understand the context of her statement.
This week, at a business event, we witnessed the reality of Brandolini’s Law. If you’re unfamiliar with this law, we apologize; your blissful ignorance is about to end.
Brandolini’s Law, also known as the BS Asymmetry Principle, was articulated by Italian programmer Alberto Brandolini. It states, “The amount of energy required to refute BS is an order of magnitude greater than that needed to produce it.”
In simpler terms, it takes ten times more effort to debunk a falsehood than it does to produce it. Brandolini’s insight proves to be universally applicable, with countless examples evident in various fields.
Spewing Nonsense
In the realms of finance, policy, and economics, there exists an abundance of nonsensical claims. Unfortunately, countering this misinformation is a tedious task.
Nowhere is the blend of finance, policy, and economics more pronounced than in the often disreputable world of central banking. Terms like fiat money, legal tender, zero interest rate policy (ZIRP), negative interest rate policy (NIRP), Operation Twist, and quantitative easing illustrate this chaos. Can you think of any other profession that operates so precariously on a foundation of misleading information?
Janet Yellen is undeniably entrenched in this world of misinformation, which is an essential part of her role as a central banker. Unfortunately for her, she doesn’t excel at it. For such disinformation to be effective, it must be delivered with unwavering confidence. It can be incoherent, contradictory, or downright nonsensical, but hesitation is unacceptable.
However, Yellen’s speeches are often marked by uncertainty. She hesitates, avoids direct answers, and exhibits a kind of wavering confidence. As a result, we find it hard to excuse her shortcomings.
As previously mentioned, Yellen claimed at Wednesday’s press conference that “The Phillips Curve is alive.” This assertion, in fact, is pure nonsense, conveyed in just five words. According to Brandolini’s Law, the burden now falls upon us to expend a significant amount of energy to refute it.
Why Janet Yellen is Toast
The Phillips Curve posits an inverse relationship between inflation and unemployment: when unemployment decreases, inflation rises, and vice versa.
Originally developed by economist William Phillips through data on wage rates and unemployment from the UK between 1913 and 1948, the curve has limitations. Economists often overlook a vital insight: the economy is dynamic, not stagnant, and its variables evolve over time.
While the Phillips Curve may have accurately reflected a specific historical context, its relevance has faded, particularly in light of globalization and fluctuating economic conditions.
Moreover, following Phillips’s initial findings, there have been extended periods that contradict this theory, particularly during the late 1970s when both inflation and unemployment surged simultaneously.
How could this happen? Weren’t inflation and unemployment supposed to be mutually exclusive? According to the Phillips Curve, such a scenario was deemed impossible. Yet, it occurred nonetheless. Therefore, the Phillips Curve can be considered a flawed theory.
Yellen’s continued endorsement of this outdated concept is not only intolerable but also an affront to economic reasoning. This sentiment, alongside other criticisms, explains why her tenure is in jeopardy. With her four-year term concluding in February 2018, we suspect she may not remain in her position much longer, especially after the next Presidential inauguration.
Sincerely,
MN Gordon
for Economic Prism
