From FT Alphaville:
NAIRU: not just bad economics, now also bad politics
Janet Yellen has long believed it’s possible for “too many” Americans to have jobs. In her view, shared by many of her generation in the economics profession, consumer prices will rise too fast unless millions of people remain unemployed.
Despite this, the outgoing Federal Reserve boss is generally liked by the Left and is sometimes described as a “hero” for workers. Fed board nominee Marvin Goodfriend, however, was lambasted by Democratic Senators Sherrod Brown and Elizabeth Warren during his confirmation hearing for expressing similar opinions.
The difference suggests dwindling political support for one of the most bog-standard theories in central banking. Without politicians as adept as Yellen to defend it, the Fed may be forced to abandon the conceit there is always some “natural rate” of unemployment that prevents inflation from slowing down or speeding up.
That would be welcome; in addition to being morally odious, the theory is empirically unsupportable and is increasingly questioned by a younger generation of central bankers.
Fed staffers were consistently surprised by the persistence of inflation after crisis. Their theories told them high unemployment should have caused prices to rise more slowly. When that failed to happen, they eventually adjusted by concluding the “natural rate” of unemployment — also known as the “non-accelerating rate of unemployment”, or NAIRU — had increased.
Consider what Goodfriend said on May 4, 2012, which got him into so much trouble with Brown and Warren. In his interview with Bloomberg, Goodfriend expressed concern that the Fed could risk excessive inflation if it tried to bring the unemployment rate down to 7 per cent too quickly....MORE