Archive for March, 2017

A Tale of Three Posts

Since I started blogging in July 2011, I have published 521 posts (not including this one). A number of my posts have achieved a fair amount of popularity, as measured by the number of views, which WordPress allows me to keep track of. Many, though not all, of my most widely viewed posts were mentioned by Paul Krugman in his blog. Whenever I noticed an unusually large uptick in the number of viewers visiting the blog, I usually found Krugman had linked to my post, causing a surge of viewers to my blog.

The most visitors I ever had in one day was on August 7, 2012. It was the day after I wrote a post mocking an op-ed in the Wall Street Journal by Arthur Laffer (“Arthur Laffer, Anti-Enlightenment Economist”) in which, based on some questionable data, and embarrassingly bad logic, Laffer maintained that countries that had adopted fiscal stimulus after the 2008-09 downturn had weaker recoveries than countries that had practiced fiscal austerity. This was not the first or last time that Krugman linked to a post of mine, but what made it special was that Krugman linked to it while he on vacation, so that for three days, everyone who visited Krugman’s blog found his post linking to my post, so that on August 7 alone, my post was viewed 7885 times, with 3004 viewing the post on August 8, 1591 on August 9, and 953 on August 10. In the entire month of August, the Laffer post was viewed 15,399 times. To this day, that post remains the most viewed post that I have ever written, having been viewed a total 17,604 times.

As you can see, the post has not maintained its popular appeal, over 87 percent of all views having occurred within three and a half weeks of its having been published. And there’s no reason why it should have retained its popularity. It was a well-written post, properly taking a moderately well-known right-wing economist to task for publishing a silly piece of ideological drivel in a once-great newspaper, but there was nothing especially profound or original about it. It was just the sort of post that Krugman loves to link to, and I was at the top of his blog for three days before he published his next post.

Exactly a year and a half later, February 6, 2014, I wrote another post (“Why Are Wages Sticky?“) that Krugman mentioned on his blog. I wasn’t mocking or attacking anyone, but suggesting what I think is an original theoretical explanation for why wages are more sticky than most other prices, while also reminding people that in the General Theory, Keynes actually tried to explain why wage stickiness was not an essential element of his theoretical argument for the existence of involuntary unemployment. Because it wasn’t as polemical as the earlier post, and because I didn’t have Krugman’s blog all to myself for three days, Krugman’s link did not generate anywhere near the traffic for this post that it did for the Laffer post. The day that Krugman linked to my post, February 7, it was viewed by 1034 viewers (333 of whom were referred by Krugman). Very good, but nowhere near the traffic I got a year and a half earlier. For the entire month of February, the post was viewed 2145 times. Again, that’s pretty good, but probably below average for a post to which Kruman posted a link. But the nice thing about the wage stickiness post is that although the traffic to that post dropped off over the next few months, the decline was not nearly as precipitous as dropoff in traffic to the Laffer post. During all of 2014, wage-stickiness post was viewed a total of 6622 times.

What I also noticed was that after traffic gradully dropped off in the months after February, traffic picked up again in September and again in October before dropping off slightly in December and January,  only to pick up again in February. That pattern, which has continued ever since, suggests to me that somehow econ students, on their own or perhaps at the suggestion of their professors, are looking up what I had to say about wage stickiness. Here is a WordPress table tracking monthly views of this post.

So unlike the Laffer post, the vast majority of the visits to the wage-stickiness post (almost 88%) have occurred since the month in which it was published. So for about two years I have been watching the visits to my wage-stickiness post gradually move up in the rankings of my all-time most viewed posts until I could announce that it had eclipsed the fluke Laffer post as my number one post. The price-stickiness post is now within less than fifty views of passing the Laffer post. Yes, I know it’s not a big deal, but I feel good about it.

But over the past six months, suddenly since October, a third post (“Gold Standard or Gold Exchange Standard: What’s the Difference?“), originally published on July 1, 2015, has been attracting a lot of traffic. When first published, it was moderately successful, drawing 569 visits on July 2, 2015, which is still the most visits it has received on any single day, mostly via links from Mark Toma’s blog and Brad DeLong’s blog. The post was not terribly original, but I think it did a nice job of describing that evolution of the gold standard from an almost accidental and peculiarly British, institution into a totem of late nineteenth-century international monetary orthodoxy, whose principal features remain till this day surprisingly obscure even to well trained and sophisticated monetary economists and financial experts.

And I also tried to show that the supposed differences between the pre-World-War I gold standard and the attempted and ultimately disastrous resurrection of the gold standard (GS 2.0) in the 1920s in the form of what was called a gold-exchange standard were really pretty trivial. So if the gold standard failed when it was reconstituted after World War I, the reason was not that what was tried was not the real thing. It was because of deeper systemic problems that had no direct connection to the nominal difference between the original gold standard and the gold exchange standard. I cconclluded the post with three lengthy quotations from J. M. Keynes’s first book on economics Indian Currency and Finance, which displayed an excellent understanding of the workings of the gold standard and the gold exchange standard, the latter having been the system by which India was linked to gold while under British control before World War I. Here is the WordPress table tracking monthly views of my post on the gold exchange standard.

The number of views this month alone is a staggering amount of traffic for any post — the second most views in a month for any post I have written. And what is more amazing is that the traffic has not been driven by links from other blogs, but has been driven, as best as I can tell, at least partially, by search engines.

The other amazing thing about the burst of traffic to this post is that most of the visitors seem to be coming from India. Over the past 30 days since February 28, this blog has been viewed 17,165 times. The most-often viewed post in that time period was my gold-exchange standard post, which was viewed 7385 times, i.e., over 40% of all views were of that one single post. In the past 30 days, my blog was viewed from India 6446 times while my blog was viewed from the United States only 4863 times. Over the entire history of this blog, about 50% of views have been from within the US. So India is clearly where it’s at now.

Now I know that the Indian monetary system was implicated in this post owing to my extended quotation from Keynes’s book, but that reference is largely incidental. So I am at a loss to explain why all these Indian visitors have been attracted to the blog, and why the attraction seems to be growing exponentially, though I suspect that traffic may have peaked over the last week.

At any rate here is how a WordPress table with my 11 most popular posts (as of today at 3:07 pm EDST).

So, as I write this it is not clear whether my hopes that my price-stickiness post will become my all-time most viewed post will ever come to pass, because my gold exchange standard post may very well pass it before it passes the Laffer post. Even so, over the very long run, I still have a feeling that the wage stickiness post will eventually come out on top. We shall see.

At any rate, if you have ever viewed either one of those posts in the past, I would be interested in hearing from you how you got to it.

PS I realized that, by identifying Paul Krugman’s blog as the blog from which many of my most popular posts have received the largest number of viewers, I inadvertently slighted Mark Thoma’s indispensible blog (, which really is the heart and soul of the econ blogosphere. I just checked, and I see that since my blog started in 2011, over 79,000 viewers have visited my blog via Mark’s blog compared to 53,000 viewers who have visited via Krugman. And I daresay that when Krugman has linked to one of my posts, it’s probably only after he followed Thoma’s link to my blog, so I’m doubly indebted to Mark.

Deconstructing Judge Bybee’s Disingenuous Dissent

On January 27, 2017, Executive Order 13769 was issued; among other things the order instructed cabinet secretaries to stop immigration from seven previously identified countries (Iran, Iraq, Libya, Somalia, Sudan, Syria, and Yemen), the officials being authorized to issue exemptions on a case-by-case basis. The order was immediately challenged in a number of suits in the federal district courts, with at least one court (in Boston) upholding the order. However, the court in the Western district of Washington, finding that the order was likely to be ruled unconstitutional in a trial on the merits, issued a temporary restraining order (TRO) blocking the government from enforcing the order. The government immediately appealed the TRO to the Ninth Circuit Court of Appeals. A three-judge panel of the court heard the appeal, and unanimously dismissed the government’s request for a stay of the TRO in a per curiam decision. Rather than appeal the decision of the 3-judge panel to the full court of appeals, or to the Supreme Court, the government chose to withdraw the initial order, mooting the decision, and began to redraft the order to address the defects in the original order identified by the district court trial judge and the 3-judge panel of the Ninth Circuit.

The opinion of the 3-judge panel upholding the TRO, focused on three provisions of the order: first the 120-day ban on entry into the US by any nationals from the seven listed countries, including nationals who are legal permanent residents, holders of green cards, or other valid non-immigrant visas permitting them to work or reside in the US, second the suspension for 120 days of the refugee resettlement program for nationals of the seven listed countries, and, upon completion of the 120-day period, the prioritization of granting refugee status to religious minorities (i.e., non-Muslims) from those countries, and third, the indefinite suspension of all Syrians from the refugee resettlement program.

Although the cause of action underlying the Washington case was removed by the withdrawal of executive order 13769, the decision of the 3-judge panel remains valid and may be cited as authority by other courts. However, one (unnamed) judge on the Ninth Circuit moved for the opinion to be vacated, a technical term meaning that the decision and the opinion are reduced to the approximate status of, say, a law review article, but become devoid of any precedential authority. A motion by a judge on the court of appeals to vacate a decision is typically not made unless a judge wants to signal his or her strong disagreement with the decision, and the opinion written by Judge Jay Bybee of the Ninth Circuit and concurred in by four other judges of the Ninth Circuit, including the former Chief Judge, Alex Kozinski.

The main points of the opinion of the 3-judge panel were: 1) the states of Washington and Minnesota had standing to act as plaintiffs on behalf of resident aliens and on behalf of citizens whose rights or interests were incidentally harmed by the executive order; 2) the executive order was subject to judicial review notwithstanding broad Constitutional powers assigned to the executive branch in matters of foreign policy and explicit grants of authority by Congress over immigration policy; 3) the TRO issued by the district court was a procedural order based on a finding by the court that the plaintiffs had established a substantial likelihood of success at trial; 4) in seeking to stay the TRO, the government bore the burden of rebutting the decision of the trial court that plaintiffs would prevail on the merits, which could be done either by proving that the wrong standard of judicial review was applied, or by showing that there was a compelling national security justification for the order; 5) the district court was correct in ruling that the plaintiffs had a strong likelihood of success in establishing that the Constitutionally granted rights of due process to which nationals from the seven listed countries who were either legal resident aliens, green-card holders, or holders of valid travel visas are entitled had been violated by the executive order; 6) the likelihood that claims by plaintiffs that they were victims of religious discrimination would be upheld is not clear, but a likelihood of success in establishing their due-process claims having been established, plaintiffs could continue to raise their religious discrimination claims in subsequent proceedings.

In his opinion arguing for the decision and opinion of the 3-judge panel to be vacated, Judge Bybee focused his attention primarily on the standard under which Executive Order 13769 may properly be reviewed. The key point of contention is whether the Supreme Court’s decision in Mandel v. Kleindienst sets the limits to what factors a court may take into consideration in reviewing the Executive Order, the failure of the 3-judge panel to abide by the Mandel standard constituting the fundamental error justifying the panel’s per curiam opinion to be vacated. But before considering the relevance of Mandel v. Kleindienst to the Washington case, I want to take note of some of Judge Bybee’s remarks about the Constitutional status of aliens and the rights to which they are entitled.

Having acknowledged that decisions by the government in the fields of foreign affairs and immigration policy are not entirely beyond the scope of judicial review, Judge Bybee asks how the requirements of judicial review can be reconciled with the deference owed to the political branches in those areas. He responds by invoking an old case:

The Supreme Court has given us a way to analyze these knotty questions, but it depends on our ability to distinguish between two groups of aliens: those who are present within our borders and those who are seeking admission. As the Court explained in Leng May Ma v. Barber,

It is important to note at the outset that our immigration laws have long made a distinction between those aliens who have come to our shores seeking admission, . . . and those who are within the United States after an entry, irrespective of its legality. In the latter instance the Court has recognized additional rights and privileges not extended to those in the former category who are merely “on the threshold of initial entry.” 357 U.S. 185, 187 (1958) (quoting Mezei, 345 U.S. at 212). (pp. 10-11)

The panel did not recognize that critical distinction and it led to manifest error.

This is a quite remarkable assertion by Judge Bybee, because two paragraphs earlier, criticizing the 3-judge panel for having merely paid lip-service to the deference owed to the President in the field of foreign affairs, Judge Bybee commented acidly:

The panel began its analysis from two important premises: first, that it is an “uncontroversial principle” that we “owe substantial deference to the immigration and national security policy determinations of the political branches,” 847 F.3d at 1161; second, that courts can review constitutional challenges to executive actions, see id. at 1164. I agree with both of these propositions. Unfortunately, that was both the beginning and the end of the deference the panel gave the President. (p. 9)

A rather peculiar criticism for Judge Bybee to have made inasmuch as his invocation of the critical distinction between aliens coming to our shores seeking admission and those already within the US after entry is both the beginning and the end of his own recognition of that distinction. But aside from its peculiarity, the criticism was completely misplaced, the distinction between two classes of aliens actually being central to the reasoning by which the panel justified its opinion.

The bedrock of Judge Bybee’s dissent rests is the case Kleindienst v. Mandel decided in 1972. Before Mandel, the doctrine of Consular Nonreviewability was absolute. Thus, in Knauff v. Shaughnessy the Supreme Court rejected the appeal of a former American soldier who wanted to bring his German wife to America under the War Brides Act. His wife’s application for a visa having been denied on the basis of confidential undisclosed information transmitted to the counselor official processing Mrs. Knauff’s visa application, Mr. Knauff filed suit seeking judicial review of the consular decision. The Court ruled that, as an alien applying for admission to the United States, Mrs. Knauff had no due-process claim for a review of the consular decision. The best commentary on the Court’s reprehensible decision was delivered by Justice Jackson in his dissenting opinion (which follows Justice Frankurter’s dissent in the link). “Security is like liberty” wrote Justice Jackson, “in that many are the crimes committed in its name.”

In Mandel, the doctrine of consular nonreviewability was extended, and modified ever-so slightly, to take into account not the non-existent right to due process of non-resident aliens, but the implicated rights of American citizens claiming some injury as a result of the consular official’s rejection of the alien’s visa application. Mandel, a Marxist journalist and scholar invited to speak at an academic conference, had unsuccessfully applied for a visa to enter the United States to attend the conference, his application having been denied by a consular official. In an earlier visit to the US to lecture and participate in academic conferences, Mandel had made an unscheduled appearance not authorized by his visa. Mandel and co-plaintiffs brought suit against Richard Kleindienst to require him to grant a waiver to the denial of Mandel’s visa request on the grounds that denial of Mandel’s request had violated the First and Fifth Amendment rights, not of Mandel, but of the US citizens who had invited him to participate in their conference. Mandel is, sadly, a well-established precedent, but its holding is orthogonal to the point of law – the rights to due process of aliens legally present within our borders – for which Judge Bybee invokes its undeserved authority.

Having both acknowledged and lamented Mandel’s status as an authoritative precedent on which much current immigration law depends, I will digress briefly to that a fair reading of the dissents by Justice Douglas and especially Justice Marshall ought to create substantial doubt in the mind of any disinterested reader that the case was correctly decided. Justice Marshall’s powerful and eloquent dissent deserves particular attention.

Today’s majority apparently holds that Mandel may be excluded and Americans’ First Amendment rights restricted because the Attorney General has given a “facially legitimate and bona fide reason” for refusing to waive Mandel’s visa ineligibility. I do not understand the source of this unusual standard. Merely “legitimate” governmental interests cannot override constitutional rights. Moreover, the majority demands only “facial” legitimacy and good faith, by which it means that this Court will never “look behind” any reason the Attorney General gives. No citation is given for this kind of unprecedented deference to the Executive, nor can I imagine (nor am I told) the slightest justification for such a rule.

Even the briefest peek behind the Attorney General’s reason for refusing a waiver in this case would reveal that it is a sham. The Attorney General informed appellees’ counsel that the waiver was refused because Mandel’s activities on a previous American visit “went far beyond the stated purposes of his trip . . . and represented a flagrant abuse of the opportunities afforded him to express his views in this country.” App. 68. But, as the Department of State had already conceded to appellees’ counsel, Dr. Mandel “was apparently not informed that [his previous] visa was issued only after obtaining a waiver of ineligibility and therefore [Mandel] may not have been aware of the conditions and limitations attached to the [previous] visa issuance.” App. 22. There is no basis in the present record for concluding that Mandel’s behavior on his previous visit was a “flagrant abuse” — or even willful or knowing departure — from visa restrictions. For good reason, the Government in this litigation has never relied on the Attorney General’s reason to justify Mandel’s exclusion. In these circumstances, the Attorney General’s reason cannot possibly support a decision for the Government in this case. But without even remanding for a factual hearing to see if there is any support for the Attorney General’s determination, the majority declares that his reason is sufficient to override appellees’ First Amendment interests.

Thus, the Mandel court’s own invocation of the “facially legitimate and bona fide reason” by which it justified the government’s refusal to grant Mandel a visa was itself neither facially legitimate nor bona fide, but a flagrant exercise of bad faith by the majority, invoking a made-up and pretextual justification for the refusal to grant Mandel a visa that even the government had not offered as a justification of its position. After disposing of this sham argument, Justice Marshall addressed the heart of the majority opinion, the broad grant of power to the Executive to exclude whole classes of aliens from the US.

The heart of appellants’ position in this case . . . is that the Government’s power is distinctively broad and unreviewable because “the regulation in question is directed at the admission of aliens.” Brief for Appellants 33. Thus, in the appellants’ view, this case is no different from a long line of cases holding that the power to exclude aliens is left exclusively to the “political” branches of Government, Congress, and the Executive.

These cases are not the strongest precedents in the United States Reports, and the majority’s baroque approach reveals its reluctance to rely on them completely. They include such milestones as The Chinese Exclusion Case, 130 U.S. 581 (1889), and Fong Yue Ting v. United States, 149 U.S. 698 (1893), in which this Court upheld the Government’s power to exclude and expel Chinese aliens from our midst.

But none of these old cases must be “reconsidered” or overruled to strike down Dr. Mandel’s exclusion, for none of them was concerned with the rights of American citizens. All of them involved only rights of the excluded aliens themselves. At least when the rights of Americans are involved, there is no basis for concluding that the power to exclude aliens is absolute. “When Congress’ exercise of one of its enumerated powers clashes with those individual liberties protected by the Bill of Rights, it is our ‘delicate and difficult task’ to determine whether the resulting restriction on freedom can be tolerated.” United States v. Robel, 389 U.S. 258, 264 (1967). As Robel and many other cases5  show, all governmental power — even the war power, the power to maintain national security, or the power to conduct foreign affairs — is limited by the Bill of Rights. When individual freedoms of Americans are at stake, we do not blindly defer to broad claims of the Legislative Branch or Executive Branch, but rather we consider those claims in light of the individual freedoms. This should be our approach in the present case, even though the Government urges that the question of admitting aliens may involve foreign relations and national defense policies.

The majority recognizes that the right of American citizens to hear Mandel is “implicated” in our case. There were no rights of Americans involved in any of the old alien exclusion cases, and therefore their broad counsel about deference to the political branches is inapplicable. Surely a Court that can distinguish between pre-indictment and post-indictment lineups, Kirby v. Illinois, 406 U.S. 682 (1972), can distinguish between our case and cases which involve only the rights of aliens.

I do not mean to suggest that simply because some Americans wish to hear an alien speak, they can automatically compel even his temporary admission to our country. Government may prohibit aliens from even temporary admission if exclusion is necessary to protect a compelling governmental interest.6  Actual threats to the national security, public health needs, and genuine requirements of law enforcement are the most apparent interests that would surely be compelling.7  But in Dr. Mandel’s case, the Government has, and claims, no such compelling interest. Mandel’s visit was to be temporary.8  His “ineligibility” for a visa was based solely on § 212(a)(28). The only governmental interest embodied in that section is the Government’s desire to keep certain ideas out of circulation in this country. This is hardly a compelling governmental interest. Section (a)(28) may not be the basis for excluding an alien when Americans wish to hear him. Without any claim that Mandel “live” is an actual threat to this country, there is no difference between excluding Mandel because of his ideas and keeping his books out because of their ideas. Neither is permitted. Lamont v. Postmaster General, supra.

Writing for the majority, Justice Blackmun – yes, that Justice Blackmun – attempted to deflect the clear violation of the First Amendment rights of American citizens resulting from the denial of Mandel’s visa application.

Appellees’ First Amendment argument would prove too much. In almost every instance of an alien excludable under § 212(a)(28), there are probably those who would wish to meet and speak with him. The ideas of most such aliens might not be so influential as those of Mandel, nor his American audience so numerous, nor the planned discussion forums so impressive. But the First Amendment does not protect only the articulate, the well known, and the popular. Were we to endorse the proposition that governmental power to withhold a waiver must yield whenever a bona fide claim is made that American citizens wish to meet and talk with an alien excludable under § 212(a)(28), one of two unsatisfactory results would necessarily ensue. Either every claim would prevail, in which case the plenary discretionary authority Congress granted the Executive becomes a nullity, or courts in each case would be required to weigh the strength of the audience’s interest against that of the Government in refusing a waiver to the particular alien applicant, according to some as yet undetermined standard. The dangers and the undesirability of making that determination on the basis of factors such as the size of the audience or the probity of the speaker’s ideas are obvious. Indeed, it is for precisely this reason that the waiver decision has, properly, been placed in the hands of the Executive.

This response might have been persuasive if there had in fact been a bona fide reason for denying Mandel’s visa application. However, the stated reason was clearly pretextual and a sham; the real reason for denying the application was Mandel’s political opinions, so the First Amendment argument raised by Appellees was entirely correct and unrebutted by Justice Blackmun’s majority opinion. Mandel v. Kleindienst was wrongly and dishonestly decided, and, like similar wrongly decided cases, e.g., Korematsu v. United States, deserves, as a matter of simple justice, no precedential weight.

Despite its having been demolished by Justice Marshall’s dissent, I am willing to stipulate for present purposes that the majority opinion in Mandel would be controlling if it were not distinguishable from the case decided by the 3-judge panel. But let us keep in mind two important takeaway points from Justice Marshall’s discussion: first, the disgraceful, racist lineage of the plenary powers doctrine as it relates to immigration, and second, and more importantly for assessing Judge Bybee’s dissent, the absence in Mandel v. Kleindienst of any distinction between the Constitutional rights or interests of citizens that are incidentally abridged by the refusal to admit non-resident aliens into the Unites States and the Constitutional due process rights of aliens legally residing in the United States, precisely the distinction that, Judge Bybee incorrectly asserts, is addressed by Mandel.

Judge Bybee begins by criticizing the 3-judge panel for distinguishing Mandel, in which the Attorney General’s refusal to grant a waiver allowing Mandel entry to the US after a consular official denied his visa application, from an Executive Order promulgating sweeping immigration policy. Judge Bybee offers the following rebuttal:

First, the panel’s declaration that we cannot look behind the decision of a consular officer, but can examine the decision of the President stands the separation of powers on its head. We give deference to a consular officer making an individual determination, but not the President when making a broad, national security-based decision? With a moment’s thought, that principle cannot withstand the gentlest inquiry, and we have said so. See Bustamante v. Mukasey , 531 F.3d 1059, 1062 n.1 (9th Cir. 2008) (“We are unable to distinguish Mandel on the grounds that the exclusionary decision challenged in that case was not a consular visa denial, but rather the Attorney General’s refusal to waive Mandel’s inadmissibility. The holding is plainly stated in terms of the power delegated by Congress to the Executive.’ The Supreme Court said nothing to suggest that the reasoning or outcome would vary according to which executive officer is exercising the Congressionally-delegated power to exclude.”) (pp. 12-13)

Judge Bybee’s sarcasm is as misplaced as it is inappropriate. Mandel is a case about the exercise of a Congressionally authorized power to make a factual determination, normally delegated to a consular official, but in this case the determination at issue was made by the Attorney General reviewing the consular decision. In Bustamente the decision was made at the consular level. Big deal! The Mandel court ruled that such consular decisions to deny visas or higher- level decisions to deny waivers to lower-level decisions were not reviewable on the merits, even if the denials incidentally infringed upon the Constitutional rights of American citizens, provided that “a facially legitimate and bona fide reason” for the decision was provided. The deference accorded by Mandel to the factual decision of a consular official – or his superior — to deny the visa application of a non-resident alien, albeit one that incidentally affected the rights of an American citizen, is in no way comparable to a Presidential decision denying or abridging the Constitutional due-process rights of legally resident aliens, green-card holders and non-immigrant aliens holding valid visas.

Second, the promulgation of broad policy is precisely what we expect the political branches to do; Presidents rarely, if ever, trouble themselves with decisions to admit or exclude individual visa -seekers. See Knauff, 338 U.S. at 543 (“[B]ecause the power of exclusion of aliens is also inherent in the executive department of the sovereign, Congress may in broad terms authorize the executive to exercise the power . . . for the best interests of the country during a time of national emergency.”). If the panel is correct, it just wiped out any principle of deference to the executive. (p. 13)

Is there no deference to the executive unless we allow the Constitutional rights of American citizens and legally resident aliens to be trampled upon by the executive? Since when does “deference” mean “abject submission?” The implications of Judge Bybee’s argument lead straight to Korematsu v. United States. If Judge Bybee is correct, what Constitutional rights may not be abridged by the executive in the process of excluding aliens? Deference to the executive need not entail acquiescence in the denial of due process rights on an industrial scale.

Judge Bybee then invokes Fiallo v. Bell to support his position that broad policy decisions – in this case by Congress, which accorded preferential treatment to the natural mothers of illegitimate children over the natural fathers – are immune from scrutiny despite having discriminatory effects (pp. 13-14). In Fiallo, the Supreme Court upheld a provision of the 1952 Immigration and Nationality Act giving preference for immigration into the US to the legitimate parents of American citizens and to the illegitimate mothers (but not illegitimate fathers) of American citizens as well as to the legitimate children of American parents and to the illegitimate children of American mothers (but not American fathers). A group of illegitimate fathers of American children and illegitimate offspring of American fathers challenged this provision for discriminating on the basis of sex and legitimacy. The Fiallo Court relied on the Mandel “facially legitimate and bona fide reason” test to rule against the plaintiffs.

The panel’s holding that “exercises of policy making authority at the highest levels of the political branches are plainly not subject to the Mandel standard,” id., is simply irreconcilable with the Supreme Court’s holding that it could “see no reason to review the broad congressional policy choice at issue [there] under a more exacting standard than was applied in Kleindienst v. Mandel,” Fiallo, 430 U.S. at 795.

Having thoughtlessly embarked on the wrong road, Judge Bybee keeps marching relentlessly forward. Fiallo, like Mandel, is a case brought by American citizens claiming that their Constitutional rights not to be discriminated against had been incidentally abridged by a Congressional policy decision concerning which aliens, not otherwise eligible for entry into the US, shall be granted special waivers. While the case is related to Mandel, it was not entailed by Mandel, because deference to a consular decision about a question of fact need not entail deference to Congress about a matter of policy. Indeed, both the majority and the minority in Fiallo suggested reasons why the Congressional policy might have been judged to serve a legitimate public purpose. But again the key point is simply that the holding of the Fiallo court did not address the issue addressed by Washington, which is whether the President, by Executive Order, may deny the Constitutional rights of resident aliens, green card holders, and aliens holding valid visas.

Judge Bybee’s wrongheaded attack on the decision of the 3-judge panel reaches a crescendo of confusion in his discussion of Kerry v. Din (pp. 14-16), once again citing a case involving the Constitutional claim of an American citizen as a basis for challenging the denial of a visa to a non-resident alien. In Din, a US citizen whose Afghani husband had been denied an entry visa, claimed that her Constitutional right to live with her husband had been violated without due process. After the Ninth Circuit Court of Appeals upheld her claim, the Supreme Court reversed that decision on appeal. Not only does Judge Bybee misunderstand the relevance of Din to the issues addressed by the 3-judge panel, he fails to recognize that the holding of the Din court has essentially no precedential weight, because the majority that upheld the decision not to grant Din’s husband a visa did not agree on the grounds for rejecting Din’s claim, three justices rejecting Din’s claim that she had a Constitutional right to live with her husband, and two justices arguing that even if she had such a Constitutional right, the consular decision to her husband’s visa request satisfied the Mandel “facially legitimate and bona fide reason” test.

Believing that, because Justice Kennedy’s opinion invoking the Mandel test was controlling, that opinion has precedential authority for other cases, Judge Bybee admonishes the 3-judge panel for ignoring Din. Judge Bybee is wrong on both counts; Din is irrelevant to the opinion of the 3-judge panel, and, even if it were relevant, the 3-judge panel would not have had to reckon with it, because the majority could not agree on the basis of the decision. And I can’t help but observe that, on its face, Justice Kennedy’s opinion that the decision of the consular official that Din’s husband was a terrorist threat merely because he had held a civil-service position under the Taliban government did not obviously satisfy even the weak Mandel test, as Justice Breyer cogently observed in his dissenting opinion.

When Judge Bybee finally does get to a discussion of relevant precedents 16 pages into his 25 page opinion, the best he is able to come up with is Rajah v. Mukasey. After the September 11 attacks, non-immigrant resident males over the age of 16 from 24 Muslim-majority countries plus North Korea were required to appear for registration and fingerprinting. The Second Circuit Court of Appeals upheld this requirement in view of potential risks of further terrorist attacks. Although these requirements were burdensome and discriminatory, those requirements were hardly comparable to exclusion from the United States, so the willingness of the Rajah court to approve such provisions in the wake of the worst terrorist attack in US history does not come close to proving what Judge Bybee wants it to prove: that the law allows the President to revoke the Constitutional rights of resident aliens and prevent them from re-entering the country without even granting them a hearing. In other words, under Judge Bybee’s understanding, resident aliens denied re-entry into the country by Executive Order 13769 would be denied even the minimal “additional rights and privileges not extended to those on the threshold of entry” that, according to the Court in Leng May Ma v. Barber cited above, have been recognized by the Court.

The logical confusion of Judge Bybee’s conflation of two completely different classes of cases is actually quite impressive.

Judge Bybee (p. 20) also invokes 8 U.S.C. 1182f as a legal basis for the executive order at issue. However, the statutory authority of the US Code does not automatically override the Constitutional right to a hearing of a legal resident alien denied re-entry into the United States. Nor is it obvious that the statute in question referring to “the entry of any aliens or of any class of aliens into the United States,” includes resident aliens seeking re-entry into the United States. That is a question of statutory interpretation and the courts are entitled to have the final say on matters of statutory interpretation.

Judge Bybee (p. 20-21) considers that the reasons offered by the President in issuing the executive order were facially legitimate and bona fide reasons, but he acknowledges that in Din, Justice Kennedy indicated that evidence of bad faith on the part of a consular officer who denied a visa might be grounds for questioning whether the reasons offered by consular officer were “facially legitimate and bona fide.” After again chiding the 3-judge panel for not discussing Din, Judge Bybee (p. 21-22) then makes the interesting remark that “it would be a huge leap to suggest that Din’s ‘bad faith’ exception also applies to the motives of broad-policy makers as opposed to those of consular officials.” Because the grounds for suspecting that the executive order was issued in bad faith are so varied and abundant, it is astonishing that Judge Bybee would consider it a leap to conclude that a bad-faith exception might apply to a policy maker, especially after Judge Bybee was so insistent earlier in his opinion that the Mandel “facially legitimate and bona fide reason” test originally applied to the consular nonreviewability doctrine applied seamlessly to both consular decisions and to broad policy decisions.

There are other defects of Judge Bybee’s decision that I could have touched on, but this post is already much too long, and I have devoted too much of my time to tracking them down and explaining them. But I hope others will continue.

Samuelson Rules the Seas

I think Nick Rowe is a great economist; I really do. And on top of that, he recently has shown himself to be a very brave economist, fearlessly claiming to have shown that Paul Samuelson’s classic 1980 takedown (“A Corrected Version of Hume’s Equilibrating Mechanisms for International Trade“) of David Hume’s classic 1752 articulation of the price-specie-flow mechanism (PSFM) (“Of the Balance of Trade“) was all wrong. Although I am a great admirer of Paul Samuelson, I am far from believing that he was error-free. But I would be very cautious about attributing an error in pure economic theory to Samuelson. So if you were placing bets, Nick would certainly be the longshot in this match-up.

Of course, I should admit that I am not an entirely disinterested observer of this engagement, because in the early 1970s, long before I discovered the Samuelson article that Nick is challenging, Earl Thompson had convinced me that Hume’s account of PSFM was all wrong, the international arbitrage of tradable-goods prices implying that gold movements between countries couldn’t cause the relative price levels of those countries in terms of gold to deviate from a common level, beyond the limits imposed by the operation of international commodity arbitrage. And Thompson’s reasoning was largely restated in the ensuing decade by Jacob Frenkel and Harry Johnson (“The Monetary Approach to the Balance of Payments: Essential Concepts and Historical Origins”) and by Donald McCloskey and Richard Zecher (“How the Gold Standard Really Worked”) both in the 1976 volume on The Monetary Approach to the Balance of Payments edited by Johnson and Frenkel, and by David Laidler in his essay “Adam Smith as a Monetary Economist,” explaining why in The Wealth of Nations Smith ignored his best friend Hume’s classic essay on PSFM. So the main point of Samuelson’s takedown of Hume and the PSFM was not even original. What was original about Samuelson’s classic article was his dismissal of the rationalization that PSFM applies when there are both non-tradable and tradable goods, so that national price levels can deviate from the common international price level in terms of tradables, showing that the inclusion of tradables into the analysis serves only to slow down the adjustment process after a gold-supply shock.

So let’s follow Nick in his daring quest to disprove Samuelson, and see where that leads us.

Assume that durable sailing ships are costly to build, but have low (or zero for simplicity) operating costs. Assume apples are the only tradeable good, and one ship can transport one apple per year across the English Channel between Britain and France (the only countries in the world). Let P be the price of apples in Britain, P* be the price of apples in France, and R be the annual rental of a ship, (all prices measured in gold), then R=ABS(P*-P).

I am sorry to report that Nick has not gotten off to a good start here. There cannot be only tradable good. It takes two tango and two to trade. If apples are being traded, they must be traded for something, and that something is something other than apples. And, just to avoid misunderstanding, let me say that that something is also something other than gold. Otherwise, there couldn’t possibly be a difference between the Thompson-Frenkel-Johnson-McCloskey-Zecher-Laidler-Samuelson critique of PSFM and the PSFM. We need at least three goods – two real goods plus gold – providing a relative price between the two real goods and two absolute prices quoted in terms of gold (the numeraire). So if there are at least two absolute prices, then Nick’s equation for the annual rental of a ship R must be rewritten as follows R=ABS[P(A)*-P(A)+P(SE)*-P(SE)], where P(A) is the price of apples in Britain, P(A)* is the price of apples in France, P(SE) is the price of something else in Britain, and P(SE)* is the price of that same something else in France.

OK, now back to Nick:

In this model, the Law of One Price (P=P*) will only hold if the volume of exports of apples (in either direction) is unconstrained by the existing stock of ships, so rentals on ships are driven to zero. But then no ships would be built to export apples if ship rentals were expected to be always zero, which is a contradiction of the Law of One Price because arbitrage is impossible without ships. But an existing stock of ships represents a sunk cost (sorry) and they keep on sailing even as rentals approach zero. They sail around Samuelson’s Iceberg model (sorry) of transport costs.

This is a peculiar result in two respects. First, it suggests, perhaps inadvertently, that the law of price requires equality between the prices of goods in every location when in fact it only requires that prices in different locations not differ by more than the cost of transportation. The second, more serious, peculiarity is that with only one good being traded the price difference in that single good between the two locations has to be sufficient to cover the cost of building the ship. That suggests that there has to be a very large price difference in that single good to justify building the ship, but in fact there are at least two goods being shipped, so it is the sum of the price differences of the two goods that must be sufficient to cover the cost of building the ship. The more tradable goods there are, the smaller the price differences in any single good necessary to cover the cost of building the ship.

Again, back to Nick:

Start with zero exports, zero ships, and P=P*. Then suppose, like Hume, that some of the gold in Britain magically disappears. (And unlike Hume, just to keep it simple, suppose that gold magically reappears in France.)

Uh-oh. Just to keep it simple? I don’t think so. To me, keeping it simple would mean looking at one change in initial conditions at a time. The one relevant change – the one discussed by Hume – is a reduction in the stock of gold in Britain. But Nick is looking at two changes — a reduced stock of gold in Britain and an increased stock of gold in France — simultaneously. Why does it matter? Because the key point at issue is whether a national price level – i.e, Britain’s — can deviate from the international price level. In Nick’s two-country example, there should be one national price level and one international price level, which means that the only price level subject to change as a result of the change in initial conditions should be, as in Hume’s example, the British price level, while the French price level – representing the international price level – remained constant. In a two-country model, this can only be made plausible by assuming that France is large compared to Britain, so that a loss of gold could potentially affect the British price level without changing the French price level. Once again back to Nick.

The price of apples in Britain drops, the price of apples in France rises, and so the rent on a ship is now positive because you can use it to export apples from Britain to France. If that rent is big enough, and expected to stay big long enough, some ships will be built, and Britain will export apples to France in exchange for gold. Gold will flow from France to Britain, so the stock of gold will slowly rise in Britain and slowly fall in France, and the price of apples will likewise slowly rise in Britain and fall in France, so ship rentals will slowly fall, and the price of ships (the Present Value of those rents) will eventually fall below the cost of production, so no new ships will be built. But the ships already built will keep on sailing until rentals fall to zero or they rot (whichever comes first).

So notice what Nick has done. Instead of confronting the Thompson-Frenkel-Johnson-McCloseky-Zecher-Laidler-Samuelson critique of Hume, which asserts that a world price level determines the national price level, Nick has simply begged the question by not assuming that the world price of gold, which determines the world price level, is constant. Instead, he posits a decreased value of gold in France, owing to an increased French stock of gold, and an increased value of gold in Britain, owing to a decreased British stock of gold, and then conflating the resulting adjustment in the value gold with the operation of commodity arbitrage. Why Nick thinks his discussion is relevant to the Thompson-Frenkel-Johnson-McCloseky-Zecher-Laidler-Samuelson critique escapes me.

The flow of exports and hence the flow of specie is limited by the stock of ships. And only a finite number of ships will be built. So we observe David Hume’s price-specie flow mechanism playing out in real time.

This bugs me. Because it’s all sorta obvious really.

Yes, it bugs me, too. And, yes, it is obvious. But why is it relevant to the question under discussion, which is whether there is an international price level in terms of gold that constrains movements in national price levels in countries in which gold is the numeraire. In other words, if there is a shock to the gold stock of a small open economy, how much will the price level in that small open economy change? By the percentage change in the stock of gold in that country – as Hume maintained – or by the minisicule percentage change in the international stock of gold, gold prices in the country that has lost gold being constrained from changing by more than allowed by the cost of arbitrage operations? Nick’s little example is simply orthogonal to the question under discussion.

I skip Nick’s little exegetical discussion of Hume’s essay and proceed to what I think is the final substantive point that Nick makes.

Prices don’t just arbitrage themselves. Even if we take the limit of my model, as the cost of building ships approaches zero, we need to explain what process ensures the Law of One Price holds in equilibrium. Suppose it didn’t…then people would buy low and sell high… know the rest.

There are different equilibrium conditions being confused here. The equilibrium arbitrage conditions are not same as the equilibrium conditions for international monetary equilibrium. Arbitrage conditions for individual commodities can hold even if the international distribution of gold is not in equilibrium. So I really don’t know what conclusion Nick is alluding to here.

But let me end on what I hope is a conciliatory and constructive note. As always, Nick is making an insightful argument, even if it is misplaced in the context of Hume and PSFM. And the upshot of Nick’s argument is that transportation costs are a function of the dispersion of prices, because, as the incentive to ship products to capture arbitrage profits increases, the cost of shipping will increase as arbitragers bid up the value of resources specialized to the processes of transporting stuff. So the assumption that the cost of transportation can be treated as a parameter is not really valid, which means that the constraints imposed on national price level movements are not really parametric, they are endongenously determined within an appropriately specified general equilibrium model. If Nick is willing to settle for that proposition, I don’t think that our positions are that far apart.

Cyclical versus Secular Causes of Stagnation

Nick Rowe and Scott Sumner have recently had an interesting little debate about whether the slowdown in real GDP growth and labor productivity since the 2007-09 downturn is the result of cyclical or secular factors. Nick argues that successful inflation targeting in the two decades before the 2007 downturn had given rise to entrepreneurial expectations of stable aggregate demand, thereby providing a supportive macroeconomic environment for long-term investment that generates rising labor productivity over time. By undermining confidence in macroeconomic stability, the 2007-09 downturn diminished the willingness of businesses to continue make long-term investments and thus compromised one of the institutional pillars supporting long-term investment and productivity growth. Despite a recovery, expectations of future aggregate demand are now held with less confidence – higher perceived variance – than previously, thereby reducing entrepreneurial willingness to commit to the long-term capital expansion that increases productivity.

Scott is skeptical of the argument, because productivity growth had already started to decline after the 2001 downturn. Of course, one could argue that geopolitical uncertainty after the 9/11 attack and the invasions of Afghanistan and Iraq could have had a similar depressing effect on investment well before the 2007 downturn. So the decline in productivity growth that was underway at the time of the 2007 downturn is not necessarily inconsistent with Nick’s basic story. But Scott at least partially defends himself against that response by showing that real long-term investment as a share of GDP rose sharply after the 2001 downturn and was well above the levels of 1950s and 1960s.

Seeing no reason why the pace of productivity growth couldn’t have been affected by both cyclical and secular forces, I am happy to agree with both Nick and Scott. But I also have my own theory about the slowdown in productivity growth, which I have discussed previously, so this seems like a good time to weigh in again on the topic. As I pointed out in a 2015 post, one characteristic that distinguishes the 2007-09 downturn from earlier downturns is that it was associated with relatively large sectoral shifts in demand. Thus, the 2007-09 downturn was characterized by a higher percentage of jobs lost in the downturn that were not subsequently restored than was the case in earlier downturns. In earlier downturns, the decline in aggregate demand caused workers to be laid off temporarily from their jobs when demand and output fell, but a large percentage of laid-off workers were later rehired by their former when demand and output recovered. And even many of those laid-off workers that weren’t rehired by their previous employers still eventually found jobs doing work very similar to what they had been doing before losing their old jobs.

The depth and the severity of recessions can be measured not just by the unemployment rate, but also by the long-term unemployment rate. What set the 2007-09 downturn and the recovery apart from earlier downturns — even the 1981-82 downturn, in which the unemployment rate rose to almost 11 percent, higher than the 10 percent rate at depth of the 2007-09 downturn – was a long-term unemployment rate substantially higher, followed by a slower rate of decline, than in any post-World-War II downturn. I quote from a recent article on long-term unemployment

In January 2017, there were 1.85 million long-term unemployed. The number first dropped below two million in May 2015. That means 24.2 percent of the unemployed have been looking for work for six months. That’s better than the record high of 46 percent in the second quarter of 2010.

Sadly, it’s barely better than the darkest days of the 1981 recession. At that point, 26 percent of the unemployed were out of work for more than six months. On the other hand, total unemployment was worse than it is today. There was a 10.8 percent overall unemployment rate. In other words, the Great Recession created a higher percent of long-term unemployment.(Source: “Potential Causes and Implications of the Rise in Long-Term Unemployment,” The Federal Reserve Bank of Richmond, September 2011.)

Here’s how I put it in 2015.

[T]he 2008-09 downturn was associated with major sectoral shifts that caused an unusually large reallocation of labor from industries like construction and finance to other industries so that an unusually large number of workers have had to find new jobs doing work different from what they were doing previously. In many recessions, laid-off workers are either re-employed at their old jobs or find new jobs doing basically the same work that they had been doing at their old jobs. When workers transfer from one job to another similar job, there is little reason to expect a decline in their productivity after they are re-employed, but when workers are re-employed doing something very different from what they did before, a significant drop in their productivity in their new jobs is likely.

In addition, the number of long-term unemployed (27 weeks or more) since the 2000-09 downturn has been unusually high. Workers who remain unemployed for an extended period of time tend to suffer an erosion of skills, causing their productivity to drop when they are re-employed even if they are able to find a new job in their old occupation. It seems likely that the percentage of long-term unemployed workers that switch occupations is larger than the percentage of short-term unemployed workers that switch occupations, so the unusually high rate of long-term unemployment has probably had a doubly negative effect on labor productivity.

Long-term unemployment has adverse effects on health and many other metrics of well-being, effects that aren’t confined to the unemployed, but extend to their families, friends and communities. An increase in long-term unemployment, even if originally caused by an aggregate demand shock, is associated with a long-term negative supply shock. So it’s not surprising that the unusually and persistently high rate of long-term unemployment after the 2007-09 downturn, causing a massive loss of human capital, has depressed the subsequent growth in labor productivity. In my 2015 post, I tried to provide an optimistic interpretation of this phenomenon, but my optimism was misplaced, because the damage inflicted by long-term unemployment is very often irreversible, and rates of long-term unemployment have remained stubbornly high notwithstanding the steady decline in the overall unemployment rate.

Accounting for a disproportionate share of the long-term unemployed, discouraged older workers, chronically unable to find new jobs, have prematurely departed from the labor force. These older workers have presumably been replaced by younger entrants into the labor force, and one would suppose that the productivity of the younger workers is, on average, substantially lower than the productivity of the older and more experienced workers whom they have replaced, though presumably as they gain experience and acquire skills, the productivity of new workers will rise over time. Thus the demographic shift in the labor force is another reason for the low productivity growth since the 2007-09 downturn. But that effect, though largely demographic, has also had a cyclical component, making it difficult to disentangle the cyclical from the secular causes of sluggish productivity growth.

That difficulty is further compounded by another contributory cause of slow productivity growth. In my 2016 post, I discussed the late Walter Oi’s idea that labor is not really a variable factor of production as it is typically treated in simplified models, but a quasi-fixed factor. Here’s how Oi explained the idea:

For analytic purposes fixed employment costs can be separated into two categories called, for convenience, hiring and training costs. Hiring costs are defined as those costs that have no effect on a worker’s productivity and include outlays for recruiting, for processing payroll records, and for supplements such as unemployment compensation. These costs are closely related to the number of new workers and only indirectly related to the flow of labor’s services Training expenses, on the other hand, are investments in the human agent, specifically designed to improve a worker’s productivity.

The training activity typically entails direct money outlays as well as numerous implicit costs such as the allocation of old workers to teaching skills and rejection of unqualified workers during the training period.

So, if the 2007-09 downturn and the recovery was associated with an unusually high flow of workers from old jobs into new jobs, there has been an unusually high level of training expenses incurred by firms as they have brought workers into new jobs. The large investments by firms in training new workers have inevitably caused measured labor productivity to lag below previous trends when the fraction of workers entering the labor force or requiring new training to learn new skills was likely less than it has been since 2009. This idea, at any rate, does provide some reason to hope for at least a modest improvement in productivity and economic growth over time, even if the human cost of almost a decade of extremely high long-term unemployment is now largely irremediable and irretrievable.

Richard Lipsey and the Phillips Curve Redux

Almost three and a half years ago, I published a post about Richard Lipsey’s paper “The Phillips Curve and the Tyranny of an Assumed Unique Macro Equilibrium.” The paper originally presented at the 2013 meeting of the History of Econmics Society has just been published in the Journal of the History of Economic Thought, with a slightly revised title “The Phillips Curve and an Assumed Unique Macroeconomic Equilibrium in Historical Context.” The abstract of the revised published version of the paper is different from the earlier abstract included in my 2013 post. Here is the new abstract.

An early post-WWII debate concerned the most desirable demand and inflationary pressures at which to run the economy. Context was provided by Keynesian theory devoid of a full employment equilibrium and containing its mainly forgotten, but still relevant, microeconomic underpinnings. A major input came with the estimates provided by the original Phillips curve. The debate seemed to be rendered obsolete by the curve’s expectations-augmented version with its natural rate of unemployment, and associated unique equilibrium GDP, as the only values consistent with stable inflation. The current behavior of economies with the successful inflation targeting is inconsistent with this natural-rate view, but is consistent with evolutionary theory in which economies have a wide range of GDP-compatible stable inflation. Now the early post-WWII debates are seen not to be as misguided as they appeared to be when economists came to accept the assumptions implicit in the expectations-augmented Phillips curve.

Publication of Lipsey’s article nicely coincides with Roger Farmer’s new book Prosperity for All which I discussed in my previous post. A key point that Roger makes is that the assumption of a unique equilibrium which underlies modern macroeconomics and the vertical long-run Phillips Curve is neither theoretically compelling nor consistent with the empirical evidence. Lipsey’s article powerfully reinforces those arguments. Access to Lipsey’s article is gated on the JHET website, so in addition to the abstract, I will quote the introduction and a couple of paragraphs from the conclusion.

One important early post-WWII debate, which took place particularly in the UK, concerned the demand and inflationary pressures at which it was best to run the economy. The context for this debate was provided by early Keynesian theory with its absence of a unique full-employment equilibrium and its mainly forgotten, but still relevant, microeconomic underpinnings. The original Phillips Curve was highly relevant to this debate. All this changed, however, with the introduction of the expectations-augmented version of the curve with its natural rate of unemployment, and associated unique equilibrium GDP, as the only values consistent with a stable inflation rate. This new view of the economy found easy acceptance partly because most economists seem to feel deeply in their guts — and their training predisposes them to do so — that the economy must have a unique equilibrium to which market forces inevitably propel it, even if the approach is sometimes, as some believe, painfully slow.

The current behavior of economies with successful inflation targeting is inconsistent with the existence of a unique non-accelerating-inflation rate of unemployment (NAIRU) but is consistent with evolutionary theory in which the economy is constantly evolving in the face of path-dependent, endogenously generated, technological change, and has a wide range of unemployment and GDP over which the inflation rate is stable. This view explains what otherwise seems mysterious in the recent experience of many economies and makes the early post-WWII debates not seem as silly as they appeared to be when economists came to accept the assumption of a perfectly inelastic, long-run Phillips curve located at the unique equilibrium level of unemployment. One thing that stands in the way of accepting this view, however, the tyranny of the generally accepted assumption of a unique, self-sustaining macroeconomic equilibrium.

This paper covers some of the key events in the theory concerning, and the experience of, the economy’s behavior with respect to inflation and unemployment over the post-WWII period. The stage is set by the pressure-of-demand debate in the 1950s and the place that the simple Phillips curve came to play in it. The action begins with the introduction of the expectations-augmented Phillips curve and the acceptance by most Keynesians of its implication of a unique, self-sustaining macro equilibrium. This view seemed not inconsistent with the facts of inflation and unemployment until the mid-1990s, when the successful adoption of inflation targeting made it inconsistent with the facts. An alternative view is proposed, on that is capable of explaining current macro behavior and reinstates the relevance of the early pressure-of-demand debate. (pp. 415-16).

In reviewing the evidence that stable inflation is consistent with a range of unemployment rates, Lipsey generalizes the concept of a unique NAIRU to a non-accelerating-inflation band of unemployment (NAIBU) within which multiple rates of unemployment are consistent with a basically stable expected rate of inflation. In an interesting footnote, Lipsey addresses a possible argument against the relevance of the empirical evidence for policy makers based on the Lucas critique.

Some might raise the Lucas critique here, arguing that one finds the NAIBU in the data because policymakers are credibly concerned only with inflation. As soon as policymakers made use of the NAIBU, the whole unemployment-inflation relation that has been seen since the mid-1990s might change or break. For example, unions, particularly in the European Union, where they are typically more powerful than in North America, might alter their behavior once they became aware that the central bank was actually targeting employment levels directly and appeared to have the power to do so. If so, the Bank would have to establish that its priorities were lexicographically ordered with control of inflation paramount so that any level-of-activity target would be quickly dropped whenever inflation threatened to go outside of the target bands. (pp. 426-27)

I would just mention in this context that in this 2013 post about the Lucas critique, I pointed out that in the paper in which Lucas articulated his critique, he assumed that the only possible source of disequilibrium was a mistake in expected inflation. If everything else is working well, causing inflation expectations to be incorrect will make things worse. But if there are other sources of disequilibrium, it is not clear that incorrect inflation expectations will make things worse; they could make things better. That is a point that Lipsey and Kelvin Lancaster taught the profession in a classic article “The General Theory of Second Best,” 20 years before Lucas published his critique of econometric policy evaluation.

I conclude by quoting Lipsey’s penultimate paragraph (the final paragraph being a quote from Lipsey’s paper on the Phillips Curve from the Blaug and Lloyd volume Famous Figures and Diagrams in Economics which I quoted in full in my 2013 post.

So we seem to have gone full circle from the early Keynesian view in which there was no unique level of GDP to which the economy was inevitably drawn, through a simple Phillips curve with its implied trade-0ff, to an expectations-augmented Phillips curve (or any of its more modern equivalents) with its associated unique level of GDP, and finally back to the early Keynesian view in which policymakers had an option as to the average pressure of aggregate demand at which economic activity could be sustained. However, the modern debated about whether to aim for [the high or low range of stable unemployment rates] is not a debate about inflation versus growth, as it was in the 1950s, but between those who would risk an occasional rise of inflation above the target band as the price of getting unemployment as low as possible and those who would risk letting unemployment fall below that indicated by the lower boundary of the NAIBU  as the price of never risking an acceleration of inflation above the target rate. (p. 427)

About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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