The Tyranny of the “Phillips Curve”

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Unleash Prosperity Hotline
Issue #916
12/14/2023
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1) The Tyranny of the “Phillips Curve”
Since back in the days when some of us were in high school several decades ago, we’ve been served up the dumbest economic concept of all time: the Phillips Curve. This was the lame-brained “theory” by neo-Keynesian economists of the 1960s and 1970s that to slow inflation the Fed needs to raise unemployment and slow down economic growth.

The Theory
The whole concept of an inverse relationship between unemployment and inflation blew up when it was put into practice in the mid-1970s and the result was rising inflation AND rising unemployment. Then in the 1980s and ‘90s with free market supply side policies in place, we had low inflation and low unemployment.

That should have been the end of buying the Phillips Curve snake oil. Except that we’ve learned in recent years that when the left’s theories are contradicted by the real world, they stick with the theory. If the laboratory mice aren’t behaving as predicted, the problem isn’t the theory, it’s the mice.

The Theory Blows Up
Which brings us to the high priests in the temple of the Federal Reserve Board – who gave us 9.2% inflation last year. Now what are they doing? Still singing out of the Phillips Curve hymnal. Just listen to Jerome Powell explaining the Fed strategy back in August: "Getting inflation sustainably back down to 2 percent is expected to require a period of below-trend economic growth as well as some softening in labor market conditions” – i.e., fewer people working.

Then there was this from Fed governor Christopher Waller explaining the latest Fed decision: “While I am ENCOURAGED BY the early signs of moderating economic activity in the fourth quarter, inflation is still too high.” Then he added: “I am increasingly confident that policy is currently well positioned to SLOW THE ECONOMY and get inflation back to 2 percent.” (emphasis added)” Christopher Waller, November 28, 2023. ([link removed].)

This is dangerous nonsense. We still have 5 to 6 million working age men out of the workforce. The economy’s average growth post-Covid over the last two years has averaged less than 2% and this quarter GDP is now reading at a measly 1.2%. Congratulations, Dr. Powell. There’s that below-trend GDP you were hoping for.

The Fed should have long ago tossed out the Phillips Curve sophistry. As Arthur Laffer has put it: “If the economy produces more apples, the price of apples goes down, it doesn’t go up.”

We are for prosperity. This Fed is for private sector austerity and fine with government growth (does anyone recall Fed chairman Jerome Powell advising the government to stop spending so much money as Paul Volcker and Alan Greenspan routinely did?) And that’s what they’ve delivered since Biden came into office.

Then they wonder why 70% of voters are unhappy.

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2) Best Year Ever for School Choice Just Got Better
We reported extensively on the saga of Lifeline Scholarships in Pennsylvania, school choice scholarships that would allow poor kids in the state's lowest-performing 15% of school districts to go to private schools. Governor Shapiro campaigned on it, but then killed it as a sop to the teacher union.

But Pennsylvania's legislature did strike a deal yesterday, passing a measure that includes a $150 million expansion in the state's tax credit scholarship programs, while leaving the Democrats' top desire – a paid family leave program – on the cutting room floor.

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Our friends at the Commonwealth Foundation report:

"Pennsylvania scholarship organizations awarded 77,640 K–12 scholarships through the Educational Improvement Tax Credit (EITC) and Opportunity Scholarship Tax Credit (OSTC) in the 2021–22 school year. The average 2021–22 scholarship amount was $2,583 for EITC and $1,853 for OSTC."

"In 2021–22, K–12 students in Pennsylvania submitted almost 139,000 scholarship applications, the highest on record. Unfortunately, more than 63,000 student scholarship applications went unfunded due to arbitrary program caps."

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We will celebrate this $150 million increase in the cap as a partial victory and the winners will be many of the 63,000 kids whose applications were rejected. Hip. Hip. Hooray.

What a great way to cap off the best year ever for school choice.

And next year we will all fight for the Lifeline Scholarships.

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3) Biden Is Threatening To Destroy the Patent System in America
We mentioned last week that Biden wants to take away patents from drug companies that don’t lower their prices.

Now we are learning that the White House wants to expand this approach to other industries. The plan has two features: First, they want to impose strong-armed price controls on industries where they think prices have risen too much (because this policy worked so well in the 1970s to stem inflation), and second they want to take away patents for firms that don’t comply. We can’t imagine anything more dangerous to our innovation process in America.

Here are some of the examples in Biden's new proposed "interagency guidance" for when the federal government can seize a private company's patent and license it to a competitor:
* "An advanced manufacturing startup that received Phase I and Phase II SBIR grants is working on improved 3–D printing technology for construction materials... A large, established construction company is looking to launch a 3–D printing initiative and it has asked the government funding agency to march-in and grant it a license to the startup's patent portfolio."

* "A contractor has developed a new retroreflective coating for traffic signs that improves the visibility of the signs... The contractor is a medium-sized company that is seeking to grow, based on this new patented technology, but they are unable to keep up with demand... Several manufacturers have approached the government funding agency seeking assistance in licensing the patented material to manufacture and incorporate the material" into the signs they sell to the state DOTs."

* "A water filtration company has an exclusive license from a government-funded university to patents covering a subject invention for point-of-use water purification technology... Three other manufacturers and a dozen rural community groups have asked the government funding agency to march-in and issue licenses to increase supply and reduce cost of the specialized filters."

The proposal applies to ANY technology in which government grants flowed – a nuclear attack on innovation throughout the economy, not just the pharmaceutical sector.

Perhaps companies will stop looking for government funding for their technologies and inventions. Government money is NEVER free.

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4) Hooray for Houston
In elections this week the big news is that Houston, the nation’s 4th largest city with 2.3 million people, elected moderate state Senator John Whitmire. He won in a 2 to 1 landslide over Sheila Jackson Lee, a rabble-rousing member of Congress from Houston.

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Jackson Lee promptly announced after her loss she would seek re-election for a 16th term with her trademark lack of humility: “I am compelled by the numerous opportunities still ahead to enhance the lives of my constituents."

Some more good news is that Philadelphia elected Cherelle Parker, a moderate who favored hiring more police officers and defeated several wacko progressive candidates. We’re pleased that so many big-city residents are starting to avoid the tragic mistake that Chicago made earlier this year when voters elected Marxist mayor Brandon Johnson.

Our prediction: the cities that rejected progressives are likely to add jobs, enhance public safety, and see population growth rather than decline.

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5) The Best and the Brightest

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