US Federal Reserve Bank economists going Marxist on us

It only took about 6 decades or so. And, in between, there has been denial, fiction, and diversions. But here we are 2022 and work that was explicit in the 1960s is now being recognised by the central bank of the largest economy. In fact, the foundations of this new acceptance goes back to the C19th and was developed by you know who – K. Marx. Then a socialist in the 1940s wrote a path breaking article further building the foundations. And then a group of Marxist economists brought the ideas together as a coherent theory of inflation early 1970s as a counter to the growing Monetarist fiction that inflationary pressures were ultimately the product of irresponsible government policy designed to reduce unemployment below some ‘natural rate’. I am referring here to a Finance and Economics Discussion Series (FEDS) working paper – Who Killed the Phillips Curve? A Murder Mystery – published on May 20, 2022 by the Board of Governors of the US Federal Reserve System. I suppose it is progress but along the way – over those 6 decades – there have been a lot of casualties of the fiction central banks created in denial of these findings.

The topic is of course close to my heart given that I have specialised in the Phillips curve since early in my academic career.

My PhD concentrated on the evolution of the concept in the face of innovations like hysteresis, the rise in underemployment, and the impact of employment buffer stocks on the inflation-unemployment trade-off.

And going back to 1987, my first contribution to the literature, the framework I was using was exactly the same as the US Federal Reserve economists have now finally decided is the way forward if they want to understand inflationary processes.

In other words, their contribution is just repeating what some progressive (Marxist) economists have been writing about for decades.

But that just means that things are changing for sure.

Once central banks start writing about things then we are entering the realms of orthodoxy.

You might recall the Bank of England in 2015 rejected a key plank of mainstream monetary theory in a 2015 working paper, which was subsequently updated as Staff Working Paper No. 761 (published October 26, 2018 and updated further in June 2019) – Banks are not intermediaries of loanable funds – facts, theory and evidence.

Even last week, when I was presenting a talk to the Economic Society of Australia on MMT and inflation, I noted questions in the Zoom Chat questioning why I bothered to mention loanable funds and the money multiplier as if those concepts had disappeared from mainstream economics teaching programs.

Unfortunately they haven’t – yet a reading of the Bank of England research alone should mean no economist would give those ideas the time of day.

I analysed the Bank of England paper and what it meant in this blog post – Bank of England finally catches on – mainstream monetary theory is erroneous (June 1, 2015).

Anyway, last week the US FEDS publications put out the Phillips Curve paper (cited above).

The authors state at the outset:

1. “the Phillips curve failed to predict the stable inflation seen in the aftermath of the Global Financial Crisis (GFC) during 2008-2009 period, dubbed the ‘missing deflation’ puzzle.”

In fact, the Phillips curve worked well once it was properly specified.

In 2004, I examined how the changing labour market – the shift away from unemployment to increased underemployment – impacted on the inflation generating process.

First, the standard Phillips curve model predicts that the official unemployment rate (a proxy for excess demand) impacts negatively on wage inflation.

I found that the unemployment rate in a typical Phillips curve model still exerted a statistically-significant negative influence on the rate of inflation.

Second, when I added an underemployment variable I found it exerts negative influence on annual inflation with the negative impact of the unemployment rate being reduced.

Third, I also found that movements in short-term unemployment are more important for disciplining inflation than unemployment overall. This result was consistent with the hysteresis model which suggests that state dependence is positively related to unemployment duration and at some point the long-term unemployed cease to exert any threat to those currently employed.

This suggests that a downturn, which increases short-term unemployment sharply, reduces inflation because the inflow into short-term unemployment is comprised of those currently employed and active in wage bargaining processes. In a prolonged downturn, average duration of unemployment rises and the pressure exerted on the wage setting system by unemployment overall falls.

This requires higher levels of short-term unemployment being created to reach low inflation targets with the consequence of increasing proportions of long-term unemployment being created. In addition, as real GDP growth moderates and falls, underemployment also increases placing further constraint on price inflation.

I updated that work in 2008 in this paper – Labour underutilisation and the Phillips Curve – which then fed into our 2008 book – Full Employment abandoned.

What that research told me was that the Phillips curve was alive and well, but the labour market proxy for excess demand had to be broadened to include the rise of the gig economy and underemployment.

As motivation for their work, the US Federal Reserve authors cite one of their own from 2017 in saying:

The substantive point is that we do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policy-making.

In other words, relying on the mainstream approaches – the NAIRU concepts – which came out of the Monetarist takeover of macroeconomics in the late 1960s – have resulted in the ‘experts’ not having a clue about the phenomena they wax lyrical over and, more importantly, make policy about, which impacts negatively on millions of workers and their families.

To say they do not have a theory of inflation dynamics – that is, a statement of their ignorance – is not a statement that there is no theory of inflation dynamics that more or less captures the evolution of the data.

Effectively, that is what their paper is about – revealing the existence of a workable theory of inflation.

The problem for them is that those who work within a Marxian-Progressive tradition have known about this theory and used it for decades.

And it has been the prejudice and Groupthink of the mainstream that has prevented them from seeing that.

And like all instances where Groupthink dominates, the ‘clinical’ practice that is based on the dominance theoretical stance is typically very damaging to those that are impacted.

Remember this quote from Franco Modigliani, one of the co-authors of the original NAIRU terminology.

In 2000, reflecting on what central bankers had done in his name, he said.

Unemployment is primarily due to lack of aggregate demand. This is mainly the outcome of erroneous macroeconomic policies… [the decisions of Central Banks] … inspired by an obsessive fear of inflation, … coupled with a benign neglect for unemployment … have resulted in systematically over tight monetary policy decisions, apparently based on an objectionable use of the so-called NAIRU approach. The contractive effects of these policies have been reinforced by common, very tight fiscal policies (emphasis in original

We considered Modigliani’s about face in detail in my 2008 book with Joan Muysken – Full Employment abandoned.

Anyway, back to the US Federal Reserve economists who want to tell their readers they are on track to articulate what really caused the “the demise of the Phillips curve” (as in their model of the Phillips curve derived from Milton Friedman’s Monetarism).

In a way, I am happy that these characters think they are coming up with some new understandings even though they are just reinventing the wheel.

The important point is that they are now mainstreaming our work even if they don’t care to admit or even know that.

Essentially they spend 36 pages developing a conflict theory of inflation model, which they think has gained validity because of “structural changes in the labor market since the 1980s”.

But it is only the specification of the ‘model’ that has changed not the underlying causal structure.

That structure is rooted in the conflictual relations of Capitalism and the battle between workers and capital for real income share.

They fight that battle via their claims for nominal shares of national income and use their price setting power – workers bargaining for higher nominal wages and bosses pushing for higher nominal profit margins.

Inflation emerges and persists as these ‘price setters’ engage in what has been called the ‘battle of the markups’.

I discussed the idea in this blog post among many others – Distributional conflict and inflation – Britain in the early 1970s

The reference to the work of Pat Devine and the series of articles in the journal – Marxism Today – in 1974 is important because that work laid out the class conflict nature of inflation dynamics as a counter to the Monetarist fiction that was becoming dominant.

It is ironic that the US Federal Reserve is now just rehearsing theoretical approaches that were publicised by the Communist Party of Great Britain in the early 1970s.

That is the part I find amusing.

A rejection of the New Keynesian approach

An important aspect of the US Federal Reserve paper is that it effectively rejects the mainstream New Keynesian approach.

The authors write:

In stark contrast to the standard New Keynesian result, we find that non-monetary factors are an important determinant of inflation dynamics. Instead, we show that the process that governs inflation dynamics is intimately related to the distribution of bargaining power between workers and firms.

In other words, inflation is about real economy dynamics rather than central banks ‘printing’ too much money or expectations driving cost pressures.

A rejection of the Volcker myth

They also challenge the claim that the “disinflation since the 1980s was due to Volcker’s monetary policy”, which is part of the mainstream justification for elevating monetary policy to be the primary counter stabilisation macroeconomic policy tool and pushing fiscal policy off to a passive, subjugated role.

They show that it was changes in “bargaining power, and the resulting flattening of the Phillips curve” which reduced “inflation volatility by 87 per cent without any changes in the moentary policy regime”.

In other words, it was not what Volcker did but rather:

… structural changes in the labor market, led to reduced worker bargaining power, and it was those forces which induced the large disinflation. In addition, the consequences of the disinflation may not have been shared equally across economic agents, as workers bore the brunt of economic consequences of the decline in their bargaining power.

And this helps to understand why wages growth is so low

This is a point I have been making for some 20 years.

The US Federal Reserve authors write:

From our theoretical point of view, the lack of inflation pressure in the current situation reflects the lack of bargaining power of workers despite the extremely low rate of unemployment.

But they don’t go further – as we did in that paper I cited above – to explain why the bargaining power of workers has declined such that unions can no longer prosecute higher wage claims.

One must consider the rise of the gig economy, the increased casualisation, the rise of underemployment and multiple-job holdings and all the rest of the dimensions that come under the general heading of the ‘precariat’ – as being important aspect of the shift in inflation dynamics.

None of this really has anything to do with the rise of inflation targetting as the dominant monetary policy strategy.

It has everything to do with the shift in power away from workers to capital as a result of the rise in neoliberal governments, shifting their focus from mediating the class conflict to becoming agents of capital.

That has been a dominant characteristic of the last several decades and it has spawned legislative and regulative changes thhat have tilted the field towards capital.

And while official unemployment is typically lower than it was in the 1970s, underemployment and other forms of labour market slack (labour hire companies, independent contractors, outsourced consultancies, zero hour contracts, mini jobs, etc) have risen to maintain the discipline on wages pressure.

And this helps to explain why inflation is transient at present

And all this research is additional evidence to support my view that the current inflationary pressures are transient, which, I stress for the thousandth time doesn’t mean they are necessarily short-lived.

The point is that the dynamics the US Federal Reserve authors are referring to are what I call the propagating structures that can respond to an additional inflationary impulse and turn it into a persistent, structural force.

In the 1970s, the price setting powers of workers and firms were such that the inflation that began with the OPEC oil price rises became a self-fulfilling wage-price spiral as the two conflictual forces – labour and capital – fought it out for who would take the real income loss arising from the imported oil price rises.

As the Federal Reserve authors note – that battle ended when the bargaining power of workers fell.

In 2022, there is no wages pressure as the workers have been divided and conquered – unions are weakened, casualisation etc – and so there are just real income losses for workers arising from the cost pressures due to the supply disruptions and the anti-competitive behaviour of OPEC, not to mention the invasion of the Ukraine.

That means that once these supply and other forces dissipate, the inflation will drop away because there will be nothing propelling it further.


The US Federal Reserve paper is important because it signifies an acceptance of the class conflict framework and a recognition that class is important in a capitalist society.

For all those who think Left and Right, Labour and Capital, are meaningless dichotomies, I suggest you read the paper.

For others – you are entitled to say – we knew it all along!

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

This Post Has 21 Comments

  1. Can’t get the link to work Bill?
    “Banks are not intermediaries of loanable funds – facts, theory and evidence.”

  2. Dear William (at 2022/05/30 at 11:03 am)

    Thanks for pointing that out. It seems to be a problem at the Bank’s page so I have altered the link to point to the landing page for the paper rather than the pdf link.

    best wishes

  3. Jeez, that paper makes things a lot more complicated than it needs to be, no wonder people are confused.

    The essence of the banking business is swapping promissory notes. The bank accepts either public or private promissory notes in exchange for its own promissory instrument, that is, a deposit. The deposit is partly backed by the bank’s reserves and capital but mostly by the bank’s receivable assets, that is, mortgage and business and consumer loan payments due to the bank. This is how it’s been done since banking was invented.

  4. Another US Fed paper appeared recently –

    The author concludes that –
    “Historical patterns show that persistent shocks can push inflation away from the Fed’s longer-run goal for sustained periods, warranting a stronger and longer-lasting policy response versus the case when elevated inflation is driven mainly by transitory shocks.”

    Elsewhere in the paper it says “a persistent shock is one that can shift the longer-run value over time” so the quoted conclusion would seem to be saying precisely nothing – or am I missing something?

  5. Acceptance of the class conflict framework explanation of inflation provides ground for conservatives to argue against the recent revival of successful efforts to unionise workers, as in the case of Amazon and Starbucks in USA. The progressives’ counterargument would be instead of braking unions, smash the monopoly price setting power of big business by simply enforcing existing antitrust laws.

  6. Good to hear Bill commenting on underemployment and minimum wages, on the ABC ‘news radio’ today.

    A welcome relief from the usual neoliberal hogwash. But did any ALP luminaries hear it? …..

  7. The changing and conflictual nature of the power relations between labour and business is at the centre of inflation behaviour.

    The power of labour in the West has been undermined by globalization which is exacerbated by international labour mobility (immigration and special arrangements for certain classes of labour).

    The power of business in labour and goods markets has to be dealt with.

    To ignore what central banks do with monetary policy is going too far.

    Inflation has a complex dynamic.

  8. The TUC have called for a large demonstration in London on June 18th in the face of the cost of living crisis. “Working people have had enough. Everything’s going up but our wages. Join the trade union movement in London to tell this government: we DEMAND better!” reads the TUC blurb. They are right and a massive march on that day would be most welcome.
    But ‘We Demand Better’ is somewhat vague. Does it mean that workers should receive wage increases that match inflation so that there is no reduction in their standard of living? It’s an important question. The situation today has many similarities with the situation in the 1970s. Then, two large increases in the cost of oil lead to a high inflation in prices. Workers demanded equivalent wage increases. In the 1970s the unionisation rate was some 40% and they were able to extract the wage increases that they demanded. However companies matched these wage increases with price increases to protect their profits. This led to the infamous wage-price spiral inflation of the 1970s. By 1979 Margaret Thatcher had become Prime Minister.
    The election of the Thatcher government in 1979 is usually described as representing a move to the right by British society but that is an over-simplification that doesn’t really help us understand what Thatcher represented. It also avoids the culpability of the labour movement in creating the conditions in which someone like Thatcher could thrive. A more accurate description would be that she represented the reaction of the electorate to the political and economic future that the labour movement had threatened to create through its irresponsible behaviour in the 1970s. At that time the trade union movement had shown by its actions that it was in control of most aspects of civil society from the disposal of the dead to the people’s access to energy and light. The question that dominated the concerns of civil society was how that power was to be used in the future. Up to then that power had been seen to assert itself as a disruptive power used in a sectional interest. What remained to be seen was whether it could be used responsibly by putting it to a more constructive use in the wider society.
    In many ways the answer was given in the rejection of the 1977 Bullock Report on industrial democracy. That rejection came about through the dominant influence of a narrow sectional mindset among most of the trade union leadership and an ideologically constrained left-wing in politics. Those in the leadership of Labour politics who saw the problem in clear electoral terms, being unable to bring these elements into line, were then deemed to be an ineffective element in an evolving situation that could not be sustained indefinitely. The electorate was confronted with a Labour leadership that was unable to influence the way in which the enormous power of the trade union movement was being used. Consequently, the Labour Party was seen to offer no alternative to the ongoing prospect of continued industrial strife and anarchy.
    On the other hand, the Tory party under Thatcher was seen to represent the only escape from that unthinkable future.

  9. @MartinD

    Bill maintains that the current inflationary environment is transitory (I agree) but that transitory does not automatically mean that it will end next week. Rather it will persist until the factors driving it ultimately resolve – but the time frame for this cannot be predicted with certainty. It could potentially be a number of years, depending on how global events pan out.

    When the average working households standard of living is continuously going backwards, assuring them that “you just need to keep holding out for a while (we have no idea how long) and things will get better by themselves” isn’t going to cut it.

    While the possibility of losing market share through raising prices while the consumer base’s ability to keep paying diminishes may temper many businesses ability to keep upping prices – this will not apply equally to all businesses.

    A breakdown of the current inflation shows that it has been most dramatic in non-discretionary or limited discretionary purchases – food, clothing, fuel etc. Inflation in discretionary retailing (superfluous goods and services) by contrast has been much more modest. This on it’s own suggests that there has been no significant wages breakout occurring. But it also demonstrates the obvious – that demand for life essentials is inelastic……….and where people do not have the choice to be able to stop buying, prices can continue rising.

    While this isn’t much of an issue for households in the upper part of the income spectrum, it can be a much bigger issue in the lower half. The lower half do not benefit from moderating prices for top-of-the-range home theatre equipment but they are harmed by rising prices for groceries and fuel since they spend a larger portion of their incomes on essentials than better-off households.

    So the question is – is your average working household any better off in real terms by having to bear the entire cost of price inflation (given that unions are a pale shadow of the power they possessed in the 70’s) than they are in a wage-price spiral environment – where prices are rising rapidly but so are wages?

    It seems conceivable that many households could actually end up worse off in real terms.

    The root of the issue lies in a lack of sovereignty in crucial things like energy and food, leaving nations at the mercy of geopolitical events driving movements in pricing – and when I say sovereignty, I also mean: who owns and controls the locally-available resources. I’m of the opinion that energy for starters, should be a public good in order to ensure fair pricing and equitable access. Case in point is Australia – we are absolutely awash in all kinds of energy here, both old-school and new. We are among the largest exporters of coal and gas. Yet while we are up to our armpits in supply – prices are allowed to behave as though the supply shortages that exist on the other side of the planet also exist here. Ditto with food, Australia produces and exports far more food than our population could ever consume but prices have kept going up.

    Where abundant supply of something is geographically located is only part of the story of what it costs the local population – who is allowed to own and control it is an equal or larger factor.

  10. Notwithstanding that old goat Friedman, inflation is always and everywhere a distributional phenomenon, and therefore political.

  11. “The power of labour in the West has been undermined by globalization”
    ” prices are allowed to behave as though the supply shortages that exist on the other side of the planet also exist here”

    Just as the UNSC is useless, because of the veto demanded by the ideology of ‘absolute national sovereignty’, so are central banks useless (including the BIS) because of absence of public sector sovereignty to spend money into existence without being forced to borrow from “independent” central banks.

  12. MartinD @ 4:47, why describe labor unions as ‘irresponsible’ when seeking to maintain the real wages of workers? And wouldn’t it be at least as fair to describe employers raising the prices they demand from customers to maintain their profit margins as equally irresponsible?
    You seem to ask more of the trade unions than you do of the businesses their members work for. Why?

  13. Bill, I believe “Full Employment Abandoned” is the best book you have ever written. I would advise everyone serious about Labour Economics to purchase a copy.

  14. Looking back at the 70s knowing what we know now, aka MMT, IMO, the solution was a UBI. That is neither to workers nor the corps could absorb all of the negative economic results of the oil price shock. OTOH, the Gov. of the US & UK could just provide the cash for the workers to pay the higher prices. It would require the corps to *not* take advantage to increase their profits more . Back in the now, we see the corps using their monopoly pricing power to increase their profits. If they had done that in the 70s then the UBI would not have worked. Dr. Steve Keen has an interactive computer program he calls ‘Minski’ that he will give you. I wonder if it is such that you can test my solution for the 70s.

  15. @JerryBrown
    I would also ask businesses to be responsible. But what do we mean by responsible? I mean accepting that the real resources the society has access to have diminished (at least temporarily) and try to have some way of handling that, rather than ignoring the fact.
    The rejection of the Bullock commission on Industrial Democracy in the mid 70s, which would have seen workers on the boards of companies, was indicative of the political state of a trade union movement which preferred to pursue narrow sectional interest rather than engage in running the society. My criticism of the trade union movement is from the perspective of making it better able to wage the battle againt capital.

  16. @Leftwinghillbillyprospector
    I think I agree with what you have written.
    It may have to be accepted that some drop in the standard of living will be unavoidable if the current disruption in the supply of goods and energy continues. The TUC and unions must demand that they be active participants in determining how any drop in the standard living is distributed through society. The TUC had an active input into the design of the Furlough scheme to deal with the pandemic. They should insist on an equally active role in designing a response to the cost of living crisis.

  17. Dear Wayne McMillan (at 2022/05/31 at 2:20 pm)

    That is a very nice thing to say. Thanks. That book was really based on my PhD work.

    best wishes

  18. Steve Keen’s ‘Minsky’ is a framework. It allows you to represent economic relationships in the form of interacting spreadsheets and T-accounts. It looks to be a very god program.
    It expects you to put all the economics in for yourself.
    If you can put all your ideas in, down to the basic details, then *you* can model them and test them. Or if you can tweak your ideas into somebody’s existing model, or if you can establish a cooperative study group to try ‘Minsky’ models, then there are all kinds of possibilities.

  19. Hehheh. “Good program”. I don’t think it’s _quite_ as powerful as that. But haven’t read the code in detail.

  20. Mel
    Minsky has been put to some interesting use.
    A recent example is Tyrone Keynes who used it to model COVID-19 responses in Canada with the capacity to test various measures.
    Details can be found by searching for ‘Tyrone Keynes Minsky’

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