Phillips Curve

Figure 1

An economist wrote in The New York Times about Republican lawmakers’ plans to improve the mandate for monetary policy by Federal Reserve.

The attack on the Fed for having the temerity to actually try to do something about the economy continues.  Now Republican politicians are pointing out that the Fed has failed to reduce unemployment — and therefore, it should no longer even try to do anything about unemployment, and focus only on price stability. And this makes sense because ….?

To explain why this makes sense, let’s first take a look at the above line of reasoning, using the six elements of argument by Stephen Toulmin.

1. Claim: the position or claim being argued for; the conclusion of the argument.

“[The Fed] should no longer even try to do anything about unemployment, and focus only on price stability.”

2. Grounds: reasons or supporting evidence that bolster the claim.

“Republican politicians are pointing out.”

3. Warrant: the principle, provision or chain of reasoning that connects the grounds/reason to the claim.

“The Fed has failed to reduce unemployment.”

4. Backing: support, justification, reasons to back up the warrant.

Link to The Wall Street Journal

5. Reservation: exceptions to the claim; description and rebuttal of counter-examples and counter-arguments.

N/A

6. Qualification: specification of limits to claim, warrant and backing.  The degree of conditionality.

N/A

It’s pretty easy to conclude that the above argument makes a weak case against improving the Fed’s mandate.

With a basic understanding of the elements that make a good argument, we can now offer a rebuttal, reconfiguring the elements for a clear description of the Republican proposition of policy.

1. Grounds: The Federal Reserve Act states that the Fed shall “promote effectively” stable prices and maximum employment in a dual mandate, which itself is based on the logic of the Phillips Curve, predicting a tradeoff between inflation and unemployment (Figure 1).

2. Warrant: Since the Fed can be taken almost certainly to promote effectively stable prices with a single-minded focus on inflation,

Figure 2

3. Backing: Because unless exceptional conditions still hold from more than half a century ago, a time when the American dollar was a commodity currency linked to gold, application of the Phillips Curve appears to resemble logic approaching chaotic dynamical behavior, as observed during the era of oil supply shocks and in the more recent economy (Figures 2 and 3),

Figure 3

4. Qualification: So, almost certainly,

5. Reservation: Unless other economic data can prove otherwise,

6. Claim: The Fed will promote effectively stable prices with a single-minded effort.

References

Eugene M. Izhikevich, Dynamical Systems in Neuroscience: The Geometry of Excitability and Bursting (Cambridge: The MIT Press, 2007).

Stephen E. Toulmin, The Uses of Argument, Updated Edition (Cambridge: Cambridge University Press, 2003).

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