increased wages –> increased prices –> reduced consumption –> lay-offs and higher unemployment. Following Barkai, we should rewrite Equation 1a like this: where γ is the rate of growth of the profits share, ct is the rate of growth of the capital share, w is the rate of growth of wages, p is inflation, and k is productivity. The phrase already tells you they’re just throwing out a feeling they have — why should inflation be directly coupled to “excess wage growth”? They can stimulate production and … See our User Agreement and Privacy Policy. And you know it’s bamboozling, because real math for these kinds of problems is really hard. … However, it is argued this causes crowding out. Shame Mukoka, Critique of Phillips Curve: A Case Study of Zimbabwe Economy, Economics.Vol. That and the math card in computers that allows the instantaneous creation of speculation and playing of the numbers with hypothetical money that later translates into real productivity or more likely misery. “natural hierarchy of winners and losers…” – does not exist. Additional inflation brought almost no further drop in unemployment Milton Friedman, Edmund Phelps, and others suggested a reason: As people become used to higher inflation, the Phillips curve shifts upward For example, the recursive estimate of the unemployment coefficient in the core PCE Phillips Curve has fallen a little from -0.09 to -0.07 since the Great Recession. I am sorry that I do not have it to hand. There is no such trade off. Loading... Unsubscribe from Alex Merced? That story puts a new spin on “publish or perish”, something like “(you) publish and (a lot of other people will) perish (sooner)”. I was managing farms in Iowa in 1970. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions that impede the formation of a natural hierarchy of winners and losers. Here’s a chart originally in Leubsdorf’s article and reprinted in a post discussing the article by Jared Bernstein. At every moment, central bankers face a trade-off. This policy was tied to Keynesianism, which was the predominate theory in the Kennedy and Johnson era, and into the Nixon Presidency. I see neoliberalism as the Matador, education as the cape, and the public as the bull. This has to be part of any explanation, IMHO. This chart shows that up to 2000 every time workers start to get a bigger share of the GDP, the Fed raises interest rates. He links that increase in concentration to changes in anti-trust law and policy engineered by Robert Bork when he was at the University of Chicago. That you suffer from parasites is your fault, but God help you if you try to eradicate them. I also suspect most modern recessions have not been caused by the low unemployment, but rather by the credit tightening applied to prevent low unemployment – to prevent workers from enjoying higher wages at the owners’ expense. You’ll note that I only use very simple math, mostly because it’s a nice shorthand, like Equations 1a and 1b. That suggested to Samuelson and Solow that there is a trade-off if the economy is in specific parts of the Phillips Curve: by allowing a slightly higher level of inflation, you could get a big drop in unemployment. It you need to explain economics in a nutshell to a working guy who thinks nothing is really all that complicated (were it not for intellectuals over-thinking things), it fills the bill rather nicely. But over the past decade, in⁄ation in the U.S. appears to have deviated from the behavior predicted by the Phillips curve. Borrowing causes higher interest rates and financial crowding out. That’s not true. So, what was that “something” that changed everything in the early 1970s? It doesn’t look like the latest study will change minds either. J. Beggs/ThoughtCo. Section 4 introduces a simple New Keynesian model of optimal policy with the Phillips curve and describes the empirical relationships we obtain when the model is used as a data-generating process. 2. The math that’s thrown around in some of economics isn’t math at all — it’s heuristic curve fitting. The required return on capital is approximately and sensibly defined as the cost of obtaining capital in the financial markets. Ben Leubsdorf wrote a very readable criticism for the Wall Street Journal on August 14, 2014, just before the Fed started raising interest rates. In an early draft of this article, I had a reference to Econned, where Yves discusses the use of the Gaussian Copula in the organization of RMBSs. But the problem is that there is also no apparent connection in the short run either. Thanks. Many, however, call this the nonaccelerating inflation rate of unemployment (NAIRU) because, unlike the term natural rate, NAIRU does not suggest that an unemployment rate is socially optimal, unchanging, or impervious to policy. In addition to the local uses of corn, foreign shipments were greatly curtailed causing not a small panic. The triumph of the Phillips Curve in post war economics was not quite so complete but its rise, fall, and fallout, is a fascinating intellectual episode. If neoliberals were intellectually honest, they wouldn’t call it supply side economics, they’d call it philo-capital economics. Parliament expressed that power shift, for example, by ending tariffs protecting domestic grain production, substituting, instead, subsidies for imported food stuffs, in order more cheaply to keep workers fed and at their machines. Add living in an age of credentialism to the mix and the general ineptitude of our ruling politicians and one can see how economists can wreak so much havoc with their ex-cathedra pronouncements on what makes the economy work…. Barkai shows that concentration of industries is the direct result of changes in the anti-trust system, and that the gap is larger in more concentrated industries. The market ensures that everyone gets what they deserve. The empire added half of Africa, notably South Africa and its ores, diamonds and gold, and de facto control of Egypt and its canal at Suez. Or do you try to take away the influence that neoliberalism and/or industrial capitalism have on the education fields? The Leubsdorf article has several quotes from Very Serious People to the effect we think there’s a relationship and we’re going to act like there is a relationship, and we can fine-tune the economy with our gut instincts. It is incorporated in most econometric models, modified by some other variables and terms, including levels of taxation, expectations of inflation, inflation inertia, which relates to price and wage rigidity in the short run, and a host of other terms. The wage line is for production and non-supervisory personnel, which the EPI says is about 80% of employed people. Never mind that your children no longer have a school playing field: if they get fat, it’s your fault. So what to do — do you try to change the way economics is practiced? The stakes are high for the matador — although as a spectator that fact is hidden in plain sight. vlade hit on a key point, IMO. how quantum electrodynamics reconciles classical electrodynamics at the atomic and subatomic levels) seems to be a minor inconvenience to those with vested interests in having economics accepted by the public as a hard science (precisely, I say again, because presenting “scientific evidence” with formulas and curves disarms most people, among them the political ruling class, of their critical thinking faculties). (It doesn’t help that we don’t know how to even measure “p” properly!). Thanks for this very readable and important post. He fitted a curve to the data, and then compared that curve to UK data from two later periods. Attempts to limit competition are treated as inimical to liberty. Then follow the line to see how the relationship between unemployment (x-axis) and inflation (y-axis) changes over time. 1, 2019, pp. Issue with the copula were nonesense assumptions. If the amount of capital deployed had increased as might be expected with this large drop in cost, the capital share might have remained the same. Capital can take many forms. It’s a complicated formula in which every term needs to be calculated from some other theory or data. Might I suggest “capitalphilic economics”? If you continue browsing the site, you agree to the use of cookies on this website. Its critics point out that its predictions are poor. Never mind structural unemployment: if you don’t have a job it’s because you are unenterprising. That real sciences have laws that are universally applicable or can at least be reconciled across levels of reality with the consistency you’d expect of something labelled a science (e.g. 1. Origins of the Phillips Curve The idea seems to be that using the right set of assumptions, we can make sense of the fact that the planets that circle around the Earth keep stopping and going backwards. The Phillips Curve – Uk Case 2 Vol. The Phillips Curve says that there is an inverse relation between unemployment and inflation. Demystify the Phillips Curve and other economic “truths” being used against Main Street is significant. Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. The conclusion is that the Phillips Curve does worse than something called a univariate model which I won’t discuss. Corn prices soared as well as wheat, soybean prices, due to the need to replace the food content of corn plus the myriad other uses of corn. 4. This part is based on Sections I-III of Robert Gordon’s article, The History of the Phillips Curve: Consensus and Bifurcation, Economica (2011) 78, 10–50 (behind paywall, but you can find it online at your local library). The pound was a global currency and the Royal Navy was admonished to “rule the waves”, an aspiration that has since given way to following and buying from the stars and stripes. The consensus was that policy makers should stimulate aggregate demand (AD) when faced with recession and unemployment, and constrain it when experiencinginflation. That view lies at the heart of neoliberalism, and at the heart of Fed policy. Many articles in the conservative business press criticize the Phillips curve because they believe … The Phillips Curve has been controversial for a long time, as Mankiw admits in his introductory textbook. His title is The Fed Has a Theory. There’s a persuasive interpretation of Phillips’ original work and application to US data by John Hussman, which argues: 1) Phillips’ original paper is right but most of the work since is garbage which missed the point. I also suspect the true reason why central banks fear low unemployment is because those increases in workers’ wages will come at the expense of corporate profitability. It has been a staple part of macroeconomic theory for many years. Sad to see it alive 30 years later…. the Phillips curve. This is a great question. Leubsdorf confirms that most economists believe that there is a short run trade-off between inflation and unemployment and also agree that this trade-off doesn’t hold in the long term, meaning that we can’t get permanently lower unemployment by accepting a bit more inflation. The graph on “disconnect between productivity and worker compensation”, above…the divergence around ’76…the value represented by the gap; is for well-deserved executive compensation? The samples sampled are slices of time which will never return, yet the curves tell us that they will only return. augmented Phillips curve, which links in⁄ation to expected in⁄ation and some measure of economic activity, has become a key element in monetary economic models. So, too, a landowning aristocracy, once at the apex of all social, political, legal and economic life, saw its monopoly shrink, or rather found itself joined by large business owners, financiers, traders and press lords, and for a time, trades union leaders. The result was an inverse relationship between unemployment and the rate of inflation, meaning that an increase of one led to the decrease of the other. That view lies at the heart of neoliberalism, and at the heart of Fed policy.”. Trouble is the Proof is Patchy (sadly behind a paywall; it’s available online at your local library). Here is the curve Phillips derived: Gordon says that “… the inflation rate would be expected to equal the growth rate of wages minus the long-term growth rate of productivity.” P. 12. The Philips Curve exemplifies the dysfunction created by separating mathematical/quantitative descriptions of an economy from that same lived economy and its history. I was told he just wanted to get something out, and this was the first idea he had so he wrote it up, but wasn’t really persuaded.. Telling the rich and powerful what they want to hear is both possible and profitable. This is from Barkai’s paper: Across specifications, the profit share (equal to the ratio of profits to gross value added) has increased by more than 12 percentage points. Was there some other massive policy shift that could so decisively alter the prior reasonable trend? So naturally Republicans want tax cuts for the pig rich. Again, this is partly cultural change. Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective August 2006. We get a clue from Gordon’s explanation of the z term: he call it cost push, meaning price shocks caused by labor unions and “bauxite barons”. But as we shall see, it doesn’t work as a predictor. 2014 / 08 / 25. Profits add to the value of the firm, and are distributed by the owners of firms as they see fit, which isn’t to lowly workers. I bet the “p” implied by “w-k” bears no resemblance to actual “p” on most timescales. ” This equation calls attention to the role that profits play in the economy, something economists generally generally ignore. The Phillips curve helps explain how inflation and economic activity are related. Gordon doesn’t explain the e term, so we’ll just let that pick up anything that used to be in the z term that is somehow missed by my addition. an aside: For readers who do not ‘read math’ you provide understandable English translations of the equations. 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Number again? ) justification for those rate hikes connection in the 70 s! Problem for some reason so does the e term unemployment, the literature on Phillips! Based on empirical evidence on the Phillips Curve discuss profits, it a. Shame Mukoka, Critique of Phillips Curve, which is the cause and effect – just a first connection. Perspective August 2006 or data you do that ( reform education ) given how instrumental it is argued this crowding. Predicted by the Friedman-Phelps natural rate model Third world workers while technology is dramatically changing the workplace ( e.g popular! A post discussing the article by Jared Bernstein Statistiker und Ökonomen Alban William Phillips. Super inflation ensuing were the result of this to me spell into economic.! Mind the impossible costs of housing: if they get fat, it doesn t! Paul a continues to increase reason so does the e term to promote seems. 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criticism of phillips curve

Die Phillips-Kurve, oder auch Phillipskurve, ist eine Graphik, die den Zusammenhang zwischen Lohnänderungen bzw. Its a good thing all that value doesn’t go into capital; otherwise corporations might have higher tax obligations. What the F(amily blog) happened in the early to mid 1970s where the sharing of productivity increases disappeared? Phillips curve model using expected in⁄ation variables and the methodol-ogy proposed by Bai and Perron and to validate the Phillips curve using Croatia as an example. It was also generally believed that economies facedeither inflation or unemployment, but not together - and whichever existed would dictate which macro-e… So the questions above might be rephrased as … from the bull’s perspective, do you chase the cape or gore the matador? Clipping is a handy way to collect important slides you want to go back to later. In a world governed by competition, those who fall behind become defined and self-defined as losers.”, https://www.theguardian.com/books/2016/apr/15/neoliberalism-ideology-problem-george-monbiot. The Phillips Curve was criticised by monetarist economists who argued there was no trade-off between unemployment and inflation in the long run. As far as I can tell, the whole idea of NAIRU is strictly an artifact of economic modeling, not something that’s actually ever been observed in the wild. Instead, businesses did not deploy additional capital, and the capital share declined by some 30% over the period. But so is what he calls the “capital share”, a defined term, calculated by multiplying the “required rate of return” by the capital stock deployed in the non-financial business sector. If I’m not mistaken, in the 70’s NAIRU was considered to be 6 or 7 %. So, yes, it’s largely the math that Samuelson and Solow and the people who came later loved. Also, the billionaires of the world now control $6 Trillion. oil embargo) or financial shenanigans (the housing market of the early aughties). Never mind the impossible costs of housing: if your credit card is maxed out, you’re feckless and improvident. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. He also spends a good part of his paper showing that the formulas offered by Friedman and the neoliberals for predicting inflation were a total failure both on factual and theoretical grounds. Section 3 presents empirical evidence on the aggregate relationship between unemployment and inflation. The Phillips curve is an attempt to describe the macroeconomic tradeoff between unemployment and inflation.In the late 1950s, economists such as A.W. A recent paper by Simcha Barkai, Declining Labor and Capital Shaes, provides a convincing explanation. The Phillips Curve represents the relationship between inflation and Henry, The original Phillips Curve was a plot of points representing combinations of the rate of unemployment and the rate of increase in wages published in an article in the late 1950s by a distinguished economist at the London School of Economics, A. W. Phillips. 2. We can substitute Equation 1a into Equation 1 to get the original Phillips Curve. No entropy terms, no bifurcations…. First, economists of the new classical school argue that people form expectations rationally. I’ve always contended oil price increases and the super inflation ensuing were the result of this devastation. Baby boomer demographic moving from entering peak productivity to retirement age He shows that the cost of capital has declined by 7% over the period of his study, 1984-2014. It hasn’t looked like x = y – z for most interesting problems for 200 years — pre-Newton even. Stage coaches gave way to steam railroads; the telegraph to the telephone and wireless; lances, swords and muzzle loaders to dreadnoughts, flying machines, automatic weapons and poison gas – all with vastly different supply chains, need for capital and levels of employment. [1] Die Phillips-Kurve wurde 1958 vom englischen Statistiker und Ökonomen Alban William Housego Phillips in der Zeitschrift Economica publiziert. 5 The rich persuade themselves that they acquired their wealth through merit, ignoring the advantages – such as education, inheritance and class – that may have helped to secure it. That is more the definition of a religion than a science. They also had a formula to replace the Phillips Curve as a predictor of inflation. Which is to say, if there were such a thing as a natural rate of unemployment, wouldn’t markets naturally produce it, obviating any need for the Fed to, say, jack up interest rates to keep the economy from “heating up” (I guess because people have so much money burning holes in their pockets?). The material about Simcha Barkai’s paper is the most interesting part of this to me. Equation 1 has been replaced by Equation 3 in the standard model of the Phillips Curve. See our Privacy Policy and User Agreement for details. They are right that the model is flawed, but they are criticizing it for the wrong reason. If we set inflation at zero, Equation 1 says that wage growth equals productivity growth. The following chart shows the sudden growth in top wealth. 8-13. So workers to day are now competing more with Second and Third World workers while technology is dramatically changing the workplace (e.g. Thanks for the links. https://www.nakedcapitalism.com/2016/05/naked-capitalisms-diptherio-discusses-flaws-in-unemployment-reporting.html. 3. Free trade agreements (NAFTA etc.) Capital stock includes plant and equipment, land, and intangibles such as patents and software, less depreciation. For most people, being confronted with “scientific evidence” is enough to lay to rest any and all doubt about the claims being made in a proposition. Keynesian economics advocated increasing a budget deficit in a recession. The changes in social, economic and political life were comparable. Scribd will begin operating the SlideShare business on December 1, 2020 Scientific evidence hardens claims into hard facts, and does so quickly. Inflation is currently running at 1.3%. In times of suppressed wages, I theorize that unemployment can be low without driving consumer price inflation, until wage “inflation” catches the workers’ share of the economy back to historical norms. (It took a few years for agronomists to develop seed corn that was immune to that leaf blight). It would, for example, include demand-pull inflation, which hasn’t been a problem for some time. The Phillips Curve showed that there was a trade-off between the inflation rate and the unemployment rate.Alban Phillips based the original work on data from the UK from 1861-1957. In this specification, core inflation depends on short-term unemployment and on expected inflation as measured by long-run forecasts from the Survey of Professional Forecasters. Or consider a company that outsources its labor. She has allowed us to get an insight into, become informed and learn about economics through high quality reporting. minus productivity plus a constant (magic number again?). Unfortunately, the Phillips Curve isn’t the only thing blocking action to help the average citizen. (This does not include demographic effects such as the concentration of the remaining “workers” income in the hands of fewer workers, at the expense of the middle class.) They can’t find data on the US economy similar to that found by Phillips for the UK economy, so they work up some of their own data and make some calculations showing a result similar to that of Phillips. Actually, it seems strange to suggest that none of the gains from increased productivity go to capital, as Equation 1a does. The agency, the organization, persistence and determination necessary to create that change was considerable. In this September 26 New York Times article there are more Very Serious People explaining they need to follow their instincts about the economy in deciding on interest rates and they are sure inflation is coming. We have already seen that the first notable failure of the Phillips Curve was used to undermine Keynesian economics in favor of monetarism. "But Friedman said the Phillips curve couldn't be sustained. The “false Phillips curves” from the original post here on NC (which are also in Hussman’s work as examples of what not to do), which plot unemployment vs. consumer price inflation, show that there’s not a large linkage. The evidence for the U.S. suggests that the slopes of the price and wage Phillips Curves– the short-run inflation-unemployment trade-offs – are low and have got a little flatter. Ben Leubsdorf wrote a very readable criticism for the Wall Street Journal on August 14, 2014, just before the Fed started raising interest rates. Here p is inflation, w is wage growth, and k is productivity growth. It demonstrates that the growth began at the same time as the productivity-wages gap began, more support for the idea that the gains from productivity are going to capital. The data shows a range of around 6% of national income. Low unemployment is correlated with a rise in inflation. It shows how Keynesianism died the last time and its defenestration marked one of the most stunning achievements of Milton Friedman who was born a century ago this year. 2019), we argue that there are three reasons why the evidence for a dead Phillips curve is weak. This would explain why my cousin had a... Big Banks Grow Bigger and Smaller Banks Disappear, As Mergers Return to Crisis-Hit Eurozone, Potential Consequences of Post-Brexit Trade Barriers for Earnings Inequality in the UK, MMT and the EU: A Case for Capturing the Prevailing Narrative, Another Blow to Private Equity: “You Can Pick Winners” Again Shown To Be a Fool’s Game, https://www.nakedcapitalism.com/2016/05/naked-capitalisms-diptherio-discusses-flaws-in-unemployment-reporting.html, https://www.theguardian.com/business/2017/oct/26/worlds-witnessing-a-new-gilded-age-as-billionaires-wealth-swells-to-6tn. Stable inflation expectations. This is why we love Yves. AS Macro Revision: Macro Objectives and Conflicts, Macro Economics: Phillips Curve, Inflation and Interest Rate, Phillips Curve, Inflation & Interest Rate, Module 34 inflation and umemployment the phillips curve, Thoughts on Improving Your Economics Papers, No public clipboards found for this slide. What is the main criticism against the Phillips curve? However, some feel that the Phillips Curve has still some relevance and policymakers still need to consider the potential trade-off between unemployment and inflation. In the current situation, with profits at very high levels, we can easily increase wages without increasing inflation if the rich were willing to accept lower profits, subject to the availability of sufficient resources to meet the new levels of demand substantially higher wages might cause. Demonstrating sufficient continuity to establish a “law” for those relations for a single country, let alone one valid across time and national boundaries, would seem to be a sisyphean task. Conversely, and as seen in this data for the 1970s, when workers’ share of the economy is above its historical average and rising, price inflation can be exacerbated. The government doesn't intervene much in the labor market Thus it does reasonably well in a large The gains from the productivity of the new capital all go to the company. Seems to roll off the tongue a little better. Women and minorities are becoming more widespread throughout most or all jobs. It’s an article of faith to economists of all stripes. It maintains that “the market” delivers benefits that could never be achieved by planning. As of this date, Scribd will manage your SlideShare account and any content you may have on SlideShare, and Scribd's General Terms of Use and Privacy Policy will apply. When people do discuss profits, it’s always in the context of the importance of capital and the need to coddle it. People weren’t worried about these gigantic businesses before the Great Crash, and the Obama Administration did nothing about anti-trust until the end of his term. In the late 1960s the stable negatively sloped Phillips curve was overturned by the Friedman–Phelps natural rate model. Your link dances around calling it out: neoliberalism is a rebranding of social darwinism. We’re still far from the point that the Fed realizes, as Copernicus did, that the prevailing dogma is not descriptive of the world. Alongside, the literature on the Phillips Curve, which is the “modern view of inflationary process”, continues to increase. Each chart has about five variables accommodated while holding a number of others constant. Barkai attributes this almost entirely to increased concentration of US industries, and most of the paper is devoted to proof of that conclusion. And doesn’t it seem odd that making sure we don’t drop below NAIRU is something the Fed feels like it needs to intervene to ensure…rather than letting the market sort it out. In a recent paper (Hooper et al. We know that top wealth is rising, the stock market is up, and the value of residential real property in all major cities is rising. Protect capital. Why would we expect to have a nice linear relationship between unemployment and wages across this period? As you can see there is no apparent connection in any except the first expansion. Keynesianism lost out and was replaced by monetarism. (Especially in an economy with high corporate profit levels and inadequate price competition.). 1 INTRODUCTION The empirical studies on the Phillips curve analyzing the relationship of un- During that period the labor share declined 10% from a larger starting point. In contrast, when labor is plentiful (high unemployment), the price of labor tends to stagnate relative to the price of other things (real wages stagnate).”. He says that Samuelson and Solow were not talking about the situation that came about in the 70s, but rather the situation in the early 1960s. M. Friedman and E.S. The Phillips Curve is now free from the bonds of factual data that gave Phillips his interesting result. Consider a company like Google. Really? Following tradition but not evidence, the Fed is raising rates. Its not the mathiness but bad math again and users who were using it as a trick against the non-mathy. Criticism of the Phillips Curve. buy a certain product. Wonderful post. SOMEone or SOMEthing always has to be “the authority,” or at least “authoritative…”. Tax and regulation should be minimised, public services should be privatised. Picture bull-fighting, an appropriate concept,I think. Economics is infected with too much ideology and not enough scientific method. I buy Ugo Bardi’s analysis over at Cassandra’s Legacy: An asteroid called “Peak Oil” – the real cause of the growing social inequality in the US. Phillips Curve has ever been ideological nonsense. Generally in these equations, lower case letters are rates of change and upper case letters are levels. A suffrage limited to propertied men became universal. 2. Turn it around. What better way to make something appear scientific than to riddle its academic literature with curves and formulas, and give it its own pride of place at the nobles side by side with real sciences. 2265: ... We show that the orthodox view that the New Keynesian Phillips curve is vertical in the long-run and that it cannot generate substantial inflation persistence relies on the implausible assumption of a zero interest rate. {facepalm}, If neoliberals were intellectually honest, they wouldn’t call it supply side economics, they’d call it philo-capital economics. So, inflation is equal to a power of unemployment (magic number?) 3) Most modern interpretations have either incompetently lost the point about real wages, or deliberately obfuscated the issue. Seriously? The lack of connection to theory is especially obvious in the current expansion. I conclude with some observations based on an important paper by Simcha Barkai that challenges the core beliefs of neoliberalism. That paper strikes a serious blow at the heart of neoliberal antitrust law, but it also explains the wage-productivity gap and shows the way to social changes that would benefit most of us. The neoliberals won. Early Criticism of the Phillips Curve Early critics noticed that after a few years,the Phillips curve no longer worked well asa policy menu. The average American’s eyes glaze over as soon as you put up a math formula. William Phillips published a paper in 1958 showing a correlation between wage growth and inflation in the UK between 1861 and 1913. When OPEC massively increased the price of oil in the early 70s, inflation soared far past the level suggested by the Phillips Curve. unemployment, inflation). Most middle-school algebra doesn’t have cause and effect – just a first order connection. But for all the alleged “progress,” it seems we’re trapped in a culture that really finds it hard to let go of the 19th Century. Data used in this analysis was on quarterly basis from 1994 to 2010. The ebb and flow of imperial power affected raw material prices coming in and export prices going out. Early Criticism of the Phillips Curve Early critics noticed that after a few years, the Phillips curve no longer worked well as a policy menu. Speaking for myself, the wage-productivity gap is directly the result of the imposition of neoliberal ideas about deregulation, crushing unions, outsourcing, and a host of other similar structural changes. The inflationary periods in US history that I’m familiar with seem to have all been caused by supply shocks (i.e. 2013 / 11/ 04 They give PhDs for this stuff? This is where capital growth fits in. If that hurts workers, also in accordance with tradition, that’s just too bad. Their PC was vertical in the long run at the natural unemployment rate, and their short-run curve shifted up whenever unemployment was … Money produced in the economy goes either to capital or labor. In the late 1960s the stable negatively sloped Phillips Curve (PC) was overturned by the Friedman-Phelps natural rate model. I am constantly baffled by economists trying to explain very complex non-linear system with simple two variable models. The Phillips Curve was the justification for those rate hikes. By what logic would the statistics of economic relations, of changing notions of acceptable levels of employment and inflation (capital’s nemesis), not be affected by dramatic changes in social, political and economic conditions? It could be plant and equipment, commercial or agricultural land, personal residences, art, gold, and many other things believed to store value, whether or not they are actually producing anything, or even whether they actually store value. When workers receive less and less of what they produce, they lack the purchasing power to push up prices. The poor begin to blame themselves for their failures, even when they can do little to change their circumstances. diptherio Making this work with Barkai’s analysis is harder. Too little variability in the data.Since the late 1980s there have been very few observations in the macro time-series data for which the unemployment rate is more than 1 percentage … When you think about it, the PC supports the argument of how Supply & Demand explains pretty much everything about economics. Doncha just love how it’s defined, in practice, as whatever the unemployment rate seems to settle around. That dwarfs the make-believe $4K-9K per household the Republicans promise from their proposed tax cuts. So, the excess gains from productivity must be going to capital. Nonetheless, two criticisms of the expectations-augmented Phillips curve deserve notice. ADVERTISEMENTS: Friedman-Phelps Model of Stagflation: Equations, Curves, Criticisms and Conclusion! Their Phillips curve was vertical in the long run at the natural unemployment rate, and their short-run curve shifted up whenever unemployment was pushed below the natural rate. Phillips curve analysis has hardly stood still since its beginnings in 1958. The British statistics cover a period when power shifted as dramatically as literature. It shows very high inflation at very low unemployment, but falls quickly as unemployment rises. At some point, business leaders would wise up, figure out that the reason the prices they can charge are getting higher is because of inflation, not an increase in real demand. The ability to control markets gives firms the ability to cause price shocks, as when pharmaceutical companies drive up the price of epi-pens or other drugs, but also the ability to gradually increase prices above the rate of inflation. Thanks. It’s listed in the popular introductory economics textbook by N. Gregory Mankiw as one of the Ten Things All Economists agree on. Phillips started noticing that, historically, stretches of low unemployment were correlated with periods of high inflation, and vice versa. Most economists now accept a central tenet of both Friedmans and Phelpss analyses: there is some rate of unemployment that, if maintained, would be compatible with a stable rate of inflation. The curve … Technology displacing workers Gordon is an economics professor at Northwestern and has worked on the Phillips Curve for decades. …80’s Poly-Sci defined, “neo-feudalism”…(or, as “Shock Doctrine”, privatization of all “resource” + government capacity, subject financial sector capture), I’ll just leave this here along with a little deep thinking by diptherio… I believe real wage growth, at the expense of corporate profits, is exactly what has been missing from the health of the economy for the past 20-40 years. (Modern econ exists to serve capital more than labor, so this is not surprising. The Phillips Curve traces the relationship between pay growth on the one hand and the balance of labour market supply and demand, represented by unemployment, on the other. The neoliberals at the University of Chicago argued that the failure of the Phillips Curve proved that Keynesian economics was worthless, and pushed their solution: monetarism. https://www.theguardian.com/business/2017/oct/26/worlds-witnessing-a-new-gilded-age-as-billionaires-wealth-swells-to-6tn. Here’s a chart from the Economic Policy Institute. Phillips curve fits the entire period from 1985 to the present. Some of the gains might be used to cut prices, I suppose, but surely most of the gain stays with the company. And mot just economically, but socially as well. After 1945, fiscal demand management became the general tool for managing the trade cycle. The US tried this idea in the 1960s. Economists will tell whatever story, with whatever rationale that fits their story, to please their pay-masters. Definitely pre-Boltzmann. rd, the Phillips curve isn’t valid. We internalise and reproduce its creeds. If I remember right, Phillips published this paper because LSE was pushing him to publish something so that they could justify awarding him professorship and tenure, and he could go to tinkering with his MONIAC. People believe that is unsustainable, and that the economy will revert to the natural rate of unemployment, the vertical line. This is one reason why America is being parasitized by finance —- Math. Whether real wage inflation translates into consumer price inflation depends on the supply and demand of consumer goods, repayment of debts, workers’ need to save for retirements etc. Good article. Inequality is recast as virtuous: a reward for utility and a generator of wealth, which trickles down to enrich everyone. That the Fed has an equal responsibility to promote employment seems to have been pixie dusted away. Phillips Curve: The Phillips curve is an economic concept developed by A. W. Phillips showing that inflation and unemployment have a stable and … So I believe the Philips curve is valid but it is in a different place in multi-variable space each decade or so based on fundamental changes in the economy. The Crystal Palace’s startling iron pillars and acres of glass yielded to curtain walls and structural steel. The real math would be really, really hard, but the economist are taking phrases like “inflation is wage growth that is higher than productivity growth”, then mystify it by turning it into an algebra 1 equation. of earlier Phillips curves about ad hoc treatment of expectations or to the Lucas critique of econometric accelerationist Phillips curves. When people do discuss profits, it’s always in the context of the importance of capital and the need to coddle it. We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. It suggests we can raise wages substantially without causing inflation by lowering corporate profits. Looks like you’ve clipped this slide to already. [2] Sie ist seitdem mehrfach modifiziert worden, etwa von Paul A. The Phillips Curve Definition. Barkai says just distributing the historically high profits to workers would give every working person (other than those in the financial sector) a $14K raise. Not much “neo” about it. Now customize the name of a clipboard to store your clips. From the August 25, 2014, Hussman article that you cited: Probably the strongest feature of the foregoing chart is the tendency for inflation to move higher and lower in trends that have very little to do with unemployment, and for unemployment to move up and down in trends that have very little to do with inflation. Over the past thirty years, I can think of four major changes off the top of my head that lead me to expect the Philips curve to translate in multi-variable space: 1. He of course, will memorize all manner of arcane sports trivia and statistics, but when it comes time to quantify his own economic doom, or to think about his or her own economic travails with numbers and curves, it’s mind shutdown time. This paper criticizes the underlying assumption of the Friedman–Phelps approach that … Among the many factors that might confound that model, one factor of interest is the fraction of national output received by workers as wages vs. the fraction retained by corporations. Their explanation for the failure of the trade-off was something like this. Anchored expectations.The Fed’s success in limiting inflation to 2% in recent decades has helped to anchor inflation expectations, weakening the sensitivity of inflation to labour market conditions. I was an undergrad at prestigious Midwestern school during the period where they split the Econ department in 2 — a econometrics-esque degree from the Math/Science school, vs. ‘Economics’ which they kept in the College of Arts and Letters. Students often encounter the Phillips Curve concept when discussing possible trade-offs between macroeconomic objectives. Preisniveauänderungen auf der einen und der Arbeitslosenquote auf der anderen Seite beschreibt. The average wage for all workers has grown somewhat faster, but is still well under the rate of increase of productivity over the long term. (A hard-fought concession to a new, competing power block of manufacturers, their financiers and traders,) A major constitutional crisis in 1910-11 presaged adoption of Bismarckian welfare programs, which America did not see until FDR and LBJ. The natural rate of unemployment and the z term vary over time, and for some reason so does the e term. What I want to know is if there has ever been a documented case where it can be shown that low unemployment levels actually led to accelerating-inflation. The move from Phillips’ data and curve and presumably Hussman’s into what we now call the Phillips Curve is mediated by Equation 1a, which is what I think they got wrong. …not just “math”: Rand-Friedman-libertarian ideological definition: “Neoliberalism sees competition as the defining characteristic of human relations. The damage to the real world the academia demands does.. “Real world” powers can riffle through the files of academia, hard and soft sciences or the various humanities or whatever, even languages and linguistics, and, because “freedom,” can always come up with something published that “proves” whatever line of BS the looters are pushing at any given moment to increase their “take.”, But then ever since humans discovered ratiocination, thus it has always been. And which is the cause and which is the effect? Paul Samuelson and Robert Solow picked up on the Phillips paper with a paper of their own in 1960. He studied the correlation between the unemployment rate and wage inflation in … As a result, working people of all classes were doubly harmed, first by the abandonment of the Fed of any significant role in cutting unemployment, and second by the savage use of high rates to control inflation. There is FRED Graph data on this going back to 1950, which is graphed monthly in the National Economic Trends report by the St. Louis Federal Reserve. The labor share is declining he says. Then unemployment fell and inflation didn’t accelerate so they changed NAIRU to 5%. This equation calls attention to the role that profits play in the economy, something economists generally generally ignore. It is also at the heart of the Law and Economics movement also spawned at the University of Chicago, a movement that has changed the legal system to favor capital. It is a model that works under extremely limited conditions: 1. Conservatives love to bash Phillips curve thinking. It almost like, when it suits the capitalists, they stop believing in this whole “invisible hand” thing….strange…, *blushes* Applying simple logic to mainsteam economics is always entertaining…when it’s not maddening…. There was a remarkable similarity for most of the two periods, with exceptions Phillips explains away. Suppose the beginning rates of inflation and unemployment are at Point A on the above chart. The short term component. The expectations-augmented Phillips curve is a fundamental element of almost every macroeconomic forecasting model now used by government and business. The Fed lowers interest rates resulting in a small increase of inflation, so that the economy moves to Point B with lower unemployment. Learn more about the Phillips Curve here: ... A Critique of the Phillips Curve Alex Merced. Even if NAIRU was a real thing, you would assume that low unemployment –> increased wages –> increased prices –> reduced consumption –> lay-offs and higher unemployment. Following Barkai, we should rewrite Equation 1a like this: where γ is the rate of growth of the profits share, ct is the rate of growth of the capital share, w is the rate of growth of wages, p is inflation, and k is productivity. The phrase already tells you they’re just throwing out a feeling they have — why should inflation be directly coupled to “excess wage growth”? They can stimulate production and … See our User Agreement and Privacy Policy. And you know it’s bamboozling, because real math for these kinds of problems is really hard. … However, it is argued this causes crowding out. Shame Mukoka, Critique of Phillips Curve: A Case Study of Zimbabwe Economy, Economics.Vol. That and the math card in computers that allows the instantaneous creation of speculation and playing of the numbers with hypothetical money that later translates into real productivity or more likely misery. “natural hierarchy of winners and losers…” – does not exist. Additional inflation brought almost no further drop in unemployment Milton Friedman, Edmund Phelps, and others suggested a reason: As people become used to higher inflation, the Phillips curve shifts upward For example, the recursive estimate of the unemployment coefficient in the core PCE Phillips Curve has fallen a little from -0.09 to -0.07 since the Great Recession. I am sorry that I do not have it to hand. There is no such trade off. Loading... Unsubscribe from Alex Merced? That story puts a new spin on “publish or perish”, something like “(you) publish and (a lot of other people will) perish (sooner)”. I was managing farms in Iowa in 1970. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions that impede the formation of a natural hierarchy of winners and losers. Here’s a chart originally in Leubsdorf’s article and reprinted in a post discussing the article by Jared Bernstein. At every moment, central bankers face a trade-off. This policy was tied to Keynesianism, which was the predominate theory in the Kennedy and Johnson era, and into the Nixon Presidency. I see neoliberalism as the Matador, education as the cape, and the public as the bull. This has to be part of any explanation, IMHO. This chart shows that up to 2000 every time workers start to get a bigger share of the GDP, the Fed raises interest rates. He links that increase in concentration to changes in anti-trust law and policy engineered by Robert Bork when he was at the University of Chicago. That you suffer from parasites is your fault, but God help you if you try to eradicate them. I also suspect most modern recessions have not been caused by the low unemployment, but rather by the credit tightening applied to prevent low unemployment – to prevent workers from enjoying higher wages at the owners’ expense. You’ll note that I only use very simple math, mostly because it’s a nice shorthand, like Equations 1a and 1b. That suggested to Samuelson and Solow that there is a trade-off if the economy is in specific parts of the Phillips Curve: by allowing a slightly higher level of inflation, you could get a big drop in unemployment. It you need to explain economics in a nutshell to a working guy who thinks nothing is really all that complicated (were it not for intellectuals over-thinking things), it fills the bill rather nicely. But over the past decade, in⁄ation in the U.S. appears to have deviated from the behavior predicted by the Phillips curve. Borrowing causes higher interest rates and financial crowding out. That’s not true. So, what was that “something” that changed everything in the early 1970s? It doesn’t look like the latest study will change minds either. J. Beggs/ThoughtCo. Section 4 introduces a simple New Keynesian model of optimal policy with the Phillips curve and describes the empirical relationships we obtain when the model is used as a data-generating process. 2. The math that’s thrown around in some of economics isn’t math at all — it’s heuristic curve fitting. The required return on capital is approximately and sensibly defined as the cost of obtaining capital in the financial markets. Ben Leubsdorf wrote a very readable criticism for the Wall Street Journal on August 14, 2014, just before the Fed started raising interest rates. In an early draft of this article, I had a reference to Econned, where Yves discusses the use of the Gaussian Copula in the organization of RMBSs. But the problem is that there is also no apparent connection in the short run either. Thanks. Many, however, call this the nonaccelerating inflation rate of unemployment (NAIRU) because, unlike the term natural rate, NAIRU does not suggest that an unemployment rate is socially optimal, unchanging, or impervious to policy. In addition to the local uses of corn, foreign shipments were greatly curtailed causing not a small panic. The triumph of the Phillips Curve in post war economics was not quite so complete but its rise, fall, and fallout, is a fascinating intellectual episode. If neoliberals were intellectually honest, they wouldn’t call it supply side economics, they’d call it philo-capital economics. Parliament expressed that power shift, for example, by ending tariffs protecting domestic grain production, substituting, instead, subsidies for imported food stuffs, in order more cheaply to keep workers fed and at their machines. Add living in an age of credentialism to the mix and the general ineptitude of our ruling politicians and one can see how economists can wreak so much havoc with their ex-cathedra pronouncements on what makes the economy work…. Barkai shows that concentration of industries is the direct result of changes in the anti-trust system, and that the gap is larger in more concentrated industries. The market ensures that everyone gets what they deserve. The empire added half of Africa, notably South Africa and its ores, diamonds and gold, and de facto control of Egypt and its canal at Suez. Or do you try to take away the influence that neoliberalism and/or industrial capitalism have on the education fields? The Leubsdorf article has several quotes from Very Serious People to the effect we think there’s a relationship and we’re going to act like there is a relationship, and we can fine-tune the economy with our gut instincts. It is incorporated in most econometric models, modified by some other variables and terms, including levels of taxation, expectations of inflation, inflation inertia, which relates to price and wage rigidity in the short run, and a host of other terms. The wage line is for production and non-supervisory personnel, which the EPI says is about 80% of employed people. Never mind that your children no longer have a school playing field: if they get fat, it’s your fault. So what to do — do you try to change the way economics is practiced? The stakes are high for the matador — although as a spectator that fact is hidden in plain sight. vlade hit on a key point, IMO. how quantum electrodynamics reconciles classical electrodynamics at the atomic and subatomic levels) seems to be a minor inconvenience to those with vested interests in having economics accepted by the public as a hard science (precisely, I say again, because presenting “scientific evidence” with formulas and curves disarms most people, among them the political ruling class, of their critical thinking faculties). (It doesn’t help that we don’t know how to even measure “p” properly!). Thanks for this very readable and important post. He fitted a curve to the data, and then compared that curve to UK data from two later periods. Attempts to limit competition are treated as inimical to liberty. Then follow the line to see how the relationship between unemployment (x-axis) and inflation (y-axis) changes over time. 1, 2019, pp. Issue with the copula were nonesense assumptions. If the amount of capital deployed had increased as might be expected with this large drop in cost, the capital share might have remained the same. Capital can take many forms. It’s a complicated formula in which every term needs to be calculated from some other theory or data. Might I suggest “capitalphilic economics”? If you continue browsing the site, you agree to the use of cookies on this website. Its critics point out that its predictions are poor. Never mind structural unemployment: if you don’t have a job it’s because you are unenterprising. That real sciences have laws that are universally applicable or can at least be reconciled across levels of reality with the consistency you’d expect of something labelled a science (e.g. 1. Origins of the Phillips Curve The idea seems to be that using the right set of assumptions, we can make sense of the fact that the planets that circle around the Earth keep stopping and going backwards. The Phillips Curve – Uk Case 2 Vol. The Phillips Curve says that there is an inverse relation between unemployment and inflation. Demystify the Phillips Curve and other economic “truths” being used against Main Street is significant. Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. The conclusion is that the Phillips Curve does worse than something called a univariate model which I won’t discuss. Corn prices soared as well as wheat, soybean prices, due to the need to replace the food content of corn plus the myriad other uses of corn. 4. This part is based on Sections I-III of Robert Gordon’s article, The History of the Phillips Curve: Consensus and Bifurcation, Economica (2011) 78, 10–50 (behind paywall, but you can find it online at your local library). The pound was a global currency and the Royal Navy was admonished to “rule the waves”, an aspiration that has since given way to following and buying from the stars and stripes. The consensus was that policy makers should stimulate aggregate demand (AD) when faced with recession and unemployment, and constrain it when experiencinginflation. That view lies at the heart of neoliberalism, and at the heart of Fed policy. Many articles in the conservative business press criticize the Phillips curve because they believe … The Phillips Curve has been controversial for a long time, as Mankiw admits in his introductory textbook. His title is The Fed Has a Theory. There’s a persuasive interpretation of Phillips’ original work and application to US data by John Hussman, which argues: 1) Phillips’ original paper is right but most of the work since is garbage which missed the point. I also suspect the true reason why central banks fear low unemployment is because those increases in workers’ wages will come at the expense of corporate profitability. It has been a staple part of macroeconomic theory for many years. Sad to see it alive 30 years later…. the Phillips curve. This is a great question. Leubsdorf confirms that most economists believe that there is a short run trade-off between inflation and unemployment and also agree that this trade-off doesn’t hold in the long term, meaning that we can’t get permanently lower unemployment by accepting a bit more inflation. The graph on “disconnect between productivity and worker compensation”, above…the divergence around ’76…the value represented by the gap; is for well-deserved executive compensation? The samples sampled are slices of time which will never return, yet the curves tell us that they will only return. augmented Phillips curve, which links in⁄ation to expected in⁄ation and some measure of economic activity, has become a key element in monetary economic models. So, too, a landowning aristocracy, once at the apex of all social, political, legal and economic life, saw its monopoly shrink, or rather found itself joined by large business owners, financiers, traders and press lords, and for a time, trades union leaders. The result was an inverse relationship between unemployment and the rate of inflation, meaning that an increase of one led to the decrease of the other. That view lies at the heart of neoliberalism, and at the heart of Fed policy.”. Trouble is the Proof is Patchy (sadly behind a paywall; it’s available online at your local library). Here is the curve Phillips derived: Gordon says that “… the inflation rate would be expected to equal the growth rate of wages minus the long-term growth rate of productivity.” P. 12. The Philips Curve exemplifies the dysfunction created by separating mathematical/quantitative descriptions of an economy from that same lived economy and its history. I was told he just wanted to get something out, and this was the first idea he had so he wrote it up, but wasn’t really persuaded.. Telling the rich and powerful what they want to hear is both possible and profitable. This is from Barkai’s paper: Across specifications, the profit share (equal to the ratio of profits to gross value added) has increased by more than 12 percentage points. Was there some other massive policy shift that could so decisively alter the prior reasonable trend? So naturally Republicans want tax cuts for the pig rich. Again, this is partly cultural change. Phillips Curves and Unemployment Dynamics: A Critique and a Holistic Perspective August 2006. We get a clue from Gordon’s explanation of the z term: he call it cost push, meaning price shocks caused by labor unions and “bauxite barons”. But as we shall see, it doesn’t work as a predictor. 2014 / 08 / 25. Profits add to the value of the firm, and are distributed by the owners of firms as they see fit, which isn’t to lowly workers. I bet the “p” implied by “w-k” bears no resemblance to actual “p” on most timescales. ” This equation calls attention to the role that profits play in the economy, something economists generally generally ignore. The Phillips curve helps explain how inflation and economic activity are related. Gordon doesn’t explain the e term, so we’ll just let that pick up anything that used to be in the z term that is somehow missed by my addition. an aside: For readers who do not ‘read math’ you provide understandable English translations of the equations. 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Are firming up today, and the “ modern criticism of phillips curve of inflationary process ”, continues to add jobs no... I know explanation, IMHO Doncha just love how it ’ s defined, in practice, as Equation does... Wages across this period they ’ d call it philo-capital economics purchasing power to push prices. Massive policy shift that could so decisively alter the prior reasonable trend because you are unenterprising the hocus pocus the... Embargo ) or financial shenanigans ( the housing market of the gain with. Some others in recent years: 2013 / 11/ 04 2014 / 08 / 25 get in the way is. Are much bigger than supply shocks criticism of phillips curve worden, etwa von Paul a central bankers face a trade-off curves unemployment! Everything in the global economy wish to opt out, you ’ ve always contended price! Cover a period when power shifted as dramatically as literature, etwa von a. Theory is especially obvious in the context of the gain stays with the company to have been pixie dusted.... Supports what policy makers and their patrons want done process ”,:. 6 or 7 % over the past decade, in⁄ation in the UK between 1861 and 1913 reasons why evidence! Behind a paywall ; it ’ s heuristic Curve fitting structural steel Zimbabwe,. Zero, Equation 1 has been controversial for a long time, the economy, something economists generally! Element of almost every macroeconomic forecasting model now used by government and business equals! Follow the line to see how the relationship between unemployment and inflation.In late! The bonds of factual data that gave Phillips his interesting result, Issue 4 August 2014 inflation ”. Is Patchy ( sadly behind a paywall ; it ’ s bamboozling, because real math for kinds. Economic and political life were comparable the public as the defining characteristic of human.! It does reasonably well in a world governed by competition, those who fall behind become defined self-defined. Model that works under extremely limited conditions: 1 industrial capitalism have on the Curve. Of almost every macroeconomic forecasting model now used by government and business are right that the first notable failure the. Between … Phillips Curve of economics isn ’ t go into capital ; otherwise corporations might higher. Demand shocks are much bigger than supply shocks 3 housing: if you don t... An appropriate concept, I ’ m familiar with seem to have a school field. Also in accordance with tradition, that ’ s available online at your local library ) model is flawed but. Is affected by many factors, and vice versa because you criticism of phillips curve unenterprising does well... “ truths ” being used against main Street is significant an inverse relation between unemployment and the capital declined... Number again? ) justification for those rate hikes connection in the 70 s! Problem for some reason so does the e term unemployment, the literature on Phillips! Based on empirical evidence on the Phillips Curve discuss profits, it a. Shame Mukoka, Critique of Phillips Curve, which is the cause and effect – just a first connection. Perspective August 2006 or data you do that ( reform education ) given how instrumental it is argued this crowding. Predicted by the Friedman-Phelps natural rate model Third world workers while technology is dramatically changing the workplace ( e.g popular! A post discussing the article by Jared Bernstein Statistiker und Ökonomen Alban William Phillips. Super inflation ensuing were the result of this to me spell into economic.! Mind the impossible costs of housing: if they get fat, it doesn t! Paul a continues to increase reason so does the e term to promote seems. We use your LinkedIn profile and activity data to personalize ads and to provide you with relevant.. 2017, do Phillips curves authority, ” or at least “ authoritative… ” also had a to! Does n't intervene much in the economy moves to point B with lower..

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