Model 4 is favoured by the Scandinavian countries and some of the smaller Europeans (such as the Netherlands and Austria). It involves high taxes and redistribution on an even larger scale than group 3 – but the income support provided, while generous, is more work-conditional and employment protection laws are less strict than group 3 – although stricter than in groups 1 and 2 (or Australia). Instead this model relies heavily on ‘active’ social programs to enhance the productivity and mobility of low income people throughout their life cycle. For example, in addition to spending much more on education, governments in Denmark, Norway, Sweden and the Netherlands invest about four times more (relative to GDP) on active labour market programs

“…without regard to the way that so many interventions and welfare programs reduce the incentive for poor people to help themsleves…. to their neighbour’s DVD Player, stereo and jewellery.”

America’s mean welfare system and prison population of over 2 million are not unrelated facts.

First, he limits his empirical discussion of productivity and innovation to the last decade. A much longer historical perspective would have been appropriate.

More importantly I don’t know why he focuses on the “Continent’s Big Three”

You’re right that monetary policy has become the main arm of macro policy, but it’s not the same thing as monetary targeting. Monetary targeting means targeting the money supply, that is, using whatever instruments the central bank has at its disposable to ensure that the aggregate quantity of money in circulation stays within certain precise bounds. Monetarists proposed that the money supply be restricted to a growth rate equal to the average growth rate of real GDP, leaving no room for price inflation. Most central banks tried this approach in the mid 1970s, but a decade later most had given up. Central banks can influence the money supply, but experience proved they can’t contol it, whether they target the money base, M1, or M3. In any case, the causation between money growth and price growth can work in both directions. Central banks these days simply monitor the inflation rate itself, and many, have an explicit inflation target. Do a search of the RBA web site and you won’t find any mention of the money supply, except in the more academic research papers. They still measure the various aggregates, though.

The ‘selling or buying government securities on the market’ that Ken referes to still happens, but this is the means by which the official interest rate (the ‘overnight cash rate’) is manipulated: it’s not done with a view to its effect on the money supply itself (although generally speaking if the interest rate is raised people will reduce their deposit holdings and the money supply will fall.)

Thanks to others for their comments.

The change from NRU to NAIRU was an attempt to meet these criticisms (unsuccessful in the view of the Real Business Cycle theorists, who are maybe best thought of as over-mathematicised Austrians). This change was responsible for the ‘neo-Keynesian synthesis’ of mainstream macro, which has led to inflation targeting rather than money supply targeting – to the disgust of the RBC crowd.

Phelps was always much less of a hardcore macroeconomist than Friedman – he actually paid lip service early on to the importance of the microeconomics of the labour market to stability, growth and distribution.

BTW Chris it’s now pretty apparent that, whatever the Nobel committee thought at the time, it is Friedman’s permanent income stuff (and maybe his portfolio theory) that will give him whatever immortality he gets. As a practical aid to running an economy that has a sophisticated financial sector (and thus is able to easily provide good substitutes for whatever concept of money you’re trying to target) monetarism is dead, outside perhaps parts of the ECB.

Mr Phelps of course got a recording which self destroyed in the original Mission Impossible

I’ll certainly read the links to his stuff on subsidies. Sounds very interesting. I’m sure it won’t be “piffle”…as I’m sure Nicholas’s work on imputation and the company tax rate isn’t either.

Phelps could have made great contribution to the economic profession by dismissing the entire framework of the supposed trade-off between inflation and unemployment (the Phillips Curve). Unfortunately he has chosen to stick to the bankrupt framework by making some amendments to it.

Provided by an “Austrian” “Austrian” in Australia!

Many thanks for this excellent post. It’s very helpful to economically semi-literate readers like me, and I especially love the link back to Adam Smith, morality and society.