okun's law

i thought i would post this link. i thought this is a topical theory.

http://en.wikipedia.org/wiki/Okun's_law

 

I'm not very sure about current relevance of "Okun's law" ... some form of aggregate production function would be more appropriate, obviously including stochastic elements and structural/technological dynamics...
And from such production function adding capital mobility, expectations and price setting - you can derive anything you need, Okun's, sacrifice ratios, Philips curves, etc..

 

I think that the Philips curve is most appropriate topic here. In the short-run, there is a positive correlation between inflation and employment rate. Fed is trying to tamp down rising U rates with inflation (among the many other things he's trying to accomplish with inflation).

I guess we'll see how well this works. 2010 is going to be such a pivotal year. We're probably going to see some pretty interesting stuff.

 

I think it goes something like this: Production function (thus supply-side) → AS
consequently there are: if &Delta;P/P(ex post)>&Delta;P/P(ex ante) then &Delta;U<0 &rarr; &Delta;E>0
So it's just basic macro-principles within general AS/AD framework - first-year uni...

With fixed or a bit growing AS - demand-side economics usually really yields positive &Delta;E vs &Delta;P/P , but for case if AS more volatile (especially if there is adverse supply-shock or in case of so called "production outflow" - for ex: subst. to China/India) outcome might be absolutely different (for instance accelerating &Delta;P/P>0 & &Delta;U>0 &rarr; &Delta;E<0 , BoP deficit, NCO>0 & NX<0 &rarr; &Delta;FR<0 &rarr; depreciation ... etc.. until system comes back to one of local short-run equilibriums)..

In my opinion - the "good" thing now - is demand-side limited lending capacity (not much low-risk customers left whom to lend), which consequently limits a bit monetary expansion (as we know quite a big part of liquidity went to stock-markets with such outcome as new bubble)...

If FED & GOV will really ensures restore of trust for both demand-side (cheap credit/ tax-cuts etc.) and supply-side (investors into real assets/capital through the same cheap financing and support/stability in demand), then we will probably really see some sort of sustainable restoration, but not necessarily quickly back to previous levels (because it was pushed by unreasonable overconfidence about future incomes) ...

Most interesting thing - all in all - how US will handle debt? Which tax will go up first? (Ricardian equivalence)? With consequent fall in private incomes? Investment? Going OffShore?