August 20, 2010 3:03PM # Does High Unemployment Make Inflation Impossible? By [Alan Reynolds](https://www.cato.org/people/alan-reynolds) --- SHARE Benn Steil and Paul Swartz wrote a technically brilliant yet readable *Wall Street Journal* tutorial explaining why “the Fed’s exit strategy is not credible, and that means a serious [risk of high inflation down the road](http://online.wsj.com/article/SB10001424052748703700904575391251303808226.html).” They are sure to be ignored by those of the Keynesian faith who have repeatedly assured us that inflation cannot possibly be a problem for many, many years. Why not? Because there is so much *“slack”* in the economy—a euphemism for high unemployment. If this “slack theory” of inflation makes you *too* sanguine about future inflation, recall that it is the same theory that predicted stagflation would be impossible in 1973–75 and 1979–81. Figures from *The Economist*, August 21, raise some doubts. The latest unemployment rate in Argentina is 8.3%, but CPI inflation over the past year was 12.2%. Unemployment in Venezuela is 8.2%, but inflation is 13.3%. Unemployment in Egypt is 9.1%, but inflation is 10.7%. Unemployment in India is 10.7%, but inflation is 13.7%. Unemployment in Turkey is 11%, but inflation is 7.6%. Wasn’t high unemployment supposed to make high inflation *impossible*? Perhaps Slack Theorists might take comfort from the fact that inflation is “only” 4.2% in South Africa, where unemployment is 25.3%. But that is not exactly solid proof. Whenever Keynesian dogma proves so completely at odds with the facts, there is a powerful inclination among true believers and their herd of media apostles to cling to the theory and diregard the facts. Some volatile economists who previously worried about near-term U.S. inflation have switched to assuming (as they did in 2003) that high unemployment will produce *deflation*. Yet that is obviously not happening in the countries listed above. The only country with falling prices is Japan, with an unemployment rate of 5.3% (and foolishly high tax rates and decades of wasteful “fiscal stimulus”). File the Steil-Swartz article away for future reference. And remember Reynolds’ Second Law: “Inflation is always lower before it moves higher.” ##### Related Tags [Government and Politics](https://www.cato.org/government-politics), [Tax and Budget Policy](https://www.cato.org/tax-budget-policy), [Inflation](https://www.cato.org/inflation) [![Creative Commons License](/build/cato_2020/images/creative-commons.svg)](http://creativecommons.org/licenses/by-nc-sa/4.0/) This work is licensed under a [Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License](https://creativecommons.org/licenses/by-nc-sa/4.0/).