Dean Baker has a post on Edmund Phelps and the NAIRU, discussing how it is was basically disproven by the experience of the US in the late 90s.

NAIRU, for the uninitiated (indoctrinated?) is the theory of the "Non-Accelerating Inflation rate of Unemployment". Basically, NAIRU says that you have to keep unemployment higher than it would naturally fall, otherwise inflation will accelerate out of control.

Thus, NAIRU was (in my opinion) little more than a wishful attempt to justify the high unemployment yielded by the Keynesian inflationary monetary regimes intentionally set up in the early 20th century (which, creakingly, remain with us today). It was always plain to Austrians and other sound monetarists that inflation (in the general sense) can only be caused by creating more money (duh).

I add to the discussion (first post!) the following comment on where and when else NAIRU is shown to be bunk:

How about Hong Kong... 1-2% unemployment for many years (most of its history?) and essentially no inflation.

Look at Switzerland--still 3.8% to this day, inflation .9%. The US can't even get the heavily-massaged PCE that low! Not even close!

So the NAIRU-disproving natural experiments have already been done (and are ongoing). Perhaps Greenie was looking at these.

I find it interesting that these seemingly "impossible" levels of unemployment are associated with sound money regimes (or at least, much sounder than the US's), which probably explains the negligible inflation.

Perhaps the truth is that the soundness of the money system is the "hidden variable" that controls both unemployment and inflation.

By the way, readers might be interested in knowing the epilogue to the Hong Kong story. Well, they started pegging the HKD to the USD in recent years, and now they have 5.5% unemployment.

Funny, that.