Phillips Curve, R.I.P.: A top Reagan economist paints a damaging picture of an economic tradeoff that continues to confound.

• Author: Roberts, Paul Craig

The Phillips Curve is the modern-day version of the unicorn. People believe in it, but no one can find it. The Fed has been searching for it for a decade and the Bank of Japan for two decades. So has Wall Street.

Central banks' excuse for their massive injections of liquidity in the twenty-first century is that they are striving to stimulate the 2 percent rate of inflation that they think is the requirement for sustained rises in wages and GDP. In a total contradiction of the Phillips Curve, in Japan massive doses of central bank liquidity have resulted in the collapse of both consumer and financial asset prices. In the United States, the result has been a large increase in stock averages propelled by unrealistic price-to-earning ratios and financial speculation resulting in Tesla's capitalization at times exceeding that of General Motors.

In effect, pursuit of the Phillips Curve has become a policy of ensuring the financial stability of banks by continually injecting massive amounts of liquidity. The result is greater financial instability. The Fed is now confronted with a stock market disconnected from corporate profits and consumer disposable income, and with insurance companies and pension funds that have been unable for a decade to balance equity portfolios with interest-bearing debt instruments. Crisis is everywhere in the air. What to do?

The Phillips Curve has been working its mischief for a long time. During the Reagan Administration, the Phillips Curve was responsible for an erroneous budget forecast. In the twenty-first century, the Phillips Curve is responsible for an enormous increase in the money supply. The Reagan Administration paid a political price for placing faith in the Phillips Curve. The price for the unwarranted creation of money by central banks in the twenty-first century is yet to be paid.

The Phillips Curve once existed as a product of Keynesian demand management and high tax rates on personal and investment income. Policymakers pumped up consumer demand with easy money, but high marginal tax rates impaired the responsiveness of supply. The consequence was that prices rose relative to real output and employment. Supply-side economists said the solution was to reverse the policy mix: a tighter monetary policy and a "looser" fiscal policy in terms of lower marginal tax rates that would increase the responsiveness of supply.

During the 1980s, the economics establishment was too busy ridiculing supply-side economics as "voodoo economics," "trickle-down economics," "tax cuts for the rich," and for allegedly claiming that tax cuts pay for themselves, to notice what I pointed out at the...