Is High Inflation Good for Our Economy?

CNBC news clip on "Is High Inflation Good for Our Economy"


Krugman notes that  PR strategies are as helpful for Fed chairmen as for any other CEO. The recession in the early 1980's was induced by former Fed chairman Paul Volcker in order to fight inflation.  Volcker cleverly called his strategy "setting targets for monetary aggregates like M1 and M2" which borrowed credibility from the noted monetarist and Nobel laureate, Milton Friedman. This sounded better than calling the strategy "pushing the economy into a deep recession and keeping it there until inflation cried uncle" (quotes from Krugman's article).

NYT (10-30-2011) A Volcker Moment Indeed (Slightly Wonkish)

Krugman argues that if the Fed now wants to do the opposite, i.e. push the economy into inflation and keep it there until unemployment calls uncle, a good PR move would be to call the strategy "setting targets for nominal GDP" (again quote from Krugman's article).  Krugman then offers his support for some Bernanke induced inflation (above the usual 2% inflation rate target) to fight unemployment.

Many people disagree with Krugman. They argue that setting an inflation target higher than 2% is playing with fire.  The resulting inflation might be hard to control and the policy might undermine the credibility of  Fed as an inflation fighter.  People on this side of the argument often question whether pumping money into the economy would lower unemployment.  If the surge in the unemployment rate is structural (i.e. due to a mismatch between workers' skills and locations with companies' job openings),  and not cyclical (i.e. due to low general demand to buy stuff), then the Fed's actions would not accomplish much.

So what does the data say about how much of current unemployment is structural? It is still a work in progress. Nobel laureate Dale Mortenson recently gave a talk at Villanova University and provided new evidence suggesting that most of the spike in unemployment is cyclical rather than structural. See the ever informative Mankiw blog for more,

http://gregmankiw.blogspot.com/2011/01/how-much-unemployment-is-structural.html


The Fed has a twin mandate - essentially (1) keep inflation low, and (2) keep unemployment low. If the economy is experiencing inflation below 2%, these goals are aligned.  Pumping more money into the economy will both bring inflation back to the desired level and help lower unemployment.

However, if inflation is at 2% (as it is now) these goals are in conflict. Supporting more inflation now is in effect putting more importance on the Fed's mandate to reduce unemployment.  It would help those underwater homeowners with fixed rate mortgages - which might create a more mobile workforce.

What do you think? Should the Fed consider say a 4% inflation target for the next two years?






         

WSJ Report on Human Resources - Is it really so hard to find qualified employees?

WSJ (10-24) Human Resources 2011

This special report has a host of interesting articles with practical tips on increasing productivity like: (1) have a greeter at your door who smiles at employees on the way in to work, (2) handout lots of cookies, and (3) offer Zumba exercise classes.

The one most related to recent classroom discussion is

WSJ (10-24) "Why Companies aren't getting the employees they need" by Peter Cappelli

Cappelli argues that firms just need to set their sights lower and provide more on the job training. After reading his article do you agree? Would apprenticeship style programs solve your company's recruitment challenges?

Watch CNN (5-3-2010) report on apprenticeships:

Should trading partners get bailed out?

France and Belgium are in the process of bailing out the bank Dexia. Dexia made some bad bets, not just on debt from Greece, Portugal, Italy and Sain, but also on interest rate movements. If Dexia failed, it would not be able to meet obligations to its trading partners, many of whom are U.S. financial institutions.

When the U.S. bailed out AIG, it fully met AIG's obligations to European institutions. Many in the U.S.  were upset about the large tax-payer funded flows overseas. Can and should U.S. financial institutions expect the same treatment?

For more read:
NYT (10-23-2011) Bank's Collapse in Europe Points to Global Risks by Gretchen Morgenson and Louise Story


For a good short (<5 min) video news story about Dexia and the Euro Crises




Some thoughts for discussion:

1. Should trading partners be paid in full? Should trading partners take a haircut as a penalty for not being more careful with whom they traded?
2. Would increasing the risk of loss shrink international financial markets so much that real economies would grow slower in the long run?
3. Since the U.S. honored payments to AIG's European trading partners, should Europe honor payments to U.S. trading partners?

What are the protestors protesting?

For a funny take on the protestors, watch Stephen Colbert in action:
Colbert Nation (9-21-2011) Wall Street under Siege

The Colbert Report
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For a serious take on the protestors, with LOTS of charts read:
Business Insider (10-11-2011) CHARTS: Here's What The Wall Street Protesters Are So Angry About...

This article provides the facts that the protestors have yet to clearly articulate.
Note: figure numbers below represent the order of figures in the article, and not the labels given in the article (many graphs are not labeled with a number).  If I were presenting the protestors' case, the graphs that I would focus on are:

1. Figure 10: CEO salary as percent of average workers
This has been increasing dramatically. Perhaps shareholders should be protesting too.

2. Figure 15: Chance of upward mobility (probability of rising to top 40% of income distribution)
This is now much lower than it was in the 1950's (though it hasn't changed much recently).

3. Figure 24: Bank lending
Bank lending after the bailout has been weak, lower than before the crisis, despite large profits. One of the major goals of the bailout was to increase bank lending.

4. Figure 30 (the last figure): Wages as share of the economy
This has been falling since 1970. The article calls this figure the "money shot".

Questions for students:
1. Did any of the graphs surprise you?
2. Did you find any of the graphs to be misleading?
3. Are there other related graphs you would like to see?

Dueling Nobel laureates on stimulus plans

Two leading conservative economists from over at the Hoover Institution,

WSJ (10-3-2011) Stimulus Has Been a Washington Job Killer by John F. Cogan and John B. Taylor

(22 minute interview with John Taylor)

Link to John Taylor interview (6-24-2011)

On the opposing side.

NYT (7-28-2010) How did we know the the stimulus was too small? Paul Krugman

(21 minute interview with Barton Biggs - calling for bigger stimulus)

Link to interview with Barton Biggs (7-1-2011)

To hear Krugman in his own words (11 minutes, starts at 7 min 30 second mark and finishes at 16 minutes, followed by question and answer session)
Paul Krugman lecture (12-21-2010)

Krugman talks about Japan's long period without growth, and implications for U.S. policy.

For my students:

1. Using the facts at hand, try to argue the case opposite to your initial beliefs.

2. Conclude with a discussion of the key concept that sways your final opinion.