Don't Buy Stuff...

Bernanke on the Difficulty of Economic Forecasting

In a commencement address at Boston College Ben Bernanke gave more insight into his childhood as a brilliant child from a working class family in South Carolina and the importance of education. He also gave this description of the difficulty of economic forecasting:

Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make.

Economist Robert Frank on the Consumption Tax

Robert Frank describes how replacing the current income tax with a consumption tax might help avoid future problems in the financial sector:

...What's the solution in the financial world?

To start, you can regulate the amount of leverage asset managers could offer. But if you really want to blunt the incentive for investors to squeeze out ever higher returns, scrap the income tax and shift to a much more steeply progressive consumption tax. You would report people's income and savings to the IRS each year. The difference between those numbers is how much they consume.

Tax that instead of taxing people's income, and the government would strengthen the incentive to save and invest, and weaken the incentive to build bigger houses. If other people were building smaller houses, each investor would feel less compelled to take greater risks to keep up.

Wouldn't a consumption tax, which reduces consumer spending, be a drag on economic growth?

The tax should be phased in gradually after the economy recovers. The capital market would direct consumers' extra savings to investors, who would spend the money on capital goods. So total spending would remain the same - and it's total spending that determines output and employment.

The Heavy Hand of Energy Policy

Economists often describe government policy implementation as either heavy handed or light touch. Heavy handed policy is accomplished through government mandate and often has adverse economic effects and sends inaccurate information to markets by way of bad price signals. Examples of heavy handed policies would be rent control (price ceiling) and minimum wage laws (price floor). The light touch approach takes economic incentives into consideration and uses markets and price signals to accomplish the intended goals.

The Obama administration aims to accelerate higher gas-mileage rules using the heavy handed approach. This idea is an easy sell to the public because the perception is that the automotive companies will bear the cost of the mandate, without realizing that the costs are passed on to the consumer. The same goals could be accomplished much more effectively and efficiently by using a simple gas tax as proposed by Greg Mankiw and his Pigou club.

Inflation and Zimbabwe

"Inflation is always and everywhere a monetary phenomenon."
- Milton Friedman

This from The Wall Street Journal about hyper-inflation in Zimbabwe. It seems they have solved the problem by adopting a stable currency: the U.S. Dollar.

Zimbabwe topped that record for economic mismanagement last year. The country’s annual rate peaked at 489 billion percent in September 2008, the International Monetary Fund reported, and for the full year averaged 56 billion percent. The Zimbabwe dollar became literally worthless, the IMF said, and by November 2008 it “virtually disappeared from circulation.”

Fed up, locals started using U.S. dollars, which put a sharp lid on inflation. This year, the IMF estimates that inflation will descend from hyper-stratosphere and average 6.9%, when measured in dollar terms.

Labor Mobility and Unemployment

This story in BusinessWeek is very enlightening. Some parts of the country are mired in recession with high unemployment while others (like my hometown of Minot, North Dakota) are struggling to find enough workers to fill positions. While the incentives created by generous unemployment benefits might be having some negative effect, as well as a mismatch between the job openings and the job skills of the unemployed, the most interesting observation is the sad state of the housing market. People are finding it difficult to move to more attractive markets because they are finding it difficult to sell their homes.

One reason the jobs misery index is so high: The housing bust has reduced Americans' mobility. The Census Bureau reported on Apr. 22 that the percentage of the population that moved was the lowest since recordkeeping began in 1948. Home-owners, the Census found, were only one-fifth as likely to move as renters.

Meltzer on Inflation and Deflation

In this article in the NY Times, Economist Allan Meltzer ponders inflation and deflation. Meltzer thinks that inflation lies ahead...

When will it come? Surely not right away. But sooner or later, we will see the Fed, under pressure from Congress, the administration and business, try to prevent interest rates from increasing. The proponents of lower rates will point to the unemployment numbers and the slow recovery. That’s why the Fed must start to demonstrate the kind of courage and independence it has not recently shown.

Milton Friedman often said that “inflation was always and everywhere a monetary phenomenon.” The members of the Federal Reserve seem to dismiss this theory because they concentrate excessively on the near term and almost never discuss the medium- and long-term consequences of their actions. That’s a big error. They need to think past current political pressures and unemployment rates. For the next few years, they cannot neglect rising inflation.