Inflation & Deflation

Robert Samuelson had an interesting piece in The Washington Post on Sunday.

In it, he discusses price stability, approaching it as a discussion of whether we face a greater threat from inflation (a general rise in prices) or deflation (a general fall in prices). He cites two eminent economists: Alan Meltzer who believes inflation is the greater threat, and Paul Krugman who sees deflation as more likely. If we judge from recent actions of the Federal Reserve, they're lining up with Dr. Krugman. But we'll find out more on June 23 when the Federal Open Market Committee (FOMC) concludes its next meeting. The current Summary of Current Economic Conditions (Beige Book) certainly doesn't seem to presage an inflation problem.

But Samuelson's article has value beyond the discussion. In it, he refers fleetingly to the role of consumer expectations. This idea is important. Essentially, this means that whether the nation experiences inflation or deflation depends partly on what we expect as participants. For these expectations will likely influence our actions. If we expect inflation, we likely will start acting in ways that will help inflation along - spending rather than saving to avoid price increases for example. If we expect deflation, we will like go the other way - holding back on spending out of fear of a slower economy which would only slow things further.

But Samuelson goes on to make a more important point. And that point has to do with the structure of the Fed. Mr. Bernanke's term as Chairman of the Board of Governors ends in January. And Chairman Bernanke is on record that the Fed has pledged to preempt high inflation. That pledge is highly valued because it is based on the credibility of his predecessors, Paul Volcker and Alan Greenspan, as inflation fighters, and stretches back more than 25 years. Samuelson points out that nominating Bernanke for a second term as Chairman could do much to eliminate uncertainty and could offer some sense of commitment to price stability to all participants in the economy.

What are your thoughts? Do you discuss the role of expectations with your students? And do you think the Fed's leadership has any impact on expectations? I know the school year is about over, but hopefully we can continue discussions, and help you get some ideas for next fall. I look forward to your thoughts.

***UPDATE***
One of this blog's regular readers pointed out two additional items for consideration. The first is this opinion piece by Arthur Laffer from today's edition of The Wall Street Journal. Laffer falls squarely in the more inflation camp.

The second is this speech by Jeffrey Lacker, President of the Federal Reserve Bank of Richmond before the North Carolina Senate Appropriations Committee. President Lacker is an inflation hawk, and although that might cause you to place him in the same camp with Laffer and Meltzer, take a look at the final few paragraphs of his speech where he addresses inflation. He evidently doesn't fall into the inflation or deflation camp at the moment, expressing confidence that consumer expectations are firmly anchored at the moment.


This post references the following Keystone Economic Principles:
4. Economic systems influence choices.
5. Incentives produce "predictable" responses.
7. Economic thinking is marginal thinking.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.

This Is So Cool....

HT to Mark Perry



Show this to your students and ask what some of the implications are for workers? for job skills? for infrastructure? for product quality? for competition?

This post references the following Keystone Economic Principles:
2. There Ain't No Such Thing as a Free Lunch.
3. All choices have Consequences.
4. Economic Systems Influence Choices.
7. Economic thinking is Marginal Thinking.
and
8. Quantity and Quality of available resources impact living standards

Aid Debate

One of the topics "near the end of the book" for many economics classes is economic development. This is unfortunate because students frequently ask about the efficacy of giving aid to other nations in order to help them develop - particularly if they see unmet needs in the U.S.

One of the standard responses has always been that U.S. aid to foreign nations is a small part of the federal budget, especially compared to other items. This is true, but doesn't address their point regarding opportunity cost. The issue can also cover charitable aid from private sources. Here, the usual response there is "people are free to give their money as they see fit." Both answers avoid the debate about the efficacy.

Foreign aid is, admittedly, a large and complex issue. But the popular media seems to be renewing interest in it, particularly as it relates to the continent of Africa. Much of that renewed interst is due to the work Dambisa Moyo and her book Dead Aid. A few of the "big names" in the profession have been involved in this issue for some time, but Moyo's work has sparked new interest, largely due to her background and experience.

If we can judge from this article on voxeu.org, William Easterly, author of The Elusive Quest for Growth and White Man's Burden shares Moyo's view.

This artice on voxeu.org would seem to put Jeffrey Sachs, author of End of Poverty and Common Wealth among those who disagree.

Both make strong arguments. I can see where aid without accountability can be wasted - particularly in an institutional setting where corruption may be sanctioned or, at the very least, accepted. But it is also hard to ignore that even simple resources (mosquito nets) can have a significant marginal impact in many of these nations.

There are other resources that you might want to examine if you choose to use this topic with your students. There is an interesting panel debate on National Public Radio with Easterly on one of the panels.

And there are five interviews on the topic of poverty and development at EconTalk. (Although a few of them don't necessarily restrict themselves to Africa.)

If you are trying to get students to think and look outside "their world", or if you just want students to see the value economic thinking can bring to solving real world problems, I encourage you to look at some these of resources. And if you know of others, please share your information here.

This post references the following Keystone Economic Principles:
4. Economic Systems Influence Choices.
7. Economic thinking is Marginal Thinking.
and
8. Quantity and Quality of available resources impact living standards

Slideshows for Use in the Classroom

I ran across some interesting slideshows that can be used with your students. CNBC has put together a number of them, but the three I found most interesting were the following:
US Trading Partners
What Does a Trillion Look Like?
and
Holders of U.S. Debt

I think your students will find the information interesting as it sometimes run counter to "popular opinion." I’m sure many of them will not be able to correctly identify, in order, the top three trading partners. Likewise, I wish the folks at CNBC had broken out the "#1" position on the U.S. Debt slide show. It would be interesting to see exactly where the federal debt is held.

I know the Federal Reserve holds a healthy chunk as a result of monetary policy and other efforts related to the current recession. But I also know a substantial amount is held by Social Security, and some by other agencies. Regardless, the presentations should provide some interesting information for classroom openers or closers (those short discussions at the beginning or end of class).

There are others that can easily be integrated into personal finance, government and current events, as well as economics. Which ones would you find most useful with your students?

This post references the following Keystone Economic Principles:
2. There Ain't No Such Thing as a Free Lunch.
and
6. Do what you do best, trade for the rest.

Crowding Out

A reader (Hi Laura) sent a link to this interesting article from The Globe and Mail. The authors contend that government stimulus should not stifle the recovery. One of the more interesting aspects of the article is their counterargument to the "crowding out" idea - government spending replacing private sector spending. It is eloquent and worth reading.

Concern about the stimulus plan resulting in crowding out is not restricted to one ideological group or the other, however. The Congressional Budget Office cited concerns about it as recently as two months ago (note "Long Term Effects"). I don't think the CBO is a conservative think tank. And while they were specifically looking at financial markets, not all markets; the CBO letter does seem to raise legitimate concerns about resource allocation.

My concern remains whether the government is in a position to better allocate unused resources, or whether markets can do it more efficiently.

I look forward to your thoughts.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
and
4. Economic systems influence choices.

Demand Curves Slope Downward, Evidently

Earlier this month, I posted on the decision of a couple consumer products companies to try to ride out the downturn by stressing the value of their higher priced products.

It now seems one of them is rethinking the idea. According to this story (free at this writing) in today's edition of The Wall Street Journal, consumer giant Proctor and Gamble will be boosting offerings of lower-priced products. This comes after P&G issued a lower than expected earnings forecast for its next fiscal year which begins July 1.

It seems that its lower priced products have outperformed the premium-priced items. Evidently, when people have less money to spend they buy more of the lower-priced items than they do of the premium brands.

I think you can even work in substitution effect, opportunity cost, scarcity, and a whole raft of other economic concepts.

What do you think?

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
7. Economic thinking is marginal thinking.
8. Quantity and quality of available resources impact living standards.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

Understanding Fiscal Policy

First, thanks to Izzit.org for the pointer.

Here's an interesting piece on business/government cooperation.

To think, businesses benefit from legislation. Next we'll be hearing that politicians backing the legislation receive contributions from these same businesses.

Captain Renault is "shocked."

(For the younger readers of this blog, if you've not seen the classic film Casablanca, one of the characters, Captain Renault, is "shocked" to discover gambling is going on in Rick's Cafe - just as his winnings are delivered.)

This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
and
5. Incentives produce “predictable” responses.