Tidbits…11/26/10

3. Corporate Profits Not Actually At Record High

Matthew Yglesias looks at the claim that corporate profits are at record highs and finds that the claim is not accurate. If one adjusts for inflation corporate profits are still below pre-recession levels. I think this is an important point to remember, if only to quiet the people who keep complaining that “PEOPLE ARE STARVING IN AMERICA WHILE CORPORATE PROFITS ARE AT THEIR HIGHEST LEVEL EVER!!!!” Yeah, that simply isn’t true.

2. Save the Dollar, Not the Fed

Good article that goes through a (very) short history of monetary theory and its relationship to the Federal Reserve. Prior to the 1970s the Fed had one job: price stability. However, with the onset of stagflation the Fed was given a dual mandate of price stability and full employment. Thanks to the “discovery” of the Phillips Curve, which posited an inverse relationship between inflation (which was seen to be caused by demand-side variables rather than primarily monetary policy) and unemployment. This gave the Federal Reserve a sort of theoretical justification for somehow maintaining a balance between skyrocketing prices and recessions. The author rightly points out that the empirical evidence for the Phillips Curve is questionable and, at any rate, the Fed has done an awful job of maintaining anything close to full employment and low inflation. Recent calls to remove the dual mandate and return to the original plan of solely focusing on price stability is misguided, the author claims, because the real problem is that the Fed cannot maintain price stability.

1. The Dual Over the Dual Mandate

This is an interesting article by Peter Schiff, and I think he gets it wrong (surprisingly, because he’s usually very good on monetary policy). He goes through a little history of the Fed just like the article mentioned above, but he comes to the conclusion that we should return to the days when the Fed only had one mandate, which was price stability. Now, I suppose as a policy of second best it would be better if the Fed was simply focusing on prices, but I think the first article gets it right that the Fed cannot achieve this and so we would be better off to simply get rid of the Fed. Schiff himself ends up making that case anyways when he writes

The real reason that prices rise, for both goods and wages, is that the Fed creates inflation.

How does the Fed create inflation? By increasing the quantity of money in the economy. If the Fed’s one tool- monetary policy- creates inflation, then how in the world is the Fed supposed to do anything? Price stability (which isn’t necessarily a good thing in and of itself) would seem to entail a Fed that literally did nothing, which is what Schiff should have advocated.

 

Advertisements
Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: