Iran will come to the table with its own clear set of demands: that the US cease worldwide imperialism, stop funding Israel, and end all blogs (like EconoPundit) issuing noxious statements (like this one).
It's time for the Federal Reserve to stop reducing the federal funds rate, because the likely benefit is small compared to the potential damage.
Lower interest rates could raise the already high prices of energy and food, which are already triggering riots in developing countries. In order to offset the inflationary impact of higher imported commodity prices, central banks in those countries may raise interest rates. Such contractionary policies would reduce real incomes and exacerbate political instability.
I think Mr. Feldstein is here stating an important instance of the essay's central (and in my opinion rather strange) thesis: raising US interest rates may harm Americans, but it will benefit the world by a much greater degree.
The impact of low interest rates on commodity-price inflation is different from the traditional inflationary effect of easy money. The usual concern is that lowering interest rates stimulates economic activity to a point at which labor and product markets cause wages and prices to rise. That is unlikely to happen in the U.S. in the coming year. The general weakness of the economy will keep most wages and prices from rising more rapidly.
But high unemployment and low capacity utilization would not prevent lower interest rates from driving up commodity prices. Many factors have contributed to the recent rise in the prices of oil and food, especially the increased demand from China, India and other rapidly growing countries. Lower interest rates also add to the upward pressure on these commodity prices – by making it less costly for commodity investors and commodity speculators to hold larger inventories of oil and food grains.
Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates.
An interest rate-induced rise in the price of oil also contributes indirectly to higher prices of food grains. It does so by making it profitable for farmers to devote more farm land to growing corn for ethanol. The resulting reduction in acreage devoted to producing food crops causes the supply of those commodities to decline and their prices to rise.
It seems obvious to the reader (but apparently not to Mr. Feldstein) the central problem is subsidized and regulation-induced overproduction of ethanol -- not interest rates.
Rising food and energy prices can contribute significantly to the inflation rate and the cost of living in the U.S. The 25% weight of food and energy in the U.S. consumer price index means that a 10% rise in the prices of food and energy adds 2.5% to the overall price level. Commodity price inflation is of particular concern now that the CPI has increased 4% in the past 12 months. Surveys indicate that households are expecting a 4.8% rise in the coming year.
Once again, the reader is directed towards a conclusion different from Mr. Feldstein's: that the US economy is absorbing food and energy price increases rather comfortably because they amout to only 2.5% of the overall price level.
In lower-income, emerging-market countries, food and energy are generally a larger part of consumer spending. A rise in these commodity prices can therefore add proportionally more to the cost of living in those countries, and therefore depress real incomes to a greater extent than in the U.S.
Here is another statement of the central thesis: we ought to sacrifice for the world's economic benefit. I am amazed Mr. Feldstein doesn't even suspect some readers might question the ethics of this prescription.
Government actions to dilute these effects by increased subsidies on the prices of energy and food add to the government deficits, reducing the national saving available for investment in plant and equipment that would otherwise contribute to faster economic growth.
The argument's bizarre nature is at this point growing exponentially. Consider what this paragraph means if, for example, we imagine China as suffering (as is the case) from major inflation of pork and rice prices. Simply tune into NPR to hear Chinese persons-on-the-street calling for government regulation of food prices. Is it the responsibility of the US taxpayer to save the Chinese dictatorship from itself?
The rise in the U.S. inflation rate, and the adverse effects in emerging market countries, might be defensible if lower interest rates could significantly stimulate demand and reduce the risk of a deep recession. But under current conditions, reducing the federal funds interest rate from the current 2.25% by 50 or 75 basis points is not likely to do much to stimulate demand.
The important phrase "not likely to do much" says it all: lower interest rates will indeed stimulate demand by some small degree. (Remember the real-life multiplier is never anywhere near textbook numerical examples. We lecture about multipliers of five or seven, while Ray Fair computes the actual real-world dynamic multiplier at just 1.4. In other words -- even expansionary fiscal policy is "not likely to do much" to stimulate real-world actual demand.)
The current conditions in the housing industry and in credit markets mean that a further lowering of interest rates will have a smaller impact on demand than in previous recessions. In previous recessions, lower rates stimulated aggregate demand by inducing increased home building. But with the massive inventory of unsold homes – up 50% from a few years ago – a further cut in the fed funds rate would have little effect on housing construction.
Once again, "little effect" is not the same as no effect at all. Feldstein is asking for sacrifice.
Moreover, lowering the fed funds rate has not brought down mortgage interest rates. While the fed funds rate is down three percentage points from this time last year, mortgage interest rates are down by less than 0.5 percentage points.
We repeat: "down by less than 0.5 percentage points" is not the same as down by zero.
The dysfunctional state of the credit market means that many individuals and businesses are unable to get credit. Lowering interest rates will not stimulate demand for those who cannot get credit.
And raising interest rates will make their situation better? Please!
Economic recovery will require resolving the difficult problems of the credit markets, dealing with the millions of homeowners who may now be tempted to default on mortgages that exceed the value of their homes, and reducing the risk that the ongoing decline in house prices will push millions of additional homeowners into a vulnerable, negative equity condition. A lower fed funds rate will not solve any of those problems.
Perhaps a lower fed funds rate won't solve these problems, but a higher rate will almost certainly exacerbate them.
The first candidate to effectively identify himself (or maybe herself) with this proposal will be the next U.S. President. (The principle of minimum differentiation suggests they'll all adopt some variant of the idea.)
1. Has Barak Obama ever gone on record against those routinely using the words "dog," "pig," or "monkey" in association with ethnic groups other than his own?
2. Under an Obama Presidency, what would be okay that you could say (without getting fined or ticketed?)
3. Why does the Sun Times' headline claim Linda Ramirez-Sliwinski "quit" when she was fired, and why does it quote her as saying something quite different from what (according to the story) she actually said?
The narrative that Iran (and then of course OPEC) will, any day now, switch from dollars to Euros (or something else?) has been floating around the internet since, well, the first days of EconoPundit itself.
Guess what -- the story is back! (Just like, well, uh, a "bad penny?")
See also Bohuslav Martinu opera of the same name...
News is just now leaking out that Jules Dassin died three days ago. His adaptation of Kazanzakis' The Greek Passion (US title "He Who Must Die," GB title "Christ Recrucified") was just shown on the new MGM HD cable channel, and I can report it was amazing to see a clearer, more-riveting print on HDTV than was ever seen in 16mm at all the university film society meetings of the 1960s.
We are checking as often as possible -- hourly until we move off into the wilderness of economics teaching late today -- for this quarter's update of Fairmodel.
Now that Ray and his assistants have updated the numbers and reesimated the model, what will the prediction be? Recession? Disaster? Recovery?
Don't touch that dial!
UPDATE: Oops! Drinking way too much Starbucks, I guess. The forecasting quarter doesn't end for yet another 30 days or so. (Thanks to last night's students who quietly pointed this out.)
Baker's central theme [is] that "Hitlerism and Churchillism are in fact the same thing. The difference is only one of degree."
Coming from a lesser writer, this argument could be dismissed as the sort of silly, everything-bad-is-our-fault self-loathing common among the left wing. But Baker is one of the most skilled writers at work today...
His biggest misstep was "Checkpoint," a brief reflection on the desirability of murdering George W. Bush that struck some critics as ideological, perhaps even unhinged.
That same charge could be leveled against Human Smoke. While he uses its factual form to press the case that the barbarity we all too easily ascribe to the Germans was invented by the British in India, he seems naive and partisan in places, automatically dismissing the possibility of higher British motives while credulously parroting German propaganda as if it represents historical truth.
The book is also repetitive. We see too many draft resisters go to jail. World War II was many things, but a testament to the importance of pacifism it was not. The savvy reader quickly grasps that Churchill is evil itself -- he has no redeeming qualities, apparently -- and yet Baker keeps laying on the lash. We get it.
The book's biggest flaw is to draw moral equivalency between the Nazis and the West. Refusing to admit refugee children into your country is heartless, maybe even vile. But it is on a different scale of sin altogether than conceiving and creating the machinery to murder them. No matter how ineffectual or cruel Churchill's bombing campaign was, he was still reacting to Hitler's conquest of Europe.
Baker takes the standard lesson of World War II -- that the West failed at Munich by backing down and allowing Hitler to unleash destruction -- and inverts it. Forget about confronting Hitler sooner, we shouldn't have fought him at all. Or the Japanese for that matter. The pacifists were right, Baker claims, suggesting -- somewhat idiotically -- that Europe's Jews might have all ended up safe and happy on Madagascar had the Allies not made things tough for the Nazis. We made him do it.
Yes, handing the world over to Hitler with a Gandhian blessing would have spared us from the depravity of bombing innocents. But what then would our world look like? Baker never pauses to wonder.
Still, as much as I found myself disagreeing with Human Smoke, even despising it in parts, I'm glad I stuck with this odd moral shell game of a book. Parts of it read like history as it would have been written by the Nazis had they won the war. But it also takes a nightmare that we are too familiar with, all too comfortable with, and retells it afresh, poking and prodding us, challenging our self-assigned sense of goodness, and ultimately keening at the charnel house that Europe became for six horrible years in the middle of the 20th century.
