Yes Mr. Friedman, I Can Hear You Now

For once I agree with both Robert Samuelson and Thomas Friedman. Well, mostly anyway.  First, Samuelson discovers inflation targeting:

A Big Story, Missed, By Robert J. Samuelson, Washington Post:  ...One important story we're missing today is the absence of sharply higher inflation. … Time was when an economic recovery … and this one has run 3 1/2 years -- would generate rising wages and prices that would choke the expansion … Low inflation today underlies the economy's continued resilience. It especially helps explain low long-term interest rates and, hence, the housing boom. … Even many experts are surprised by the economy's new inflation immunities. … One reason that higher oil prices haven't yet crippled the economy is that they haven't triggered a widespread jump in wages and other prices. There are many theories to explain the economy's greater inflation resistance: stiffer competition, higher productivity, spreading globalization and "slack" in labor markets. All may be partially true. … for labor-market "slack," ... unemployment is only 5 percent ... Still, companies don't seem to be bidding up wages and salaries to attract scarce workers. … One possible explanation is that there's more "slack" in labor markets than the unemployment rate suggests. Some discouraged workers may have stopped looking for jobs. ... Give all these theories their due. Still, the main reason for inflation's good behavior lies elsewhere: Expectations have changed. … The central legacy of the Alan Greenspan era at the Federal Reserve … is the suppression of ... [t]he inflationary process of the 1970s … from government policies of cheap credit and easy money that were intended to reduce unemployment. The decisive reversal of policy occurred in the early 1980s, when then-Fed Chairman Paul Volcker squeezed credit and caused a massive recession. By 1983 inflation had dropped to about 4 percent.  Greenspan has sustained that progress by preempting any resurgence of inflation; … It's easier to control inflation -- and stabilize the economy -- if people don't believe that high inflation is inevitable and are automatically raising wages and prices. Little wonder that the economy has done better in the past 20 years than it did in the previous 20. … But the transformation has occurred so slowly that most Americans simply take it for granted. It's a hugely significant story, even if it's mostly ignored.

Before we declare the current policy regime a success , we need to fully understand why wages are lagging behind inflation and productivity as the economy recovers, and why the labor market continues to emit signals of weakness.  I don’t believe the explanation for labor market weakness lies with inflation targeting, but we don’t yet know for sure.  We also do not know for sure that the increased stability since the 1980’s (e.g. the variance of GDP has fallen) is due to monetary policy.

Thomas Friedman next:

Calling All Luddites, By Thomas L. Friedman, NY Times:  I've been thinking of running for high office on a one-issue platform … I promise … America will have cellphone service as good as Japan's, provided Japan agrees not to forge ahead on wireless technology. … But don't worry - Congress is on the case. It dropped everything last week to pass a bill to protect gun makers from shooting victims' lawsuits. The fact that the U.S. has fallen to 16th in the world in broadband connectivity aroused no interest. ... The world is moving to an Internet-based platform for commerce, education, innovation and entertainment. Wealth and productivity will go to those countries or companies that get more of their innovators, educators, students, workers and suppliers connected to this platform via computers, phones and P.D.A.'s.  A new generation of politicians is waking up to this issue. … Philadelphia, which decided it wouldn't wait for private companies to provide connectivity to all … made it a city-led project - like sewers and electricity. The whole city will be a "hot zone," where any resident anywhere with a computer, cellphone or P.D.A. will have cheap high-speed Wi-Fi access to the Internet.  … Message: In U.S. politics, the party that most quickly absorbs the latest technology often dominates. F.D.R. dominated radio and the fireside chat; J.F.K., televised debates; Republicans, direct mail and then talk radio, and now Karl Rove's networked voter databases.  The technological model coming next - which Howard Dean accidentally uncovered but never fully developed - will revolve around the power of networks and blogging. ... The party that stakes out this new frontier will be the majority party in the 21st century. And the Democrats better understand something - their base right now is the most disconnected from the network."  Can you hear me now?

The whole city a hot zone.  I could live with that.

Comments

[Micah Sifry]

To help make it happen, join us at http://www.rasiej.com and sign the petition to Wifi NY at http://www.wifi4ny.com.

[howard]

The fact that inflation has stayed low for 20 years has hardly been ignored, but let's put that quibble aside.

It's hard for me to believe that inflation has stayed low all this time because the Fed wanted it to. I'd say we should look at other factors, such as globalization and the disintermediation effects of the internet first before we start looking at what i'll loosely call "responsible governance on the Fed's part." After all, when has the Fed, broadly speaking, not wanted inflation low?

That all said, i think it's very interesting that greenspan is being quite vocal (as is yellen) that they want to see long rates higher, presumably because they want the hottest housing markets to cut this out.

i have believed for a long time that the logical culmination of Bush League economics is stagflation lite: low growth, modest but upticking inflation, and long rates going higher in response and squeezing. To some degree, we're seeing indications of this already: roughly 75% of workers are not seeing real wage gains but labor costs are rising thanks in particular to health care.

Within all of this, we need to ask whether it's been "the Fed" or "Greenspan," and we need to wonder when the bond market starts pricing a post-Greenspan uncertainty into the mix (which leads me to think, given that the last thing bush needs in 2006 is a stagflation-driven recession) that they're simply going to ask Greenspan to stay at least one more year and keep targeting inflation....

[dude]

I read Friedman's article also and agreed wholheartedly. Then I continued listening to his new Book from the file I downloaded at www.audible.com and found out that he ripped off his own book. The exact same article is in the book, which is fine since its his book. My larger point is this: I was really excited about this book because I heard Freidman speak about this and I thought he was really leading the way in understanding globalization, and in many ways he does a good job at pointing out to the ludites what they are missing. But in the end the book is really "globalization on traning wheels". Unfortunately, The World Is Flat is largely a regurgitation of interesting and cool facts about globalization: UPS delivers tracks 6 million packages per day and fulfills all of Nike.com's orders, Google indexes 1 billion pages per day and serves 10 billion searches per day, India's middle class is as large as the entire population of the US, etc, etc.

If you really want to read someone who has a grasp on what globalization is all about, pick up Thomas Barnett's The Pentagon's New Map:
http://www.amazon.com/exec/obidos/tg/detail/-/0399151753/

Barnett's book is truly groundbreakinga nd he is the only one talkinga bout a workable happy ending for the "war on terra" (oops. I mean "global struggle against extremism" or whatever).