This article by Gregory Mankiw, Professor of Economics at Harvard University, was recently published in the New York Times. Dr. Mankiw talks about three hot questions in the world of Economics today: How long will the economy take to heal, how long will inflation be controlled or "anchored" and how long will the bond market trust the United States?
The most interesting argument that Dr. Mankiw makes is of Milton Friedman's theory that inflation is driven by people's expectations for the most part. I find this fascinating because we crib about inflation all the time and ironically, it is probably caused by us! When people feel that prices in the economy might rise, they ask for better wages which results in prices actually going up (due to rising costs of production)! If this is the cause of inflation, I would wonder if it is really possible to ever control it because people speculate all the time. People can make predictions based on political observations, personal experience or merely forecasts based on events in the economy! Assuming this is true, to curb inflation in the economy, the foremost aim of the Fed should be to try and manipulate the expectations of people -- which is probably the most difficult and least result-yielding strategy!
I also like how Dr. Mankiw is skeptic of economists who answer the above questions without a hint of doubt. I agree with his critical perspective that it is impossible to be sure about how the economy will look in the future because the nature of macroeconomics is such that a prediction can never convincingly take into account all the factors that influence the state of an economy at any point in time.
Too bad the unemployment rate doesn't follow the same logic, or we could just think ourselves out of this downturn. In a sense you are right, the Fed should be trying to manipulate peoples expectations. Many middle class people on the fence about spending money are worried about the future state of the economy. Yet if they all just had more faith and spent now rather that save for future downturns, the economy might improve faster.
ReplyDeleteIn a sense, aren't most parts of the economy dependent on people's perspective of the economy? Since the study of economics is in reality the study of interactions between peoples, I don't think it's too surprising to see that people's perspective can have a large impact on the economy.
ReplyDeleteWhile I do agree with the uncertainty of economics, I also think that we should give a lot of credit to economists and what they've been able to accomplish. To be able to simply predict and simplify such a complex web of interactions is pretty amazing in my opinion. I hope economists figure out how to set this country back on track, but at the same time, I hope that politicians start respecting economists and really start imposing laws that are economically sensible, not just politically sensible.