Common Sense Macroeconomics
By Arnold Kling
Robert Solow favors common sense over exotic theory. On the concerns about deflation in the U.S., he writes,
If you look at the hundreds of prices that are tracked by the Bureau of Labour Statistics as elements of the consumer price index, you can list them in order, from fastest rising to steady to fastest falling.
In the middle of the list are goods and services whose prices are rising at about 2.6 per cent a year. Half of all prices are rising faster than that, and the other half less fast.
In comparing Japan to the U.S., he writes,
Its stock market bubble was bigger than that in the US and was matched by a giant real estate bubble…
the ministry and the bank suffered from obsolete economic analysis and ideology and because they were unwilling at the time to reveal how deep in the tank Japanese banks had fallen under the burden of bad loans and evaporating collateral.
On comparing Germany to the U.S., he writes,
Not so long ago, there would have been an obvious remedy: a devaluation of the mark to get German costs in line with European prices. But mark is no longer there, and the value of the euro affects all European countries equally.
If the economy recovers next year of its own accord, it is a fair bet inflation will soon be the panic of the month.
Thanks to Stephen Kirchner for the pointer to the article.
For Discussion. Solow suggests that economic pundits have an incentive to predict disaster, because even though they are unlikely to be right, they “win big” if the unlikely disaster happens to transpire. Do you agree that this is a factor in economic journalism?