Output gap

This post from the Fed Reserve (see my blog tomorrow) discusses two views of the output gap.  At an FTE event earlier this year, this issue was raised and both sides of the debate presented (see my blog tomorrow).

"You may have another view and, again quoting Lockhart's recent speech, "reasonable people can consider the issues...and come to different conclusions. ""

To me, productive discussion is a free examiniation and exchange of ideas, as opposed to a closeminded and pedantic rejection of any view that does not conform to pre-existing ideas or ideology.

This is a very useful post that allows for a framework to discuss the costs and benefits of national income accounting and the costs and benefits of policy based upon GDP accounting.

http://macroblog.typepad.com/macroblog/2012/07/how-big-is-the-output-gap.html

Monetary Policy

James Hamilton writes of monetary policy:

"But unlike many of my fellow academics, I worry about those logistics and am convinced that it is a mistake to ask too much from monetary policy."

http://www.econbrowser.com/archives/2012/05/should_the_fed_3.html

Lecture 1: Chairman Bernanke discusses the "Origins and Mission of the Federal Reserve,"

Chairman Bernanke will discuss the "Origins and Mission of the Federal Reserve,"

Link to powerpoint of the first lecture

http://www.federalreserve.gov/newsevents/files/bernanke-lecture-one-20120320.pdfhttp://www.blogger.com/img/blank.gif

The Tax Compromise

The so-called tax compromise looks sure to pass. It keeps tax rates where they have been for eight years for another two years, increases the death tax from its current zero percent to 35%, increases unemployment compensation by allowing those long term unemployed to receive benefits another thirteen months, and reduces the employee payroll tax by two percentage points. And this is all paid for by ......borrowing, printing money running higher deficits and increasing debt. And this is good? It seems to me that a better solution would have been for Republicans to demand spending cuts along with a permanent extension of income taxes. If businesses have been unwilling to invest because of uncertainty about taxes, how will this help. Invest now so tyhat in two years you might have significantly higher taxes? Doesn't make sense.

In the WSJ today, Jeremy Siegel says the Fed policy is working. The QEII is to print $600 billion (Bernanke says not print money but digitize it??) and focus on bringing long term rates down. But, the fact that long term rates have risen suggests the Fed policy is working -- quite convoluted, but Siegel says that the rates are rising due to expectations of an improving economy and future inflation. I am a little confused over this, although the expectations of future inflation surely have to be there. However, with that debt ratio (debt to GDP) getting higher, I don't see how expectations of strong economic growth can exist.

I just finished a fascinating book titled "Capitalism with Chinese Characteristics". Not easy going but explains how the state continues to control things in China, how the entrepreneurial spirit that developed in the 1990s in the rural areas has been taken over by state spending in urban areas. I mention this because so many people are arguing that the US should follow the Chinese example of state capitalism. With the tax compromise and Fed policy, the US is doing just that -- the state continues to grow.