With low inflation, Firms find it hard to cut wages in many cases—like when a recession strikes, reducing the demand for workers. But if inflation is high, then the real cost of labour can fall even if actual wages don’t (because workers become cheaper relative to the goods they are producing).
The Economist explains
Why the Fed targets 2% inflation
The Economist explains
Sep 13th 2015
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Greenspan’s Ideological Flaw was not a mistake
Then I saw:
Alan Greenspan: I made a mistake in assuming the the self interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms, and it’s been my experience, having worked both as a regulator for eighteen years and similar quantities in the private sector, especially ten years at a major international bank, that the loan officers at these institutions knew far more about the risks involved in the people to whom they lent money that I saw even our best regulators at the Fed capable of doing. So the problem here is something which looked to be a very solid edifice, and, indeed, a critical pillar to market competition and free markets, did break down. And I think that, as I said, shocked me…..
REP. HENRY WAXMAN: The question I have for you is, you had an ideology, you had a belief that free, competitive — and this is your statement — “I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We’ve tried regulation. None meaningfully worked.” That was your quote.
You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price.
Do you feel that your ideology pushed you to make decisions that you wish you had not made?
ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — to exist, you need an ideology. The question is whether it is accurate or not.
And what I’m saying to you is, yes, I found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.
REP. HENRY WAXMAN: You found a flaw in the reality…
ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
How Greenspan’s Framework Went Awry – Daniel Kahnema on assuming Firms as actors
A short course on cost benefit analysis of sanctions by Madeleine Albright : We think the Price is worth it
Anomalies that are as important as normality
The Veblen effect is one of a family of theoretically possible anomalies in the general theory of demand in microeconomics. Other related effects include:
the snob effect: preference for goods because they are different from those commonly preferred; in other words, for consumers who want to use exclusive products, price is quality;
the bandwagon effect: preference for a good increases as the number of people buying them increases;
These effects are discussed in a classic article by Leibenstein (1950). The concept of the counter-Veblen effect is less well known, although it logically completes the family.
None of these effects in itself predicts what will happen to actual quantity of goods demanded (the number of units purchased) as prices change—they refer only to preferences or propensities to purchase. The actual effect on quantity demanded will depend on the range of other goods available, their prices, and their substitutabilities for the goods concerned. The effects are anomalies within demand theory because the theory normally assumes that preferences are independent of price or the number of units being sold. They are therefore collectively referred to as interaction effects.
The interaction effects are a different kind of anomaly from that posed by Giffen goods. The Giffen goods theory is one for which observed demand rises as price rises, but the effect arises without any interaction between price and preference—it results from the interplay of the income effect and the substitution effect of a change in price.
Recent research has begun to examine the empirical evidence for the existence of goods which show these interaction effects. The Yale Law Journal has published a broad overview. Studies have also found evidence suggesting people receive more pleasure from more expensive goods.
Ben Bernanke we are printing money, we are not printing money:
BERNANKE: Well, this fear of inflation, I think is way overstated. We’ve looked at it very, very carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. …
Twenty-one months earlier on the same program and to the same reporter, Bernanke said something quite different:
Asked if it’s tax money the Fed is spending, Bernanke said, “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing.”
“You’ve been printing money?” Pelley asked.
“Well, effectively,” Bernanke said. “And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.”