Paul Krugman explains why the Fed focuses on core rather than headline inflation. I've made this argument a different way, but it's basically the same argument. Boiled down, the argument is that the problem prices are the sticky prices, not the prices like those on food and energy that are flexible, and you want an index (core inflation) that best highlights the problem, i.e. that includes only the problem prices and throws out the ones that can be left to adjust on their own (I prefer measures that trim out the most volatile prices or use other mechanisms to extract the slowly adjusting prices rather than simply tossing out food and energy, but that's a technical point).
Here's how Krugman explains the intuition (the exact story is model dependent, but the intuition almost always comes down to indexing the problem prices so that they stand out, and leaving the other prices to take care of themselves, and expectations of inflation are a key part of the story). But more important than the explanation for why the Fed focuses on core inflation is the conclusion Krugman comes to, that the Fed shouldn't let worries about inflation interfere with stabilization of the financial sector and the broader economy:
Embedded vs. non-embedded inflation, by Paul Krugman: The big economic debate of the moment is whether the Fed and its peers have made a terrible mistake by focusing on staving off financial crisis while more or less ignoring the rise of inflation. "Inflation is rising and it seems the world's central banks have critically misjudged the situation," says Wolfgang Munchau in the FT. I've heard even more apocalyptic views from some serious people in the last couple of weeks. As it happens, I don't agree. And I thought it's worth spelling out why — especially because many if not most of the participants in this debate don't explain their premises very clearly. So: when is it appropriate to get very concerned about inflation, and when is it OK to assume that a rise in prices is a temporary shock that will pass? The answer is that inflation becomes a big problem if it becomes "embedded" in the economy, which makes it hard to restore more or less stable prices. But how does inflation get embedded? [Here's how...]
So now you've read Krugman and you are confused. I've talked about core measures of price inflation, yet Krugman is worried about wages adjusting sluggishly. How can the two views be reconciled? There is a larger theory that says to include any price that adjusts slowly, whether it's an input price or an output price, in Fed's monetary policy rule. Here's Michael Woodford:
The theory also provides important insights into the question of which price index or indexes it is more important to stabilize. Again, the answer depends on the nature of the nominal rigidities. If prices are adjusted more frequently in some sectors of the economy than in others, then the welfare-theoretic loss function puts more weight on variations in prices in the sectors where prices are stickier... This provides a theoretical basis for seeking to stabilize an appropriately defined measure of "core" inflation rather than an equally weighted price index. .... Similarly, if wages are sticky as are goods prices, as implied by many empirical ... models, then instability in the rate of growth of a broad index of nominal wages results in distortions similar to those created by variations in goods price inflation. If [adjustments in] wages are staggered ..., then the welfare-theoretic loss function includes a term proportional to the squared rate of goods price inflation and another term proportional to the squared rate of wage inflation each period. In this case, optimal policy involves a tradeoff between inflation stabilization, nominal wage growth stabilization, and output-gap stabilization...
I should also add that, under some theoretical formulations, asset prices should also be part of the Fed's monetary policy decision rule. However, for the most part, asset prices exhibit a high degree of flexibility so little is lost from leaving those prices out. However, as I've argued before, an exception is housing prices - they can exhibit downward rigidity - and this is a reason to consider including housing prices in decisions about the direction of monetary policy, something that would cause the Fed to lean against housing price bubbles as they are inflating.
One final note. Some people will disagree that the Fed should worry about wage inflation, i.e. they will say that the Fed moves to suppress wages whenever workers begin to realize gains and hence works against their interests. But I think that wage inflation that exceeds productivity growth hurts workers in the long-run. Thus, it's something to avoided.
Greg Mankiw wants a cut in the corporate income tax:
The Problem With the Corporate Tax, by N. Gregory Mankiw, Economic Scene, NY Times: At this point in the presidential campaign, Senator John McCain is the candidate of ideas on issues of tax policy. Too many ideas, in fact. While some of his ideas are great, others are almost laughable. The one that has received the most attention recently — a gas-tax holiday — falls in the second category. ...
Lost in this hubbub, however, is a bigger idea that Mr. McCain and his economic team have put forward: a cut in the corporate tax rate, to 25 percent from 35 percent. It is perhaps the best simple recipe for promoting long-run growth in American living standards. ...
A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices, but the results would not end there. A stronger stock market would lead to more capital investment. More investment would lead to greater productivity. Greater productivity would lead to higher wages for workers and lower prices for customers. Populist critics deride this train of logic as "trickle-down economics." But it is more accurate to call it textbook economics. ...
Compared with other ways of funding the government, the corporate tax is particularly hard on economic growth. A C.B.O. report in 2005 concluded that the "distortions that the corporate income tax induces are large compared with the revenues that the tax generates." Reducing these distortions would lead to better-paying jobs.
Of course, a corporate tax cut would affect the federal budget. ... Cutting the rate to 25 percent would seem to cost the Treasury about $100 billion a year.
Part of that revenue loss, however, would be recouped through other taxes. To the extent that shareholders would benefit, they would pay higher taxes on dividends, capital gains and withdrawals from their retirement accounts. To the extent that workers would benefit, they would pay higher payroll and income taxes. Increased economic growth would tend to raise tax revenue from all sources.
Some economists think that these effects are strong enough to make a corporate rate cut self-financing. A recent study by Alex Brill and Kevin A. Hassett of the American Enterprise Institute, looking at countries in the Organization for Economic Cooperation and Development, supports exactly that conclusion. But even if that turns out to be too optimistic, both theory and evidence make it reasonable to expect a significant discount from the sticker price. In the end, the net budgetary cost of the tax cut might be, say, $50 billion a year.
Senator McCain wants to fill that hole in the budget by restraining spending. If he can stop bloated legislation like the recent $300 billion farm bill from becoming law, more power to him.
But in case that quest proves quixotic, I have a back-up plan for him: increase the gasoline tax..., a gas-tax increase of about 40 cents a gallon could fund a corporate rate cut, fostering economic growth and reducing a variety of driving-related problems.
Indeed, if we increased the tax on gasoline to the level that many experts consider optimal, we could raise enough revenue to eliminate the corporate income tax. And the price at the pump would still be far lower in the United States than in much of Europe.
Don't laugh. I'm serious.
I think a 50% recovery rate on tax revenues is far too optimistic, and I'm disappointed that Greg would even hint that the tax cut would be self-financing.
[He also discusses the distribution of the tax burden, but the 70% figure he cites as the amount of corporate taxes paid by labor relies upon an assumption of perfect capital mobility (and other assumptions), and he doesn't include how the burden of paying for the corporate tax cut would be distributed, i.e. how the gas tax or any other means of paying for the tax cut would be distributed across households. So the analysis of the tax burden is a bit incomplete and relies upon some fairly optimistic assumptions. I'm not opposed to either change, but the distributional consequences need more consideration. Predictions about the distributional consequences of policies that rely upon trickle down arguments have not been accurate in the past, and we should be wary when they are used to justify further cuts in taxes.]
Corporate Tax Declines and U.S. Inequality, By John Irons, April 9, 2008: Over the last 60 years, the U.S. tax code has dramatically shifted away from corporate taxes and toward taxes on individuals, especially through the payroll tax, the financing backbone of Social Security and Medicare. In the 1950s, the corporate income tax brought in, on average, one of every four dollars in federal tax revenues. By the 2000s, however, it raised just one of every 10 tax dollars. The shrinking share of corporate taxes was made up by an increase in payroll taxes to fund social insurance and retirement programs. Excise and other taxes—such as fuel taxes, phone taxes, etc.—shrank as well over the last 60 years, while the individual federal income tax rose slightly, from an average of 43% of total federal revenue in the 1950s to 46% in the 2000s. This shift is important because of who pays these different taxes. The corporate income tax is significantly more progressive than other taxes. Those with incomes in the top 20% of the income distribution (those making more than about $86,000 a year in 2007) pay four times the average tax rate on corporate income than the middle 20% (those making between $27,000 and $48,000); while, for the payroll tax, those in the top 20% actually pay less than those in the middle as a share of their income. This shift has been one of the factors leading to the drop in average federal tax rates for the very highest earners. Between 1960 and 2004, the average tax rate has fallen by about 14 percentage points (from 44.4% to 30.4%) for the top 1% of earners (those making more than $435,000 in 2007), while it has increased slightly (from 15.9% to 16.1%) for those in the middle 20%. Without offsets, further erosion of corporate tax revenues—either through lower statutory tax rates or through special preferences—would expand the already wide and growing income inequality in the United States.
Stephen Gordon makes the point that the countries with larger social insurance programs generally have lower corporate taxes than the U.S., but they also do much more redistribution after taxes are collected so that the net tax burden is fairly progressive even when they rely on fairly flat tax collection mechanisms such as a value-added tax. These redistribution programs are an important part of those systems.
McCain keeps asking Obama to go to Iraq with him. Even though the people responsible for security have said they would not allow them to go to Iraq together, and Obama has declined, I think it's a good idea. It would be a great opportunity for Obama to straighten out McCain on all the things he has wrong about Iraq. In the past, McCain has had Joe Lieberman around to whisper in his ear when he makes great big mistakes. But Lieberman has his own problems and his own misperceptions, and he can't always be there, and Barack is a much better choice if the goal is to gain a clearer understanding of the political, economic, social, military, and other issues that make Iraq and the greater area such a complicated and difficult problem to solve.
Let's start with an easy one. If the two of them were there today, Obama could point to troops and say see those people in uniform? There's 155,000 of them - more than the pre surge levels. I know you have trouble with technical stuff, economics, that sort of thing, but this is easy John - 155,000 is a bigger number than 130,000 so we are not back down to pre surge levels like you have claimed. And if the numbers have changed by the time they get there, it will still be worthwhile for Obama to explain why it's important for someone wanting to be the Commander in Chief to keep track of how many soldiers we have deployed.
He could point to Mosul and say, I know you said that things are quiet there, but on a day when there were three suicide bombings, it's probably best to describe it some other way.
He could, and this is important for McCain to learn because he's made this mistake more than once, set up meetings with Sunnis and Shi'as. Then, - very slowly because as, as just noted, McCain has trouble on this one - explain how they differ and why it's important to understand the difference.
And as a follow up to the previous point, once McCain does finally get this distinction, Obama could point out that understanding this will help him to avoid saying it's common knowledge that Iran is training Al Qaida when it's not true (though this is one case where, when he said this, the ear whispering Lieberman did cause him to correct his obvious lack of knowledge).
Speaking of Iran, though they wouldn't actually be in Iran, it's bound to come up, and when it does it would be a great opportunity to explain to McCain how Iran's government is structured. McCain has been confused about who leads Iran, so once again, Barack could help McCain with this. And he could, yet again, also explain why it's important to get this right.
If they are walking through a market under very heavy military guard, if there's no other way to enter the area other than with armed escorts, Barack could explain how it's probably not quite correct to say the market is safe.
And, while they are strolling through the streets of Iraq protected by hordes of military personnel who could be doing more important things than setting up TV shots for campaigns, maybe Obama can talk about other things too, educate McCain on the economy, explain that tax cuts don't increase revenue, that sort of thing. It's a bit unrelated, but not completely given how poorly the Bush administration has handled economic development issues in Iraq.
So I can see why John McCain wants Barack Obama to come along to Iraq with him, he needs somebody with him who actually understands how the politics, economics, relations with nearby countries, military presence, and so on affects Iraq, he needs to hear from someone who had Iraq policy right from day one.
Why should Barack help McCain? Aren't they political opponents? Yes, but McCain, along with the noise machine that supports whatever he says no matter how daffy or gaffey, has been confusing the public about these issues. There are considerable misperceptions as a result of McCain's confusion and lack of knowledge. When Obama does win the presidency this fall, that confusion will make it much, much harder to do what needs to be done to get things back on the right track, so whatever he can do now to help to overcome those misperceptions will help to pave a smoother road to the future.
So go ahead, agree to accompany McCain to Iraq, he really needs you there. McCain has been there several times already, and his lack of knowledge shows he really needed to take those trips, but it hasn't been enough, he still gets key things wrong. You'd think he'd have figured it all out by now, if he could, that he would have had someone explain it again and again until he gets it, but maybe you can help him, and yourself, and all of us, by going along.
This examines the distributional impacts of gentrification. The results may not be what you expect:
Who Gentrifies Low-Income Neighborhoods?, by Terra McKinnish, Randall Walsh, and Kirk White NBER Working Paper No. 14036 May 2008 JEL No. J15,J60,R23 [Open Link]: Abstract This paper uses confidential Census data, specifically the 1990 and 2000 Census Long Form data, to study the demographic processes underlying the gentrification of low-income urban neighborhoods during the 1990's. In contrast to previous studies, the analysis is conducted at the more refined census-tract level with a narrower definition of gentrification and more closely matched comparison neighborhoods. The analysis is also richly disaggregated by demographic characteristic, uncovering differential patterns by race, education, age and family structure that would not have emerged in the more aggregate analysis in previous studies. The results provide no evidence of displacement of low-income non-white households in gentrifying neighborhoods. The bulk of the increase in average family income in gentrifying neighborhoods is attributed to black high school graduates and white college graduates. The disproportionate retention and income gains of the former and the disproportionate in-migration of the latter are distinguishing characteristics of gentrifying U.S. urban neighborhoods in the 1990's.
"Concern, and anger, over gentrification has grown in communities across the country as housing rental and sales prices have soared .… there are numerous reports of resident displacement from neighborhoods long ignored that now attract higher-income households."1 -2006 Urban Institute Report
Over the past several decades, there has been substantial gentrification of low-income neighborhoods in many U.S. urban areas. These neighborhoods typically experience large increases in household income and housing prices. Some laud the revitalization of decayed neighborhoods and others criticize the displacement of low-income, often minority, households.
The distribution of benefits from neighborhood change is a crucial policy issue. Since 1974 the U.S. Department of Housing and Urban Development (HUD) has allocated nearly $120 Billion in Community Development Block Grants.2 These grants, that are intended to benefit low and moderate-income individuals by eliminating slums or blight and addressing urgent community development needs, have been allocated to more than 1000 U.S. cities. While public investment in neighborhood revitalization is ubiquitous, the consequences of neighborhood gentrification for low-income and minority individuals remain an open question.
Advocacy groups for low-income neighborhoods in cities across the U.S. have raised concerns about a potential link between gentrification and the displacement of existing low income and/or minority residents. In contrast, potential displacement from gentrifying neighborhoods does not appear to be a major concern for HUD.3 Given the high levels of public investment in improving neighborhood quality, it is important to understand which of these two policy perspectives accurately reflects the impacts of neighborhood gentrification vis-à-vis displacement of low-income households. Further, missing from this debate on displacement is consideration of both the role of in-migrants and the impacts of gentrification on households that remain in gentrifying neighborhoods.
Surprisingly, many questions regarding the distributional impacts of gentrification remain unanswered. Some recent studies have examined the issue of displacement, and have found little to suggest that low-income households exit gentrifying neighborhoods any faster than they exit other neighborhoods. These studies, however, have been severely constrained by data limitations. As a result they either define neighborhoods as rather large geographic areas (regions on the order of 100,000+ in population), use overly broad definitions of gentrification, and/or focus on a single location – raising issues about what broader inferences can be drawn from their results.4 Even less is known about the role of in-migration in gentrification and the impact of gentrification on residents who remain in neighborhoods that experience gentrification.
In this paper we take advantage of confidential Census data, specifically the 1990 and 2000 Census Long Form Data, to provide the richest study of gentrification to date. Overall, we find that rather than dislocating non-white households, gentrification creates neighborhoods that are attractive to middle-class minority households, particularly those with children or with elderly householders. Furthermore, there is evidence that gentrification may even increases incomes for these same households.
Our specific findings are: 1) In-migration of college graduates, particularly white college graduates under 40 without children, is a key characteristic of a gentrifying neighborhood; 2) The presence of children, an elderly householder or a householder with low educational attainment dampens the likelihood that a white household moves into a gentrifying neighborhood, but these same effects are not present, or even reversed, for black and Hispanic households; 3) We finds no evidence of disproportionate exit of low-education or minority householders, but do find evidence that gentrifying neighborhoods disproportionately retain black householders with a high school degree; 4) Decomposition of the total income gains in gentrifying neighborhoods attributes the bulk of the gains to two key groups: black high school graduates (due to disproportionate retention and income gains) and white college graduates (due to disproportionate in-migration and high incomes).
... The findings suggest that rather than dislocating non-white households, gentrification creates neighborhoods that are attractive to middle-class minority households, particularly those with children or with elderly householders. One reasonable interpretation is that because these neighborhoods are experiencing income gains, but also more diverse with regards to race/ethnicity and income than established middle-class neighborhoods, they are desirable locations for non-white middle-class households.