raghu wrote: > You are right that the Fed's concern with wage increases is probably > separate from its effects on the CPI. I also agree with your comment that > "strictly speaking, a stock market bubble has no effect at all on the CPI". > I'd say that's exactly what is wrong with the CPI.
The CPI is supposed to be a measure of the the consumer's "cost of living." It would thus be wrong to bring in asset-price inflation as part of the CPI (or the Personal Consumption spending deflator). The CPI was originally designed (by labor, not by government, BTW) as an effort to measure the cost of living. The idea was that we should know when wages aren't keeping up with the prices that workers have to pay. Workers typically can't afford to buy stocks and bonds, so their prices shouldn't be counted as part of the CPI. Those paper products are hardly necessary to human life. BTW, in the US, the CPI's full name is CPI-U. That's short for CPI for All Urban Consumers. There's also the CPI-W, which refers to the CPI for Urban Wage Earners and Clerical Workers. It's not the CPI for financial speculators. But I'm no defender of the CPI. A few years ago, I had an article in CHALLENGE magazine arguing that the "cost of living" (COL) should be adjusted for the costs imposed by non-market processes (e.g., pollution) and the benefits received from non-market goods (such as leisure time). Of course, it the government used that kind of measure, it would indicate that the cost of living inflation rate was pretty high -- or (inversely) that the real standard of living of US workers is even worse than people think. If the Fed decided to target the COL inflation rate, it would impose a recession much more readily. > I think everyone from libertarians to Marxists can agree that price > stability and a stable currency are good things. Therefore it is legitimate > for the Fed to keep inflation under control. ... of course, there are _other_ ways to control inflation (e.g., incomes policies). But these days, we worship the Fed and give it power. Non-market anti-inflation efforts are _verboten_. > The effect of the current monetary policy is to keep wage increases subdued > while encouraging or at least being indifferent to asset price increases, > whereas we would want the exact opposite: a Fed that increases interest > rates if asset prices are inflating and stay indifferent to wage increases. I think that the avoidance of asset-price inflation would best be seen as a separate goal from that of avoiding CPI inflation. On top of that, imposing higher margin requirements and the like seems a better way to fight asset-price inflation than raising interest rates. Using standard open-market operations (or discount policy or reserve requirements) to fight asset-price inflation would punish the working class with higher unemployment when the financiers get into another one of their silly bubbles. Even better would be to take away the power that Wall Street has over our lives. -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante.
