LONDON - green day in soho, 06/06/08

A Reading for the Pigou Club

An excerpt from Charles Krauthammer:

You want more fuel-efficient cars? Don't regulate. Don't mandate. Don't scold. Don't appeal to the better angels of our nature. Do one thing: Hike the cost of gas until you find the price point.

Unfortunately, instead of hiking the price ourselves by means of a gasoline tax that could be instantly refunded to the American people in the form of lower payroll taxes, we let the Saudis, Venezuelans, Russians and Iranians do the taxing for us -- and pocket the money that the tax would have recycled back to the American worker.

This is insanity....

But instead of doing the obvious -- tax the damn thing -- we go through spasms of destructive alternatives, such as efficiency standards, ethanol mandates, and now a crazy carbon cap-and-trade system the Senate is debating this week. These are infinitely complex mandates for inefficiency and invitations to corruption. But they have a singular virtue: They hide the cost to the American consumer.

Want to wean us off oil? Be open and honest.

Down to Business

First things first, I am EXTENDING the entry deadline for the Preppiest Wedding contest. So, if you were in or had the preppiest wedding out there, send me pictures by Monday. I have a bunch more weddings to post AND I will let you know all about the great prizes on Monday. And readers, remember to check in next week and vote for the Preppiest Wedding.

Second, I got an e-mail from Kristen at I Do Originals and she wanted to extend an awesome discount to preppy wedding readers to her new affiliate site Exclusively Sew. Check out the site, you can get monogrammed dress tags or bouquet ribbons AT 50 PERCENT OFF. That's right, half off. Just enter Preppy50 during check out. The coupon expires 6/30/08, so get to it ok?

Now girls, have a fantastic weekend. Enjoy the sun, have some fun and see you Monday!

LONDON - on the street, shoreditch & soho + catch 22, 06/05/08

Wedding Four

This is such a preppy beach wedding. LOVE it. Some details: brides dress is Nicole Miller, bridesmaids dress is J.Crew's Claudine, sandals are Fondu by Nine West (they have a tiny starfish - the theme of the wedding), groomsmen suits are Banana Republic and their ties are J.Crew. The wedding was a destination affair in Islamorada, Florida.

Which inflation rate?

With oil prices and other commodity prices rising, many commentators are starting to worry about inflation. These events raise the question in the minds of some astute observers of which inflation rate central bankers should focus on.

Ricardo Reis and I addressed this question in a paper a few years ago, called What Measure of Inflation Should a Central Bank Target? (published version). The abstract:

This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector's characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.

With this conclusion in mind, let's look at growth in nominal compensation per hour:

As judged by this series, inflationary pressures look reasonably well contained at the moment.

But notice what happened in the late 1990s. Reis and I commented on this episode in our conclusion:

Consider how a monetary policymaker in 1998 would have reacted to these data. Under conventional inflation targeting, inflation would have seemed very much in control, as the CPI inflation rate of 1.5 percent was the lowest in many years. By contrast, a policymaker trying to target a stability price index would have observed accelerating wage inflation. He would have reacted by slowing money growth and raising interest rates (a policy move that in fact occurred two years later). Would such attention to a stability price index have restrained the exuberance of the 1990s boom and avoided the recession that began the next decade? There is no way to know for sure, but the hypothesis is intriguing.

Detested Masterpieces

My Harvard colleague Ed Glaeser asks:

WHAT SHOULD be done with an official building, such as Boston's City Hall, that is regarded as a modern masterpiece by architectural cognoscenti but detested by many, if not most, of the city's population?